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Sunday, Jan. 18, 2009 | 2 a.m.
Beyond the Sun
Las Vegas Sands was once the envy of Wall Street. In fall 2007, with seemingly unlimited growth prospects in Macau, the most lucrative gambling market in the world, the company’s share price topped out at nearly $150.
Founder and Chief Executive Sheldon Adelson’s personal fortune rose with the company’s. On the strength of his stake in Las Vegas Sands, his net worth reached an estimated $28 billion, according to Forbes’ list of richest Americans in 2007.
Adelson, the combative son of a cabdriver, peaked at No. 3 on that list and had his eye on the top spot, held by Microsoft founder Bill Gates.
But then came the fall, a drop so fast and long that even in this era of suicidal reversals on Wall Street, Sands stands out.
The company’s market value plummeted more than 90 percent.
Adelson’s net worth shrunk by an estimated $13 billion.
To fend off Sands’ creditors, Adelson and his family injected $1 billion of their fortune into the company.
Neither Adelson nor any company executive would comment for this story, but a review of the public record and interviews with people familiar with the company’s dive provide details showing that a combination of factors were at work: bad luck, bad corporate blood, and hubris.
Certainly Adelson and the company were victims of a global financial crisis that many financial wizards failed to see.
But some industry analysts contend Sands executives played a key role in the financial decline, pushing ahead with efforts to dominate the Macau gambling market and stretching the company thin even as indicators showed credit drying up and tourism faltering.
When asked why the company didn’t raise needed cash sooner, one Sands executive, speaking two months after September’s stock market collapse, admitted to a “monumental screwup.”
That admission surfaced in a shareholder lawsuit filed in November alleging the company’s troubles weren’t solely the result of poor economic conditions or ill-timed business decisions.
“The company’s troubles mainly stem from a poorly functioning board of directors that has remained supine in the face of ... Adelson’s domination and decision to treat this public company as it if were private — in other words, his own corporate vehicle by which to aggressively develop casinos and resorts all over the world without concern for its effect on the financial solvency” of Sands, the lawsuit stated.
Years from now, what happened to Sands could be the stuff of business school case studies. Here is a first draft.
BIG RISKS, BIG REWARDS
The casino business is all about risk. Casinos are highly leveraged businesses costing hundreds of millions, even billions, of dollars. Their gambling pits use mathematical formulas that pinpoint risk down to a fraction of a percentage point.
Experienced Las Vegas operators have historically been richly rewarded for taking big risks. But even by gaming industry standards, Adelson’s resume offers something of a graduate-level course in the potential pitfalls and rewards of risk-taking.
When he created Comdex in 1979, a computer trade show that would eventually draw more than 100,000 people and make Adelson very rich, he said he chose Las Vegas as its home on a hunch that business people would like the spectacle.
“There’s a saying that goes around — Wayne Newton fills the showrooms, Frank Sinatra fills the hotels and Comdex fills the city,” Adelson told the Sun in 1995. “We’re kind of proud of that.”
When he constructed the $105 million Sands Expo & Convention Center in 1990 — the largest privately owned building of its kind in the country when it opened — critics viewed it as a foolhardy expenditure for a gambling town that had a publicly funded convention center.
With the $1.5 billion Venetian, which opened in 1999 next door to the Sands convention center, Adelson raised the stakes, betting that his flourishing trade show business could fill an upscale megaresort. He would lure conventiongoers to the Venetian with bigger rooms and more hotel amenities, charging top dollar for rooms midweek.
Competitors scoffed at the strategy, predicting failure based on the assumption that conventiongoers didn’t gamble much.
Adding to the risk, the Venetian was financed with junk bonds at interest rates as high as 14 percent, higher than other operators paid at the time.
Analysts, influenced by critics of Adelson’s unproven business plan, worried the resort wouldn’t make enough money to pay its bills.
But Adelson proved a winner. He eventually refinanced and paid down the expensive loans, making the 4,049-room Venetian, which opened a 1,000-room hotel expansion in 2003, one of the most profitable casinos of all time.
As his businesses expanded, Adelson butted heads with local forces, including the Culinary Union and the Las Vegas Convention and Visitors Authority, fueling lawsuits, pickets and controversial legislative efforts.
His two resorts, the Venetian and Palazzo, are nonunion outposts along a unionized row of casinos facing Las Vegas Boulevard. In his battle with the Culinary, Adelson has admitted that he doesn’t like being told how to do things. He also made enemies in construction circles after protracted litigation with the contractor building the Venetian.
“He doesn’t fit in the club and doesn’t kiss the rings of certain people,” said one gaming executive, referring to longtime gaming executives who form an insular group..
“Anything that rubs us the wrong way or that we don’t understand, we criticize,” the executive, who requested anonymity, said of that group.
Adelson, whose parents emigrated from Russia to escape persecution, recalls being victimized as a child in his poor Boston neighborhood for being Jewish. He began to claw his way out of poverty with a series of jobs that began with selling newspapers on street corners.
“You have to go into a business and ignore all the taboos and mores by asking, ‘why and why not?’ ” Adelson told the Latin Chamber of Commerce days before the Venetian’s debut. “Why do people do things in the business the way they do and why not some other way? Of the 50 businesses I’ve been in, I never did it the way people were doing it.”
By making piles of money on hotel rooms, Adelson helped redefine a business that had focused on gambling revenue at the expense of other amenities. His success at the Venetian was emulated by competitors such as Mandalay Resort Group, now part of MGM Mirage, which opened a 1.8-million-square-foot convention center at Mandalay Bay in 2003.
The convention business, a big part of the Strip’s growth spurt since 2001, has helped to prop up room rates in Las Vegas during traditionally slower periods, creating year-round demand.
Success seemed to make Adelson more sure of his strategies. He appeared to revel in proving the doubters wrong and showing up more cautious competitors.
His appetite for confrontation and risk seemed to grow, gaming analysts and investors say, leading to trouble for Las Vegas Sands.
AMBITIONS FOR MACAU
Macau — a semi-autonomous province of China — began welcoming Western casino operators in 2002 in an effort to rise above its roots as a seedy gambling den and broaden the region’s appeal to Asian tourists with Las Vegas-style resorts.
Las Vegas Sands was the first Western company to open a casino in Macau, in 2004.
The early bet paid off big. The company recouped its $240 million Sands Macau construction budget within a year of the opening. The casino, which has more than 600 table games yet fewer than 300 hotel rooms, primarily offered to Chinese gamblers for free, gained a foothold ahead of the resorts that followed.
The Sands Macau was just the beginning of Adelson’s ambitions in China.
A year before the casino opened, the company laid out a decade-long building plan for more than 20,000 hotel rooms and millions of square feet of retail and convention space on reclaimed land between two islands.
The first phase of the company’s Cotai Strip would include eight resorts at a cost of $10 billion.
Privately, competitors scoffed at Adelson’s idea as the product of an out-of-control ego. But he had proved them wrong before. And Wall Street, eyeing profit growth that was perhaps unprecedented in American business, was dazzled.
Las Vegas Sands initially planned to finance its Cotai Strip resorts with hotel partners. But some hotel companies didn’t want to risk capital in a market they were less familiar with and one that was based on gambling revenue, which they wouldn’t receive a cut of.
Ultimately, the risk fell to Sands. But that was good news on Wall Street, which was salivating at the prospect of millions of newly prosperous Chinese spending money in Macau.
Before the credit boom, casino operators generally lined up financing before building their properties. Sands took a riskier, more lucrative route by raising money in stages, during the development and construction process. With capital easy to come by, the company could negotiate the lowest rates and expedite construction rather than wait for each property to open and make money first before beginning the next project.
Few on Wall Street questioned this ambitious strategy, which was unprecedented in its scope and speed. The plan was perfect for the times.
“Nobody was really critical at the time because money was loose and cheap,” Deutsche Bank stock analyst Bill Lerner said.
Also, Sands had gained an impressive track record in a short time, building resorts with stellar returns at reasonable cost, Lerner said. “When they announced something, investors just assumed that it would be executed flawlessly from a financing and operating perspective,” he said.
In September 2007, Sands opened the Venetian Macau, which anchors the entrance to the Cotai Strip. At 10.5 million square feet, the resort is one of the world’s largest buildings and about twice the size of the mammoth Venetian in Las Vegas. The resort includes a 1.2-million-square-foot convention center, a 1-million-square-foot mall, a 15,000-seat arena, more than 700 table games — a world record — and more than 3,400 slot machines.
In August 2008, the company opened its second resort on the Cotai Strip — a Four Seasons hotel, accompanied by a luxury mall.
Two months later, the stock market would crash. Financing for new projects would vanish. And Sands would be left without the cash to finish what it had started.
RIFT AMONG THE BRASS
The economic downturn, which has pounded Las Vegas tourism, exacerbated Adelson’s financing problems.
The company was using cash generated by its resorts on the Las Vegas Strip to finance growth in Macau. Lower earnings here meant less money to pay bills in Macau.
Sands executives appeared confident that money would be available to finish projects that were stacking up in the pipeline.
But after investment bank Bear Stearns collapsed in March, an early victim of the subprime mortgage crisis, investors soon began asking Sands about plans for raising capital.
The company began construction on a condominium tower between the Venetian and Palazzo during 2007 and, in an August 2008 news release, said: “Addressing would-be skeptics, Adelson said quality and luxury sell in any type of financial environment and, when combined with the premium location of these residences, he believes the company has a surefire winner.”
Executives continued to counter reports they were having difficulty raising money to complete the Macau projects, telling media the company would push forward there despite the global credit crisis.
The troubles opened a rift in company management.
Sands Chief Operating Officer Bill Weidner would later call the dispute between executives advocating going full steam ahead and those favoring a more conservative approach in the face of economic troubles a “junkyard dog fight.”
In comments to a crowd of investors and analysts at the casino industry’s largest trade show in November, Weidner said the bitter disagreement led to a delay in raising money for Macau and other projects.
The failure to line up financing, he said, was a “monumental screwup.”
Sands created a special committee, including three board members, to help resolve management disputes and “in response to a loss of confidence by certain senior management members in the management of the company and our governance process.”
Finally, in November, the company announced it was pulling the plug on its unfinished Macau projects. The company would end up spending more than $1 billion to put various projects — including the Strip condos — on hold and to redesign a scaled-down resort under construction in Pennsylvania, industry analysts said.
Gaming insiders say Weidner’s public mea culpa wasn’t an admission of mistakes so much as an olive branch to concerned shareholders.
Investors had become increasingly anxious as financing needed for the company’s Macau plans failed to materialize.
But some gaming insiders say it was a risky, yet reasonable, move for Sands executives to wait for banks to loosen their purse strings.
“If I were in Sheldon’s shoes I would have done the same thing,” said one gaming executive, who declined to be named. “You really don’t know at what point the markets are going to stop vacillating. Sometimes you have to let things run their course.”
As the economy continued its decline, the Chinese government — concerned about runaway growth in Macau, money laundering in casinos and the effects of Chinese citizens gambling away their paychecks — initiated a series of visa restrictions aimed at reducing the number of visitors to Macau from mainland China.
Because Macau is the only place in China where casino gambling is legal, and given the propensity of Chinese to gamble, the restrictions were a kind of spigot that could be turned on and off, directly affecting business at Macau casinos such as the Venetian.
Buried deep in the company’s contracts with lenders were more immediate troubles: The company wasn’t making enough money, relative to its interest expenses, to stay under a maximum leverage ratio. Exceeding this ratio could trigger a default and a Chapter 11 bankruptcy filing by allowing banks to collect on the debt.
Company shares sank to less than $8 when Las Vegas Sands accountants disclosed the news in November.
Within a week, Adelson had invested another $525 million into his company on top of a $475 million cash infusion he made in September.
In a last-ditch effort to raise money, the company also issued 182 million shares of stock, more than doubling the number of outstanding shares but diluting their value. With this capital infusion, the company was able to avoid defaulting on its loans.
Aside from the company’s financial woes, the revelation of a management team at odds, for some investors, overshadowed positive steps taken to correct the problems.
“I think it’s problematic, especially in times of crisis,” said Joe Fath, a portfolio manager for T. Rowe Price Associates. “This environment is bad enough, even without a management team that can’t get along. That’s a huge headwind, in my opinion.”
Some investors and analysts say Sands, overloaded with debt that will be tough to pay down in a troubled economy, is ultimately to blame for not raising money earlier, when banks were more willing to lend and capital was less expensive.
“A prescient CEO or CFO would have seen this coming,” Fath said of the credit crisis. “They knew what their financing needs were and they knew they were building ahead of financing.”
Lerner, the Deutsche Bank stock analyst, said the company took a wrong turn by continuing to build after the credit markets faltered.
“After it was apparent that everyone was having trouble raising capital, they continued to tap credit facilities and use liquidity to fund projects that became speculative,” he said.
Experts say this criticism is echoed by greedy investors who should have sold their shares when they were overvalued and hype about Macau was at its peak. Some shareholders have been richly rewarded by the company’s aggressive strategy, which had maximized shareholder profits until the markets collapsed.
Some experts remain starry-eyed over the prospects of the Cotai Strip despite the company’s financial difficulties. Dominating Macau, with its feeder market in mainland China, home to more than 1.3 billion people, will pay off in the long run, they say.
“Recreating the Las Vegas Strip in Asia — it’s brilliant,” said Dennis Farrell, a bond analyst with Wachovia Capital Markets. “It takes a visionary to do what Sheldon is doing there.”
But Farrell acknowledges that “going from what they have today to where they want to be is a big leap” that will also require more infrastructure in Macau, including a larger airport. That will take years, he said.
The company has emerged at the forefront of a longer-term trend as other regions consider allowing casino resorts to drive Las Vegas-style tourism. As the lead architect in Macau, Las Vegas Sands — which beat out American competitors for rights to build one of two casino resorts to open in Singapore in the coming year — is well-positioned to compete for opportunities in places such as Japan and Taiwan, where observers say casinos are simply a matter of time.
Las Vegas Sands’ admirers believe the company will emerge from its challenges and the economic downturn with a slower, though surer, gait.
The company appears to be performing respectably in desperate times, including achieving 92 percent capacity at the Venetian and 95 percent at Palazzo, at rates of more than $200 a night, in the third quarter. The Venetian Macau attracted a record 6.6 million visitors that quarter.
“Their management team is made up of very smart, seasoned gaming professionals,” Farrell said. “As long as they are wise about their growth prospects and take a more seasoned approach, I think there will be a lot of longevity with the company.”
Fath is more pessimistic, saying the company’s errors combined with a worsening economy will make survival difficult.
“I’ve been talking to CEOs and COOs who’ve been doing this for 40 years and they’ve never seen anything like this (economy),” he said.
A reflection of the company’s hard-charging chief executive, Sands is a high-risk, high-reward company that has now become an even bigger gamble for investors.
With the company struggling to keep its leverage in check in these tough times, Fath said he is unwilling to join the ranks of speculators who are gambling by investing in its stock.
“People are making a bet that (Adelson) will write another check” to shore up the company, Fath said. “That’s a tough assumption to make, as an analyst. I’m just not going to make that bet.”
A stout man who stands 5 feet, 5 inches tall, Adelson informed investors during a conference call in August that he would do whatever was needed to prop up his company.
“As all of you that know me know, I don’t equal the height of Yao Ming or LeBron James or any of the basketball players,” he said. “However, one of my closest friends says, ‘Sheldon, don’t worry about your height. You’re the tallest person I know when you stand on your wallet.’ And I’m saying right now the company will not have liquidity problems. Need I say more?”