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Battle Beginning over Promising Macau Market

23 October 2001

by David Strow

LAS VEGAS, Nevada -- MGM Mirage, the company that controls more than half of Las Vegas' high-end gambling business, has formally entered the race to acquire a gaming license in one of the Pacific Rim's most potentially lucrative markets: the Chinese port city of Macau.

But it faces competition from the man who built much of Mirage Resorts' Asian high-roller business -- casino mogul Steve Wynn.

The government of Macau announced Monday it has received 22 "expressions of interest" from companies interested in acquiring one of the city's three new gaming licenses. Macau's 10 casinos are all currently controlled by one man, Stanley Ho, who has held a monopoly on Macau's $2 billion gambling market since 1962.

Macau, like nearby Hong Kong, is a former European colony city that recently reverted to the control of the People's Republic of China. A former Portugese colony, the city of 430,000 now operates as a Special Administrative Region of China, giving local authorities considerable autonomy over the city. Earlier this year, those authorities announced they were ending Ho's long-standing monopoly, and invited companies from around the world to bid on three gaming licenses that would be awarded in 2002.

Three Las Vegas companies emerged among the bidders: billionaire Kirk Kerkorian's MGM Mirage, Wynn Resorts and businessman Sheldon Adelson's Las Vegas Sands Inc., the owner of the Venetian.

"Those are the biggest players in the high-end business," said Jason Ader, gaming analyst with Bear Stearns. "It would make sense for both the Venetian and MGM to figure it out ... to have intelligence on what's going on in Macau, if it's a potential threat to their high-end business in Las Vegas. A presence in Macau certainly acts as a marketing magnet for potential high-end Asian business into Las Vegas.

"Assuming the operating environment isn't fraught with corruption, it could be a very lucrative market. But that's a very big if."

Other U.S. companies listed among the 22 contenders are Sun Entertainment Holding Co. Ltd. and Crown Group Inc. Ho's casino company is also contending for one of the licenses.

Jim Murren, president and chief financial officer of MGM Mirage, said his company has been approached by "several very prominent interests" to take a look at Macau. The company's brand names would carry power in that market; Murren said "those three initials, MGM, are some of the most recognized letters in China."

"Macau is an enormous gaming market today, and it can be much bigger if some of the regulations are relaxed and competition is brought in," Murren said. "We have a strong interest in the region, we're the most global of any gaming company, so it would be logical for us to be interested in Macau, and we are."

Yet Murren cautioned it was too early to say whether MGM Mirage would formally bid on a license, with "only a bare minimum of information available on what the opportunity will be."

"It's still not clear what the regulatory environment will be, what the tax environment will be," Murren said. "There's an awful lot of information that still needs to be filtered out."

Wynn and Venetian officials could not be reached for comment. But observers say both entities could have a lot to gain by vying for a Macau license.

The Venetian has managed to build a significant stake in the Asian high-end business since its opening in 1999. And it, along with MGM Mirage, has actively explored the possibility of a Pacific Rim casino before.

Earlier this year, the Venetian confirmed owner Adelson had met with the president of Taiwan to discuss the possibility of building a casino on the island of Penghu, located halfway between Taiwan and China. In a March statement, Adelson said the Taiwanese president had "encouraged" Las Vegas Sands to make an investment there.

"If the government of Taiwan were to adopt a favorable policy toward gaming, (Las Vegas Sands) would be interested in pursuing a gaming venture in that country," Adelson said in March.

Wynn, unlike MGM Mirage and the Venetian, doesn't currently have an operating casino in Las Vegas. But he does have a long track record among Asia's most lucrative high-rollers, said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown.

"Wynn has significant personal relationship with many of the players, and that gives him a competitive advantage as an operator of a large, high-end, five-star casino hotel in either Las Vegas or Macau," Zarnett said. "A lot of his players, when he was chairman of Mirage (Resorts), were his friends."

And those connections could be helpful from an investment perspective as well, Ader said.

"I'm sure his Asian partners would be willing to do something if it's a good deal," Ader said.

Wynn's 50 percent partner in Le Reve, his planned north Strip megaresort, is Japanese pachinko machine manufacturer Aruze Corp. It is expected Wynn will open the 2,455-room hotel-casino sometime in 2004, with a budget exceeding $1 billion.

Wynn will soon seek out debt financing for that project. Could he build resorts in Las Vegas and Macau simultaneously, as a privately held company?

"The size and the scope of the overseas operation would be critical in determining to what extent the Venetian and Wynn Resorts could be involved," Zarnett said.

The Venetian is also a privately held company, and carries a debt load of nearly $790 million -- nearly 5 times its annual cash flow. And it has substantial long-term growth plans in Las Vegas. Construction on a 1,000-room, $175 million to $200 million hotel tower at the Venetian was temporarily suspended just a few weeks ago, and Adelson has long discussed his goal of building a second, 3,000-room resort at the Venetian site. He's said he plans to spend as much as $900 million on that project.

But there's indications a Macau project could prove quite affordable by Las Vegas standards. On Monday, Macau officials said some of the potential bidders for a gaming license were willing to invest about $125 million into the market.

By comparison, the least expensive resort built on the Las Vegas Strip in the last four years, Paris Las Vegas, cost more than six times as much. And the two locals-oriented casinos now under construction in Las Vegas -- the Palms and Green Valley Ranch Station Casino -- will cost $265 million and $300 million, respectively.

One of the largest names in casino gambling, Park Place Entertainment Corp., has also closely examined Macau, but did not submit an expression of interest.

"That doesn't mean we're out of the picture, but it means we're decided for the time being not to file," said Park Place Chief Executive Tom Gallagher. "We had greater priorities domestically and, potentially, with other international locations."

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