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MGM Resorts International
Morgans Hotel Group Co
Sam Nazarian, 36, wearing a yellow hard hat that makes him seem taller than his 6 feet 4 inches, chooses his words carefully as he paces off the square footage of the Hyde Lounge at Bellagio, the nightclub he plans to open on what is perhaps the best piece of real estate in Las Vegas. Nazarian has worked hard to shed his reputation as a dilettante, the party-boy son of a billionaire who in a 2005 New Yorker profile came across as a combination of Mark Cuban and the movie character Arthur. The image Nazarian now projects is one of unflagging seriousness. The hard hat: serious. The construction site location: serious. The deals he is making: very serious. It still irks him that he was once dismissed as a lightweight. “I didn’t look serious,” he laments. “I’m not making that mistake again.”
Nazarian no longer invites reporters to drive around Beverly Hills in his million-dollar Bugatti. He has stopped dating starlets and appearing on MTV reality shows. He is busy trying to transform SBE Entertainment (SB is short for Sammy Boy), his $300 million nightclub-driven company, into a hospitality empire that he hopes will one day rival those of the great hoteliers of the past and present. He is already movie-star famous in Southern California, where his business deals are front-page news, but now Nazarian is going national, making bets in a half-dozen cities—most conspicuously in recession-ravaged Las Vegas, where he is developing a 1,622-room hotel as well as the club at the Bellagio. “This is going to be the most interesting 24 months of my life,” he says. When asked whether this will make or break his business, Nazarian smiles and says, “Ask me in two years. But everything I’ve done, everything I’ve learned, some of it the hard way, it was to get here and do this.”
SBE has gone from owning and operating 17 properties in 2010 to 32 today, with an additional 25 in development. The majority of these new ventures are hotels and restaurants, an indication, Nazarian will tell you, of how he and his brand have matured. In March 2012, Nazarian plans to open a luxury hotel in Miami, the SLS South Beach. Various other SBE-owned businesses, including Katsuya Restaurant, Umami Burger, and Hyde Lounge, will also inaugurate franchises across the U.S., leading up to the planned opening of SLS Las Vegas and SLS New York in 2014. (He won’t say where in New York he plans to open but has signed a letter of intent on a Midtown property.)
Expanding simultaneously in Miami, Las Vegas, and New York during a down economy could be a disastrous miscalculation. MGM Resorts International (MGM) Chief Executive Officer Jim Murren, Nazarian’s partner on the Hyde Lounge at Bellagio, calls Nazarian’s expansion plans “an uphill battle, there’s no doubt about that. Las Vegas right now is not for the faint of heart.” Nazarian says that appeals to him. “I’m the underdog here. Forget it when people say it’s not going to happen. That’s what keeps you going every day.” What’s at stake goes far beyond profits. If he gets this right, then Sammy Boy, the immigrant rich kid who rivals said had only gotten as far as he had because of his daddy’s money, will complete the transition to Sam Nazarian, American mogul.
Nazarian was once a poster boy for the reality-TV era. He gained a measure of gossip-magazine fame for playing himself on Entourage and The Hills and dating one of the latter’s stars, Kristin Cavallari. “His reputation back then was this club owner who hangs out with celebrities and dates lots of girls,” says Tim Leiweke, CEO of Anshutz Entertainment Group, who has been friends with Nazarian for 10 years and has been his partner in several businesses. Nazarian may now be trying to outrun his past, but he insists he doesn’t regret it. “I was a young, single guy who owned nightclubs. What was I going to do?”
Nazarian was born in Tehran in 1975. His father, Younes, fled with his family from Iran in 1979, when the Islamic Revolution made the country unwelcoming for Persian Jews. Younes had amassed a considerable fortune as a contractor in Tehran. “He lost everything when he came to America,” Nazarian says. “He was 49, and I never once heard him talk about what we had, what we lost, what we used to be. I would hear that from my parents’ friends but never from my father.”
The family spent its first few months in the U.S. living out of a hotel in Santa Monica. Nazarian, his three siblings, his parents, and his uncles and aunts shared three hotel rooms. (The family would later buy that Sheraton hotel.) In 1980, through business contacts in Israel, Younes found out about Standard Tool & Die, a precision-machine company that he believed had the potential to benefit from the nascent U.S. space shuttle program. Tapping funds owed by European companies to his confiscated Iranian businesses, Younes, along with his brother, Parviz, persuaded a bank to lend them $11 million to buy Standard Tool & Die. “The business had $14 million in cash,” says Sam’s older brother David, 49, “This was before everybody was doing LBOs. The company paid for itself.”
A few years later, Younes discovered a technology company, Omninet, which had developed a wireless protocol that enabled trucking companies to keep track of their vehicles. Younes took the idea to Irvin Jacobs, a University of California at San Diego professor who had founded a company called Qualcomm (QCOM). Irwin offered Younes a major stake in Qualcomm in exchange for Omninet. That stake today is valued at between $1 billion and $2 billion. “How my father was able to understand a product that most MIT graduates couldn’t understand amazes me,” says Nazarian.
By the time Nazarian was at Beverly Hills High School, his family “probably had more money than anybody there,” says his friend Baze Melemad. “We went to school with Angelina Jolie, with a lot of celebrities’ kids, and he could have been a complete snob, but that’s not Sam.”
In high school, Nazarian played basketball and baseball and did odd jobs at his father’s factories. After basketball practice, he and his friends would hang out at a cellular phone store in Brentwood where Nazarian became interested in a new technology developed by Nextel, a walkie-talkie feature that allowed businesses to stay in touch with their employees. He thought the technology could be put to use in early-generation consumer cell phones. In 1996 he persuaded his parents to give him $25,000 to invest in a business he started with Melemad, Platinum Wireless. He camped outside the Nextel general manager’s office for seven days straight until he was given the contract to sell phones with Nextel technology.
Nazarian eventually sold his stake in Platinum Wireless for $1.5 million. Despite his business success, he remained an outsider. “Growing up, being Iranian, we had some challenges getting into the hot places,” says Melemad. In the late 1990s the two would try to talk their way into The Gate, then the most popular club in Los Angeles. “Sometimes we couldn’t get in—you know, the Iranian thing,” says Melemad. “Sam used to say, ‘One day we’re gonna own this place.’ ”
In 2003, Nazarian invested $300,000 to convert an old rock club, The Coconut Teaszer, in then-unfashionable West Hollywood, into Shelter, his first nightclub. He was 27 and took over every aspect of the joint, working on the design, the bar, the promotions. He also set out to remake the Los Angeles nightclub business model. “At that point, L.A. night life was promoter-driven,” he says. “The promoter was the brand. He could dictate to the owner what he wanted to do or else he could take his crowd with him to another venue.” The most powerful promoter in town was Brent Bolthouse, who did his events at a club called LAX. “Basically, we sort of ran Los Angeles, and if you weren’t in our circle of influence, you didn’t get in,” says Bolthouse. “Sam opened Shelter, and if you couldn’t get into our places, you could go to Shelter.”
A successful nightclub is a high-margin, huge-cash-flow business. A club in its prime has profit margins of about 40 percent. In a good month, a popular SBE nightclub can make $1 million to $2 million. But if you don’t open correctly, or don’t bring in the right crowd, or peak too early, or somehow fall out of fashion, your business is dead. “[It] is harder than anything I do now,” Nazarian says. “All the things that can go wrong—the trendiness, the cyclicality. It’s very difficult to have the best people of a city spend tremendous amounts of dollars and do it night in and night out. And you have three hours a night in which to make your money.”
Shelter benefited from the dawning of the age of bottle service—clubgoers spending hundreds and sometimes thousands of dollars for bottles of booze instead of ordering drinks by the glass. At the same time, rather than compete with promoters such as Bolthouse, Nazarian put them on the payroll of his company, SBE. With Bolthouse, he opened a string of successful clubs that attracted Hollywood A-listers: Prey, Area, Abbey, and Hyde. (In 2010 he bought the venue on La Cienega Boulevard that had once been The Gate; it reopens this month as Greystone Manor, a supper club.) By scaling up the business and launching multiple venues, Nazarian was able to bargain down food and beverage suppliers and drive up profits.
Within 18 months, he had become the biggest nightclub impresario in the history of Los Angeles. Like Ian Schrager, who started at Studio 54 and would go on to run the publicly traded Morgans Hotel Group (MHGC), Nazarian believed he could leverage the clubs into a wider lifestyle-and-entertainment enterprise. And he had a natural and very wealthy business partner: his family.
“At first we weren’t very comfortable with the clubs,” says David Nazarian, who runs Nazarian Enterprises, the family’s investment vehicle. “Then, as he started to bring in the restaurants, the hotels, the talent—it took us a while, but we saw the business there.” Nazarian Enterprises became the largest shareholder in SBE.
The expansion, Sam will concede, has not always been smooth. From 2005 to 2007 the Nazarians invested heavily in high-end hotels, spending more than $500 million to purchase the Ritz Plaza hotel in Miami, Le Méridién in Beverly Hills, and the Sahara Hotel and Casino in Las Vegas, and then slating at least $200 million for costly renovations on all three properties. “There was definitely a moment when I thought, ‘Oh s–t.’ It wasn’t fun doing workouts and restructurings, but we did it and didn’t hand one property back.”
It has paid off. The Philippe Starck-designed SLS Beverly Hills, which opened in December 2008, has become the most successful piece of the SBE empire, with 80 percent occupancy and an average daily rate of $300. The U.S. average in October, according to Smith Travel Research, was 66 percent occupancy and an average daily rate of $105.
“Hard Rock has Nobu, Cosmopolitan has Marquee, but that revenue isn’t straight to the bottom line,” says Nazarian. On a cool November night, he stands on the sixth-floor pool deck of the SLS Beverly Hills, a vodka and soda in his hand and a cigarette in his mouth, and explains how he plans to reinvent the hotel business in Las Vegas. As he smokes, he describes how much money large Vegas establishments such as the MGM Grand, the Wynn, and the Bellagio give away to the business partners—including Nazarian himself—who manage and operate the restaurants and clubs inside those hotels. By contrast, Nazarian owns the Bazaar, the foodie destination that has been operating to capacity every night this year in the lobby of SLS Beverly Hills. Nazarian plans to fill SLS Las Vegas with his own brands—a Katsuya restaurant, an Umami Burger, and two SBE nightclubs to be named later—and he won’t have to share that revenue with anyone.
Nazarian loves walking through his lounges, restaurants, and hotels, especially during the design and build-out, to imagine how the elements he and Starck have envisioned will come together. He will show up on opening night to check on the lines but leaves after that; he says he is a homebody, in bed by midnight. “You know that thing about how bankers don’t like to count money? I’m like that with clubs. I don’t like to go anymore.’” Leiweke, Nazarian’s friend, says: “Sam still has that pulse, he’s just not living that lifestyle. He hasn’t lost his touch with what’s trendy, but he’s able to figure it out without living it.”
Juggling more than 30 properties in cities ranging from San Francisco to Dallas to Miami, Nazarian is increasingly looking to acquire clubs and venues rather than develop them from scratch. After becoming a majority owner of Umami Burger, a popular Los Angeles chain, he announced plans to have 11 new locations open by mid-2012 on the way to a planned 60. Nazarian also bought the West Coast license for New York hot dog icon Papaya King. In an example of SBE synergy at work, Sam put a Papaya King on Wilcox Avenue in Hollywood with an orange door at the back that leads to Sayers Club, an SBE-owned speakeasy.
No matter how surprising or innovative the concept, Nazarian believes there is a 36-month window of viability for any night-life venue; after that, the buzz dies down and the margins shrink. In the SBE empire as Nazarian now conceives it, the clubs are the gateways, bringing in well-heeled young consumers, potential diners, and hotel guests, who will spend liberally throughout his venues in various cities around the world. “I want to bring them in at 21 and keep them spending until they retire,” says Nazarian. SBE has instituted a loyalty program that allows it to track repeat customers at any of its properties, “so that when they come in to any of our clubs or restaurants, we can give them a free glass of champagne, a free appetizer,” he says.
The loyalty program, the new hotels, the expansion into hamburger joints and hot dog stands—all are intended to continue the 30 percent annual growth SBE has been experiencing since 2009. According to SBE, the company this year will have Ebitda, or earnings before interest, taxes, depreciation, and amortization, of $15 million to $20 million on its $300 million in revenue. And Nazarian says the company is on track to boost earnings by 30 percent in 2012. The next few years, as Nazarian and SBE make their big expansion, will determine whether SBE becomes a household name. “It’s a challenge for anyone to get into these markets right now,” says MGM Resorts’ Murren. “He’s going up against large companies with tens of millions of names in their databases and infrastructure and brand awareness. It’s going to be difficult for Sam.”
At midnight, Nazarian is standing in front of the SLS Beverly Hills, smoking another cigarette as he watches the crowd outside. A few dozen well-dressed young revelers are smoking on the stairs, waiting for the valet to bring them their cars, or lounging on sofas outside the bar. More than a few attractive woman walk by and greet Nazarian. “Look at this demographic,” Sam says, obviously pleased. “What you don’t see is a velvet rope, a guy with a clipboard, any sign of an exclusionary product. You don’t want that in a hotel. As soon as you put in a velvet rope, the clock is ticking.”
Nazarian puts out his cigarette. “I’m an immigrant. We want to get in, not keep people out.”