Sun's purchase of Desert Inn to have major impact in Las Vegas

The price elicited yawns, but the outcome won't.

The impact of Sun International Hotels Ltd.'s agreement to buy the Desert Inn may become one of the seminal events in the evolution of the Las Vegas resort business.

The $275 million purchase price seems insignificant compared with some of the billion-dollar gaming acquisitions in the news recently. But the number isn't important; the significance lies in the players entering this market for the first time.

For the Desert Inn deal gives Sun Chairman Sol Kerzner, the South African entrepreneur who has built some of the world's most spectacular resorts, a chance and a place to weave his magic once again.

Gaming analysts, industry observers, competing corporate executives, members of royalty and, most important, just plain customers have long been in awe of the creative talents of Kerzner, who is often likened to resort developer Steve Wynn of Mirage Resorts.

Perhaps it's fitting, then, that a top Mirage executive welcomed Tuesday's announcement of the Desert Inn acquisition.

"This is great news, as it not only brings a highly respected gaming company to town but also puts the Desert Inn and its undeveloped land in the hands of an extremely creative developer who has a superb track record in, and appreciation of, the gaming industry," said Alan Feldman, Mirage's vice president of communications.

Adding Kerzner's talents to those of the other great resort developers assembled here seems certain to make the next wave of new properties -- expected to begin opening in the year 2003 -- even more enticing than the current round.

Sun had been eyeing the Desert Inn for more than a year, ever since Starwood Hotels & Resorts Worldwide Chairman Barry Sternlicht announced it was for sale after acquiring ITT Corp. and its gaming properties in January 1998.

Sternlicht was reluctant to launch an aggressive -- and costly -- marketing campaign designed to beef up the Desert Inn's anemic cash flow because he planned to sell the resort as quickly as possible and wouldn't be able to realize any return on that investment.

Several would-be purchasers ranging from cashiered Las Vegas gaming figures to entertainer Michael Jackson had tried but failed to buy it.

And it was an enticing buy, indeed. Not only had the long-time Las Vegas landmark undergone a $200 million transformation into an aesthetically stunning resort, but the assets for sale included its 140-acre golf course and -- a key incentive to Kerzner -- another 32 acres or so of vacant land.

But Kerzner and his son Butch, Sun International's president, were concentrating on finishing a $480 million expansion at Atlantis, their biggest Paradise Island, Bahamas, property. Sun owns 70 percent of the tropical island's 800 acres.

"We'd been looking at the Desert Inn for quite a while, but the timing was never right for us to move forward until now," Butch Kerzner said in an interview Tuesday. "In the past few years we've been very busy with Atlantis."

That spectacular resort evolved from Sun's $125 million purchase of Resorts International's Bahamian casino operations in 1994. Sun immediately launched a $140 million upgrade of the property, then started the latest expansion, which was completed last December.

The result is themed after the mythical civilization lost in an earthquake. The Kerzners' version contains a labyrinth of underwater ruins replicating Atlantis as it might have been 11,000 years ago.

Festooned with intricately carved ancient temples, watery passageways and chambers guarded by live piranhas, sharks, jellyfish and other marine predators, 11 lagoons including the world's largest marine habitat, and the best marina in the Bahamas -- 220-foot yachts can occupy its 63 full-service slips -- the resort offers 1,202 rooms and suites and more than 38 restaurants and lounges.

All told, Sun has spent $800 million transforming its Bahamian properties, which include another 1,100 rooms and a separate 35-acre resort, into a "total immersion" entertainment experience that plays off the natural environment and beautiful beaches of Paradise Island.

In his letter to shareholders in Sun's 1998 annual report, Sol Kerzner noted that the company still has more than 200 acres on the island available for future expansions, which could include luxury residential properties around the resort's golf course.

Such amenities, he implied, are essential to "real resorts" that can succeed as the battle for travelers' business grows more competitive.

"It has come into vogue in our industry to talk about creating 'destination resorts,"' he wrote. "I do not consider a hotel, no matter how large or fanciful, a destination resort. Our goal is to make this concept real at Paradise Island.

"We are developing a broad product range," he continued. "We are developing a destination."

With the latest Atlantis expansion completed, the Kerzners turned their attention to the Desert Inn, completing the deal after a round of exhausting negotiations that lasted into the early morning hours Tuesday.

"The big attractions there were the undeveloped land and the golf course," Butch Kerzner said. "But you have to be able to move forward very quickly with a development. You can't just bank the land. Yet we didn't have the human resources to work on Atlantis and Las Vegas at the same time. It was really a timing issue.

"We think the property plays to our strength as a real resort operator. If you look at what we've done elsewhere, we want to develop real resort products," he said.

And establish 350 time-share units at the Desert Inn in a joint venture between Sun and Starwood. If fully sold out for 52 weeks a year at $10,000 per unit, 350 time-shares would yield gross proceeds of $182 million. At $15,000 per unit, the total would be $273 million -- just $2 million short of the purchase price for the newly renovated resort, golf course and vacant land.

Butch Kerzner also spoke about the company's desire to incorporate the natural environment into the Desert Inn's planned re-development, though Sun hasn't settled on a definitive concept.

"In the Bahamas, it's all about the ocean," he said. "Sun City is the same thing, a theme about Africa."

His father created the similarly named company that built The Palace of the Lost City in Sun City, South Africa, creating an African fantasy world that many consider one of the finest hotels in the world. The Kerzners still own part of that company, though it's a separate entity from the Sun International whose stock is traded on the New York Stock Exchange.

"My father has been doing this for about three decades and has developed about 60 resorts," Butch Kerzner said. "They're all about the outdoors and the attractions of the environment."

Among the Sun International resorts now operated by the Kerzners are the Mohegan Sun in Connecticut and six located on Mauritius and Comoros, tropical islands in the Indian Ocean off the east coast of Africa.

Britain's Prince Andrew and his bride Fergie honeymooned at one of five Sun resorts on Mauritius, while Prince Phillip and Princess Caroline of Monaco vacationed there. The Le Touessrok Resort there was recently voted "the best beach resort in the world" by European readers of Conde Nast Traveler. A second -- Le Saint Geran -- is in the top 10, according to Conde Nast.

Despite that lofty ranking, the Kerzners launched a major renovation of Le Saint Geran this year, reflecting the ideal expressed by Sol Kerzner in the annual report -- "There is no such thing as good enough."

He explained his modus operandi for concept development this way: "There is no 'Eureka, I have got it' kind of moment. It is usually a case of assembling an outstanding team of talented people and then working closely with them, challenging them. It is about developing an environment where creative ideas are continuously exchanged.

"You always have to be asking yourself whether there is a better way to achieve our objective of developing exciting resorts that will produce good shareholder returns."

Kerzner acknowledged he was "somewhat tempted to string together a sequence of glowing superlatives describing the finished product" at Atlantis. "Out of deference to you, I will resist the temptation," he wrote, preferring to let financial results speak for themselves.

After airing the first two-minute television commercial in U.S. history, Sun posted a 100 percent increase in calls to its Atlantis reservation center in January.

The Kerzners will bring more than just creativity to Las Vegas; they'll also import the refreshing candor that has endeared them to Wall Street.

Writing of Sun's Atlantic City hotel-casino, Sol Kerzner explained its mediocre cash-flow performance thus: "In years past, Resorts has become, to be kind, a little 'tired."'

Resorts' faded glory prompted Sun to begin a $50 million renovation scheduled to be completed this summer. However, wrote Kerzner, "Our error was not to have commenced this renovation sooner."

Like Mirage's Wynn, the Kerzners emphasize exquisite attention to detail in their resorts, a reflection of Sun's pithy corporate motto -- "Blow away the customers."

"We do develop projects using capital reasonably prudently, but the attention to detail is key," said Butch Kerzner.

"Guests might not notice every detail, but if you execute it properly, they will sense it the moment they enter the property.

"With the Desert Inn," he said, "we've already got a golf course that establishes an environment with a resort feel. While I don't want to dismiss the themed aspect of what we might do, whatever it is will focus on our goal to create a real resort as opposed to a themed property."

The Kerzners also bring something else to Las Vegas -- a worldwide reputation for world-class resorts that seems certain to create a buzz among their legions of international customers about just what they're working on here.

Imagine: The creators of Bellagio, Atlantis, perhaps Mandalay Bay, Paris, MGM Grand and the Aladdin, all trying to outdo each other three years from now, while the world waits to see what they've wrought.

In the meantime, Sun faces a licensing investigation by Nevada gaming regulators that's expected to last about a year. The deal won't officially close unless and until the Kerzners are licensed.

Among matters the State Gaming Control Board and Nevada Gaming Commission will study are a 13-year-old incident in which Sol Kerzner was investigated for paying about $900,000 to a South African political leader in return for the right to operate a casino.

A South African commission cleared Kerzner of wrongdoing, while the New Jersey Casino Control Commission voted unanimously to license him despite a finding that the payment violated the state's laws. The regulators cited Kerzner's good reputation, charitable contributions and the then-pending expiration of a 10-year statute of limitations covering such payments.

"There is no statute of limitations here," Control Board Chairman Steve DuCharme said today. "That generally applies to criminal prosecutions.

"Matters to be considered by the Nevada board and commission in licensing do not have statutes. We'd look to past business practices to give us some indication of a future pattern," he said.

"Obviously, each member of the board and commission is free to give their own weight to the circumstances surrounding the incident. I believe there are other companies that have been involved in illegal payments to local politicians, some prior to passage of the Foreign Corrupt Business Practices act that made it a federal crime to engage in bribery or corruption in a foreign jurisdiction.

"The dated nature and circumstances of the event would be considered in judging his current suitability," DuCharme said, though Kerzner's licening in other jurisdictions wouldn't be a factor.

"We generally conduct our own recommendations and aren't usually swayed by the actions of other state regulators," he said.

Kerzner hasn't been accused of making similar payments in the United States or other jurisdictions where Sun International operates. Former casino operators ITT Corp. and Hilton Hotels Corp. are among a handful of Nevada operators that retained their gaming licenses here after allegations of illegal payments were raised in other states.

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