Tuesday, May 18, 1999 | 12:38 p.m.
Sun International Hotels Ltd. said today it has agreed to buy the posh Desert Inn hotel-casino on the Las Vegas Strip from Starwood Hotels & Resorts Worldwide Inc. for $275 million cash.
The deal gives Sun International -- which operates hotels and casinos in the Bahamas, Atlantic City, Connecticut and the Indian Ocean -- its first resort in Las Vegas. But it probably won't be its last.
Analysts say that, while not widely known in Las Vegas, Sun Chairman Sol Kerzner is considered a visionary resort designer similar to Steve Wynn, chairman of Mirage Resorts Inc.
Kerzner formed Sun International in 1995 after successfully developing a string of luxurious hotel and casino resorts in South Africa and leaving that company. He bought the Resorts hotel-casino in Atlantic City from entertainer Merv Griffin, developed world-class themed resorts on Paradise Island, as well as the Mohegan Sun hotel-casino in Connecticut.
And Kerzner hinted strongly today he plans a major development at the Desert Inn after the acquisition is consummated. Because Kerzner and other executives have to undergo licensing investigations in Nevada, the closing is expected in the second quarter of 2000.
"We are very pleased to have acquired the Desert Inn, which represents one of the last premier development sites on the Las Vegas Strip," Kerzner said in a statement.
"The property, with its existing hotel, casino, golf course and undeveloped land, plays to Sun International's strength of developing outstanding resorts at capital costs that allow the company to achieve good returns on investment."
"Sol believes the Desert Inn is one of the best real estate plays in America, let alone gaming and Las Vegas," said a Las Vegan who is a friend of Kerzner but who requested anonymity.
"He's excited about coming to Las Vegas. He's a first-class developer and a first-class individual and this will elevate Las Vegas to even greater heights. This is the kind of developer and businessman we want in the community," the friend said today.
Kerzner said the acquisition shouldn't have any short-term effect on per-share earnings.
"We expect that by expanding the property we will develop a very unique resort that capitalizes on the golf course, spa and country club and upon completion should contribute to growth in the company's earnings."
While Las Vegas is in the midst of a wave of new resort openings, plans are already on the drawing boards for the next one, expected to begin in 2003.
The openings of Bellagio, Mandalay Bay, the Venetian have already drawn a sharp increase in visitor volume to Southern Nevada following about two years of miniscule growth. That has prompted developers such as Mirage Resorts to accelerate plans to develop new destination resorts that emphasize entertainment, shopping and fine dining over gaming.
"Sun has always considered Las Vegas as one of the great vacation destinations of the world," Kerzner said.
"Although we view the current wave of additional casino expansion with some caution, we believe that, in the medium-term, this additional capacity will be well absorbed by the market and the destination will continue to prosper.
"The incredible variety of entertainment, retail, restaurants and hotel and convention facilities will ensure that Las Vegas maintains its position as one of the country's most visited vacation destinations," Kerzner said.
"We are encouraged by the results of the first quarter, when visitation to Las Vegas increased by 9 percent, which was in line with room capacity increases of 7 percent over last year," he said.
"The opening of the various exciting new casino hotels has clearly generated an increase in business levels."
The 715-room hotel-casino sits on 25 acres on the Strip. The deal includes the 140-acre Desert Inn golf course and another 32 acres of vacant land on the Strip south of the resort and along Sands Avenue, across the road from the Venetian and the Sands Expo & Convention Center.
Starwood acquired the Desert Inn in 1998 when it bought ITT Corp. But Starwood Chairman Barry Sternlicht immediately put the Desert Inn on the auction block because, despite a recent $200 million renovation, it was losing money.
Later, Sternlicht became disenchanted with the gaming business as a whole because of the volatility of the high-end baccarat business conducted by Caesars Palace. In addition, Wall Street was valuing pure lodging companies at higher cash-flow multiples than lodging-and-gaming operators, so Sternlicht agreed to sell Caesars World to Park Place Entertainment Inc. for $3 billion.
The Desert Inn sale won't get Starwood completely out of the gaming business, Starwood executive Jim Gallagher said today.
"We still have a couple of offshore casinos in places like Sydney, Australia," he said. "But there's certainly a feeling we've been able to negotiate good prices for both Caesars World and the Desert Inn and to sell them to world-class operators so the employees of both entities will have very bright futures."
Gallagher said the negotiations over the sales terms continued through last night and into early today.
As part of the transaction, Sun and Starwood agreed to form a marketing alliance under which the Desert Inn and Sun's Paradise Island, Bahamas, properties -- the Ocean Club and Atlantis -- will be included in Starwood's Preferred Guest Program. Customers will be able to make reservations for those three resorts through Starwood's reservation center, which serves more than 2 million members.
Sun and Starwood also agreed to establish a joint venture to develop 350 time-share units at the Desert Inn. The companies also will explore further time-share opportunities on Paradise Island, using some of Starwood's premier brand names.
Starwood is one of the leading hotel and leisure companies in the world and, through its subsidiaries, owns, manages or franchises more than 700 hotels in 72 countries under the St. Regis, Luxury Collection, Westin, Sheraton, Four Points and W brands.
"We believe that a marketing alliance with Sun will prove very beneficial to Starwood's brands going forward," Sternlicht said.
"This agreement and the sale of Caesars World will allow us to focus on our core global hotel business and completes the disposition process begun when we acquired ITT," he said.
When the sales of Caesars and the Desert Inn are completed, Starwood will have realized more than $6 billion from the sale of assets since February 1998. It is using the proceeds to pay down debt, strengthen its balance sheet and reinvest in existing assets.
"This is a good deal for Sun because it gives them a presence in Las Vegas," gaming analyst Andrew Zarnett of Ladenburg Thalmann & Co. said. "Given their ability to enhance properties and make them fun and interesting, it's a good transaction for Sun and for Las Vegas.
"Sun is a terrific operator of hotel-casino. They should be able to get it to a reasonable return of $20 million in cash flow almost immediately, and in the longer term, could get to a 15 percent cash-on-cash return.
"They'll also be able to develop the adjoining land, which will enable them to do what they do so well -- develop great destination resorts," Zarnett said.
"This is a 'win-win' deal," gaming analyst Kevin Jacobs of PricewaterhouseCoopers gaming said.
"The price is in the range Starwood wanted, and Sun gets a fantastic property that features the biggest suites on the Strip as well as the Strip's last plot of vacant land.
"The plan for Sun and Starwood to jointly develop time-share properties on the site brings top-name gaming and lodging firms into the time-share sector for the first time, reflecting the growth and positive economics of the U.S. time-share industry," Jacobs said.
The stock prices of Sun International were up in midday trading today. Sun was quoted at $46.875, up 68.75 cents, while Starwood was also up 68.75 cents, to $35.1875.
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