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Back to the Future

LVS thinks it may be on track again in Macau

Wednesday, 15 April 2009 00:00
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When Sheldon Adelson stated recently that the stock price of his casino operating company Las Vegas Sands Corp (LVS) would eventually trade at US$100 per share, it's possible to argue he wasn't seeking cheap headlines.

He was talking to the markets and to investors, and he had several messages rolled into one. The first was: 'I'm still here despite the recent board room divisions and as hungry as ever for success and with undimmed personal energy'. The second was: 'There's nothing wrong with our business model. We were hit by a perfect storm of once-in-a-lifetime economic conditions'.

While both messages are statements of opinion and will have their veracity tested by events, the markets do appear slowly to be regaining faith in LVS.

There is, however, a long way to go to get back to the heights of 2007. LVS went public in a 2004 offering at US$29 a share. By October 2007, its shares had risen to US$140. In the first full week of April this year the shares were trading at US$4.03 each on the New York Stock Exchange.

But as a number of macroeconomics commentators have mentioned recently, all markets remain vulnerable to sudden nervousness on the part of investors. It's perfectly possible for LVS to regain its position as an outstanding performer in its sector, given its positioning in Macau and the numbers of passionate gamblers in China. In order for the stock of LVS and other casino operators with Asian operations to be protected from sudden shocks linked to investor volatility, though, markets generally will need to regain 'traction'—i.e., solid and sustainable growth.

Business structure

On the issue of the strength of LVS's business model, there can be little doubt that following the debt default risk drama of last November, investors will in future be asking harder questions of Mr Adelson and his company.

Prior to the global credit crisis and the massive discounting of its stock that began in Q4 2008, the markets certainly displayed great faith in the company. Few analysts raised serious objections when in late 2007 a number of investment bankers were bandying around figures of US$17 billion being raised by monetisation of LVS's real estate such as shopping malls and apartments, as if it were already money in the bank.

Mr Adelson, the company's founder, chairman and chief executive, is an excellent salesman for his organisation. He recently went into overdrive with a number of public announcements.

The most prominent—delivered in early April by Stephen Weaver, a man described in LVS earnings call transcripts as 'President of Asia' (possibly a little premature even for a company of LVS's regional stature) —was that LVS planned to resume construction of its stalled Macau projects by year-end. Work on LVS's Cotai site was suspended last November following the default risk announcement and warning about LVS as a going concern made in a statement by the company's auditors to the US Securities and Exchange Commission.

China talks

The news about restarting construction on Cotai followed another statement by Mr Adelson late last month. Mr Adelson revealed he and Michael A. Leven, Bill Weidner's replacement as President and Chief Operating Officer at LVS, had travelled to China to meet with four groups enthusiastic about buying into the company. He said they included two construction companies interested in financing and building the two suspended hotel projects on the Cotai Strip in Macau in exchange for equity.

"They're serious people with serious intent and deep enough pockets," stated Mr Adelson, although he cautioned it was too soon to announce any firm news.

Since that statement, though, it's been revealed in SEC filings that in the last three trading days of March Mr Adelson bought an additional 12.6 million company shares for US$37.4 million. Given the timing of the share purchase, analysts say it's unlikely that a deal with one or more of the unnamed investors is imminent. For a chairman to buy his company's shares when he has knowledge of a deal that could boost the price of those same shares would be to contravene the strict US laws on insider trading. Mr Adelson is not that sort of chairman.

Message in a buy back

LVS recently hired Goldman Sachs to negotiate an option for the casino company to buy back from LVS' lenders as much as US$800 million of its debt.

Given that Mr Adelson said there were no immediate plans to exercise the option of the buy back, it was an effective way of signalling to the market LVS's capacity to reduce its debt without actually spending the cash.

"We don't have any intention now and we have no intention of having an intention in the very near future. Right now it's not necessary for us to do this," Mr Adelson told the Associated Press at the time of the option announcement.

According to its annual report, LVS had US$10.4 billion in debt at the end of 2008, up from US$7.5 billion the previous year. LVS gave a hint recently of how important real estate could be in rebuilding the fortunes of the company when it appointed Jeff Schwartz, a former CEO of ProLogis Inc., to its board of directors. ProLogis is one of the world's largest owners of distribution centres, with more than 475 million square feet of space in North America, Europe and Asia.

"As a company with an already significant and still growing presence in Asia, Jeff's insights [on behalf of LVS] will certainly be valuable as we continue to execute our development plans in the region, specifically the opening of the Marina Bay Sands in Singapore," said Mr Adelson at the time.

Keep it real

Property may be a face card (if not an ace card) in LVS's pack during its current challenges. Assets, including real estate, are of course only worth what people are prepared to pay for them, as has been painfully proven by the present global crisis. A large and diversified property portfolio does, though, arguably offer some kind of hedge against falling casino revenue. It has the potential of providing security for any future lenders, and in the case of Macau at least; sales should provide profits even in a depressed market, because of the cheap terms on which the Macau government leased land to foreign casino investors.

Given that LVS has spent or is still committed to spending (excluding the currently still suspended and undeveloped plots on Cotai) around US$7.6 billion on infrastructure for its Asian schemes, the trick will be to find creative ways of maximising returns on that capital investment.

The company has already outlined some methods for this. At the completed Four Seasons plot on Cotai, for example, LVS has identified a co-operative system of the sort used to market units in Manhattan apartment buildings as a way of selling on title to smaller investors.

In October last year, LVS said it had been given permission by the Macau government to use the cooperative system to sell apartments in the Four Seasons tower and to monetise cash flow generated by The Shoppes at Four Seasons, its 200,000 square foot luxury retail mall located on the same plot.

Recently in an interview with Newsweek magazine, Mr Adelson continued the real estate theme.

"We make more money these days on hotel rooms than we do on the casinos," he was quoted as saying.

Neither Mr Adelson nor the magazine clarified whether he was referring to LVS' global operations or a specific market, or how 'making money' should be defined in this context (for example, net profit, revenue or yield on investment).


Mr Adelson added in comments to an investment forum in New York City last month that 19 investors had come forward as possible buyers of space in LVS's two Cotai malls in Macau. Monetisation of real estate may also be an option at LVS's Marina Bay Sands project in Singapore, which is due to have its first phase opening at the end of this year.

There is, though, an important issue regarding monetisation of LVS's real estate. The market is currently very focused on hard evidence rather than warm words. If LVS is able to convince investors in the coming weeks and months that it can 'show them the money' from monetisation and other initiatives, then it's likely the market will respond accordingly in pushing up further LVS's stock price.

The markets have already shown their support for Mr Adelson's leadership by backing his shares during the recent spate of high profile executive departures. This may be because of, rather than in spite of, the going of Bill Weidner, James Purcell, Bradley Stone, Mark A. Brown and several other senior Macau-based executives. Markets tend to discount a company if they perceive it has a power struggle at the top, and reward those companies where the leadership structure is clear, particularly when the leader is a person of Mr Adelson's commitment and energy.

If LVS can combine a 'clear out' at the top, with strategically astute policies and also benefit from a run of good luck in terms of positive sentiment in the general market, then it may be able to return to the kind of virtuous circle of investor value it enjoyed in the heady days before the escalation of the credit crisis.

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