Inside Asian Gaming

27 26 n 2001, the Macau government decid- ed to introduce foreign competition to the local gambling industry in order to diversify the city’s tourism draws and boost tax rev- enue. The government decided to open a tender for three gaming concessions, which unlike the licenses currently being bid for in Singapore, would allow concession holders to develop a potentially unlimited number of properties (subject to government approval of the projects). The tender drew bids from 21 consortia, and three winners were announced in 2002: Stanley Ho’s Sociedade de Jogos de Macau (SJM), a subsidiary of erstwhile monopoly A Wynn-Win Sub-Concession Sale Wynn Resorts’ US$900 million sale of Macau’s last remaining gaming sub-concession to the Melco-PBL joint venture boosts the outlook for all existing Macau casino licensees by shutting out new operators until at least 2009. Inside Asian Gaming looks at the history of Macau’s multiplying concessions, and their implications on the development of the city’s post-liberalization gaming landscape operator Sociedade de Turismo e Diversões de Macau (STDM); Las Vegas-based Wynn Resorts; and the Galaxy Casino consortium, including Hong Kong property tycoon Lui Che-woo and Las Vegas Sands Corp (LVS). Although LVS was keen to bid for one of the concessions on offer, the city was then still an unknown entity, with the gambling industry’s murky associations and recent his- tory of gangland turf wars. LVS may now be busily pouring billions into developing prop- erties in Macau, but it had originally intended to act merely as a management company for Macau projects, and sought an Asian partner to foot the investment bill. LVS wanted a fi- nancially robust partner so that should any problems arise in the city that jeopardized its gaming license in Nevada, the partner could take over the concession. The partner LVS originally found was a Taiwanese bank, which came with a view not only to finance and act as guarantor to the LVS project, but also to secure a license to operate banks in Macau. The Macau authori- ties stressed the tender was only for casino concessions, and were unwilling to issue the Taiwanese bank an operating license without subjecting it to the usual approval process. LVS sought to hastily find another partner to back its bid, and settled on the Galaxy Casino group – an entity which would eventually come to be controlled by the Lui family. The concession was granted to the con- sortium prior to the conclusion of a manage- ment agreement between LVS and Galaxy Casino, although the two gave assurances that an agreement would be finalized within six months. The agreement was never reached, and according to Jorge Oliveira, the commissioner for legal affairs of the Macau government’s Commission for Gaming, because the licenses are temporary (expiring in 2022), it perhaps nevermade sense for one party to finance and own the casino projects while the other acted purely as the manager of the properties. PricewaterhouseCoopers (Macau) Gam- ing Practice Director David J. Green lists the criteria used to determine the awarding of casino licenses on page 28 of this issue of Inside Asian Gaming . One of the chief criteria is prior experience of casino operation.While LVS, as the project manager, would be well positioned in this regard at future tenders, Galaxy could risk losing out for lack of experi- ence, despite all the money it would spend on developing the properties.In addition,LVS was to be the project manager of the Cotai development, which“at the time seemed like an isolated place,” according to Mr. Oliveira, and Galaxy feared it would not generate an adequate return on its investment there. The government was eager not to de- lay the development of Cotai, and decided the best course was to disband the Galaxy consortium and issue an independent sub- concession to LVS. The government eventu- ally allowed the other two concessionaires to grant sub-concessions – perhaps partly to prevent them crying foul, and partly to open the door to more operators to help develop Macau into a world-class regional gaming and tourism hub. In June 2004, SJM sold its sub-conces- sion for US$200 million to a joint venture be- tween MGM Mirage and Pansy Ho, daughter of STDM and SJM Managing Director Stanley Ho.That now appears a bargain following the announcement early last month of a US$900 million sale of Wynn Resorts’ sub-concession to the Melco-PBL joint-venture – Melco Inter- national Development Ltd is headed by Mr. Ho’s son Lawrence, and Australia’s Publishing and Broadcasting Ltd (PBL) by James Packer, son of recently deceased media and gaming mogul, Kerry Packer. Melco will pay US$160 million in cash for a 40% interest in the sub-concession while PBL will pay US$240 million for a 60% share, and the remaining US$500 million will come from bank loans. Melco and PBL will share profits of all future projects in Macau and Asia on a 50:50 basis. Melco-PBL is developing several projects inMacau,including theUS$256millionCrown Macau hotel and casino, slated to open early next year, and the US$1 billion City of Dreams resort, expected to open in mid-2008.The ca- sinos in these properties were to be operated under SJM’s concession, with SJM receiving 20% of gross gaming revenue, Melco-PBL about 40%, and the remaining 40% going towards government gaming tax (35%) and mandatory social and welfare contributions. Now that Melco-PBL has acquired its own sub-concession, it will keep the share that would have gone to SJM for itself. SJM waived all rights in relation to its ex- isting agreement with Melco-PBL. Stanley Ho owns 10% of SJM but only has a 3.25% stake in Melco. Lawrence Ho owns 44% of Melco, however, and as such, the Ho family will see a net gain from SJM’s foregone revenue. There are rumours that other senior SJM executives were not pleased with Stanley Ho’s approval of the sub-concession deal with both MGM and Melco-PBL – Stanley Ho served as chair- man and executive director of Melco until March 16, when he quit to comply with rules against conflicts of interest in seeking a listing for SJM on the Hong Kong Stock Exchange. Severing ties with Stanley Ho and SJM is expected to speed probity checks into the Melco-PBL joint venture by Australian regula- tors.Although none of the allegations of links between Stanley Ho and organised crime groups have ever been proven, the media highlighted the probes into Pansy Ho’s rela- tionship with her father by Nevada and New Jersey gaming regulators in relation to Ms. Ho’s joint venture with MGM Mirage. Sources indicate the Nevada regulators have already cleared the JV, however. Too Much? The value of a gaming concession depends on the profit the holder can derive with it. Credit Suisse’s Gabriel Chan points out that with the current concessions set to expire in 2022, the sooner a concessionaire can begin operating, the higher the value of the con- cession.With Melco-PBL’s first project, Crown Macau, set to open in April 2007, and con- struction having commenced on the City of Dreams on April 10, Melco-PBL are at a clear advantage to other potential sub-concession purchasers who would have a longer lead time before commencing operations. A further point is that even though MGM Mirage paid only US$200 million for its sub- concession, it had to pay the cash up front, and has to share 50% of all future earnings with Pansy Ho. Thus, if MGM Mirage’s JV with Ms. Ho earns more than US$1.4 billion by 2022, it will find its sub-concession proves more costly than that of Melco-PBL. Lawrence Ho, meanwhile, justifies the hefty sub-concession bill by pointing out that the Lui family effectively monetized its gaming concession for US$2.3 billion in April 2005, when it sold 97.7% of its shares in Galaxy Casino to Hong Kong-listed K.Wah Construction Materials, which was renamed Galaxy Entertainment Group after the back- door listing. Proceeding with the Proceeds Construction of Wynn Resort’s inaugural Macau property, the US$1.1 billion Wynn Macau, is scheduled for completion on July 27, with the bulk of the project cost already covered by the company’s sub-concession sale. Wynn Macau is slated to open by Sep- tember 5, though that date could well be pushed back if staff training is not accom- plished on time. Wynn Resorts’ future Macau plans are fi- nally starting to crystallize after two reversals in direction. In 2004, Steve Wynn said he planned to develop “the best two or three places” in Ma- cau by himself.By December last year,howev- er, he indicated he was interested in pursuing developments with partners: “I’d love to be partners with Harrah’s (Entertainment) and Caesars Palace. I’d love to be partners with (the Kerzners) and their imaginative proper- ties. And Station Casinos – the Fertittas are smart, and I’d like to join with imaginative and bright guys like them.” In another 180 degree turn by Febru- ary 2006, Mr. Wynn said his company plans to develop a casino resort complex in Cotai on it own. Wynn Resorts has applied to the Macau government for a 21.9 hectare site to develop four hotels and equip three with casinos. Mr. Wynn said his company will op- erate the three casino hotels by itself, and described the fourth hotel as a “Taiwanese guesthouse.” At the same time that Steve Wynn an- nounced his latest Cotai plans, he also sug- gested the sale of his sub-concession was on hold, saying “we don’t have any sub-conces- sions at the moment.”Ten days later, the deal with Melco-PBL was announced. Be prepared for the shape ofWynn Resorts’ Cotai development to shift dramatically. I