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NOkada Manila

Thursday, 26 October 2017 15:31
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Japan’s Universal Entertainment ousted founder Kazuo Okada earlier this year, prompting questions about the future of the integrated resort bearing his name and the company’s Japan casino ambitions.

By Muhammad Cohen | Editor-at-Large

After years of controversy, it all seemed to be coming together for Okada Manila, the brainchild of Universal Entertainment Corp founder Kazuo Okada. The biggest integrated resort project in the Philippine capital’s burgeoning Entertainment City district opened last December with Chairman Okada’s name on it. That same month legislators in Japan passed a preliminary casino legalization bill, making the pachinko mogul’s long held ambition to own a casino in his homeland a possible dream.

Launching Okada Manila, even with a fraction of its guest rooms, gaming areas and dining available, involved numerous legal and personal rows, notably costing Mr Okada his US$2.8 billion leading stake in Wynn Resorts and triggering investigations in at least four jurisdictions. Okada Manila seemed worth it: Morgan Stanley forecasts Okada’s 2019 gross gaming revenue at US$1.1 billion, a 32% share of the Manila IR market. Then things fell apart for Okada Manila and its namesake again.

In early June, Universal announced it was investigating Mr Okada for diverting corporate funds for his private use, leading to his ouster as Chairman. The company’s probe found that in three cases during 2015, Mr Okada abused company funds as his own – diverting the proceeds of a loan, improperly drawing a corporate check and posting company funds as personal loan collateral – enriching himself by US$20 million.

Mr Okada, 74, who founded the company in 1969 and made it a leading pachinko and slot machine maker, insists he’s the victim of a cabal led by a former protégé, Universal President Jun Fujimoto, and an ungrateful family that voted him down from Okada Holdings, the Hong Kong entity that holds 69% of Universal’s shares.

HISTORY REPEATS

In the tangled web of Asia’s family controlled corporations, Mr Okada’s alleged indiscretions might be chalked up as honest mistakes, undone with a fund transfer and an apology. The accusations recall Wynn Resorts’ investigation by America’s former FBI Director Louis B. Freeh that uncovered allegedly improper hospitality at Wynn properties to Philippine officials on Mr Okada’s account totaling US$110,000. Those incidents didn’t merit serious scrutiny at the time – and many dismissed them as standard industry practice – yet they prompted Mr Okada’s removal from Wynn’s board and redemption of his stock at a US$900 million discount in 2012. Mr Okada is suing to get his shares back.

Universal’s allegations pile onto the history of Okada Manila, which Steve Wynn said lay at the root of splitting with his former “best friend,” Mr Okada. Reuters reported in 2012 that Universal paid US$40 million in 2010 to an associate of Efraim Genuino, then chairman of Philippine gaming regulator Pagcor. It’s that level of alleged corruption that led Wynn to judge Universal’s Philippine IR plan a threat to its Nevada gaming license and remove Mr Okada. Universal sued three employees involved and Mr Okada denied knowledge of the payments. 

Okada Manila also drew Philippine authorities’ ire. Prosecutors charged Tiger Resort Leisure and Entertainment, Universal’s Philippine subsidiary holding Okada Manila, for violating laws mandating land ownership by Philippine citizens. Tiger claimed it followed the advice of Philippine lawyers and, after two local partnerships fizzled, settled the land issue by teaming with All Seasons Hotel and Resort, headed by Antonio Cojuangco, a cousin of former Philippine Presidents Corazon Aquino and Benigno Aquino III. In 2015, Pagcor fined Tiger Php100 million (US$2.2 million at the time) for missing the repeatedly extended IR completion deadline.

FROM AUTHORIZED TO EXILED

The swirl of allegations surrounding Okada Manila triggered probes in multiple jurisdictions, including the US, where Universal subsidiary Aruze America is licensed to sell gaming machines. None of the accusations stuck to Mr Okada until Universal turned on him – and that really hurts.

“It’s a big deal,” Spectrum Asia CEO Paul Bromberg says. “He goes from someone who can say, ‘I have been investigated by the Americans and licensed’ to a guy who got thrown out of his own company.”

Despite the turmoil at the top, it’s been “business as usual” at Okada Manila, according to a resort spokesperson. By September, the casino had 250 tables on its mass floor and some 2,500 slot machines. It had one active junket promoter from Taiwan with a subjunket, both mainly drawing customers from Korea, and is expected to add bigger junkets during this quarter. Suncity President for Marketing Strategy YM Choong confirmed that Macau’s top junket promoter is working with Okada to create a VIP club housing 25 gaming tables and seven private salons.

Morgan Stanley says revenue at Manila’s integrated resorts – Okada, Travellers International’s Resorts Word Manila (RWM), Melco’s City of Dreams Manila and Bloomberry’s Solaire – grew 27% year-onyear to August, with no signs of cannibalization. Market revenue grew despite reduced operations at RWM following the fatal attack there in June. Okada took a 15% share of Manila IR’s PHP15.4 billion (US$300 million) mass market revenue in the second quarter, according to Morgan Stanley analysts Alex Poon and Praveen Choudhary.

The Philippine growth story should continue, they write, for several reasons. Chinese visitor arrivals rose 33% in the first half of 2017 to nearly 450,000, thanks in part to improved geopolitical relations between the Philippines and China under President Rodrigo Duterte. The trend got a boost from visa on arrival for Chinese tour groups in August and Morgan Stanley expects visa on arrival for all Chinese visitors soon.

Their research finds City of Dreams and Solaire comp about 50% of rooms for gaming customers, below the 80% to 90% rate in some Macau casinos, so there’s scope to expand outreach. Clustering Okada, Solaire and CoD makes Entertainment City a local and regional gaming destination. Pagcor regulation remains friendly, allowing Macau junkets and proxy betting, increasingly with video streaming. The expressway opened last December that connects Ninoy Aquino International Airport (NAIA) with Entertainment City – and exits on Okada’s doorstep – extending the bay front district’s reach deeper into Metro Manila’s population centers.

HARD CHOICES

“Potential is significant” for Okada Manila, Mr Bromberg says. “It has a great location and real [critical] mass is achieved with City of Dreams and Solaire in the neighborhood.”

But it remains unclear how Universal wants to handle that potential. Management chose, for now, to keep the name Okada Manila, but more difficult decisions lie ahead.

When Okada premiered its signature dancing fountain in March, it opened about 100 guest rooms of a projected 1,000 for its first phase and a half-dozen restaurants. It has since opened new restaurants but few rooms.

“The primary focus now is the completion of Phase One,” an Okada Manila spokesperson says. Universal has set a target of 500 rooms, plus 15 to 20 restaurants, by the first quarter of next year. There’s been no indication of when the IR plans full buildout to 1,000 rooms that would entitle it to 500 tables and 3,000 machines, based on Pagcor’s allocation formula. The IR site also has 19 hectares free for expansion.

Sources outside the company say progress on completing the resort slowed because Universal cut funding.

“Running out of money is a consequence of Okada going, but who knows what other problems exist that have yet to be disclosed?” Mr Bromberg says.

“They need to cut costs and overhead. They have a huge loan,” explains a knowledgeable source. “They offered 20% to 30% of local management voluntary separation [in August].”

BUYERS’ MARKET

Universal is reportedly seeking to sell some or all of Okada Manila but that may not prove easy. The Philippines has been off limits for US operators due to regulator Pagcor doubling as a casino operator plus the country’s reputation for corruption. Nevertheless, during the Benigno Aquino presidency that ran for five years from 30 June 2010, Caesars Entertainment broke the ice, proposing an integrated resort with its own private air terminal at NAIA. Caesars President for International Development Steve Tight says that proposal was scuttled because airport authorities earmarked the proposed IR site for future expansion. Additionally, sources contend the climate of reform that allowed US operators to consider the Philippines has chilled under President Duterte.

That’s ironic since President Duterte ordered Pagcor to sell its gaming operations and become a regulator only. In September, Philippine Finance Secretary Carlos Dominguez told local media that valuation studies are underway to price Pagcor’s 17 Casino Filipino properties and that sales of individual units could begin next year. That gives potential investors in Okada many alternatives for entry or expansion in the Philippines.

Lawrence Ho said Melco Resorts could look at some Pagcor properties to complement City of Dreams Manila. Melco fits into the relatively small set of potential international buyers for Okada Manila. Melco has no US operations – though sources suggest Native American operators or those licensees in US jurisdictions outside Nevada and New Jersey might find the Philippines palatable – boasts the expertize to operate an IR and could access sufficient capital to buy it. Macau’s Galaxy Entertainment or SJM could also be candidates. Australia’s Star Entertainment or Crown Resorts, New Zealand’s SkyCity or various European operators might view Okada as a beachhead in Asia. 

Philippine companies would find Okada Manila an easy fit. Bloomberry Chairman and CEO Enrique Razon Jr reportedly indicated early interest but was put off by Okada’s construction quality. All Seasons, the project’s local landowner, could take a bigger stake. Henry Sy, the Philippines’ richest person, holds a share of CoD Manila through Belle Corp and could consider adding Okada, perhaps through gaming vehicle Premium Leisure. Travellers, the partnership between Genting Hong Kong and local developer Alliance Global licensed to build Entertainment City’s fourth IR, could see Okada as a shortcut into the cluster and well away from the RWM tragedy.

That’s assuming Universal chooses to sell Okada Manila. At one level it makes sense to dump what took on aspects of a vanity project for the chairman it fired, from the Wynn-like dancing fountain to his name on top. However, Universal faces gargantuan rivals in the consolidating global gaming machine marketplace and a shrinking pachinko window in Japan. Branching out as an integrated resort operator gives Universal a new path to growth, building on its core business.

EYE ON JAPAN

Ideally, that growth path would include all or part of an IR in Japan. Some believe controversies attached to Okada Manila plus the Philippines’ poor probity reputation make owning it, or any Philippine casino, an impediment to IR success in Japan. But sources in Japan and beyond see it differently.

“The Okada Manila project improves Universal’s chances of winning a bid for an IR license – well, except for the name,” Global Market Advisors Senior Partner Andrew Klebanow says. “I do not see Universal offloading Okada Manila any time soon. This is a flagship project for the company and one that can be used to demonstrate to the IR selection committee that Universal is capable of developing and operating large-scale integrated resorts. That is going to emerge as a very important issue as Japan begins to evaluate development proposals.

“Never underestimate the importance of being a Japanese company, particularly one with a long history of gaming in Japan. Having a Japanese partner or being a Japanese company can be a critical success factor in winning a bid for a coveted IR license.” Universal’s pachinko and pachislot experience also matters, Mr Klebanow argues.

“With all due respect to Konami, there is not a company out there that has a better understanding of the kinds of electronic games Japanese enjoy playing, and with the experience in designing, building, opening and operating an IR, Universal remains in a good position to compete for a license,” he adds.

Mr Okada’s dismissal could also boost Universal’s prospects as an IR partner. Beyond his legal and ethical legacy, Mr Okada has a wellearned reputation as a volatile maverick. Those aren’t ideal qualities for a partner in any situation, but may be especially unwelcome in what’s likely to be a fastidious Japanese casino regulatory environment. In the end, Okada Manila may well help Universal realize Kazuo Okada’s dream of owning a casino in Japan – and his own ouster could help make his wish come true.

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