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Best of Liz Benston

Gaming Guru

Liz Benston

Sands Has More Reason for IPO Than Stock Options

10 August 2004

Wall Street analysts say the stellar stock appreciation of competitor Wynn Resorts Ltd. -- rather than the ability to issue stock options -- is a primary motivation behind an anticipated public offering of stock by the owner of The Venetian resort in Las Vegas.

Las Vegas Sands Inc., controlled by casino boss Sheldon Adelson, had discussed the possibility of an initial public offering from the company's inception, analysts say. But company President Bill Weidner confirmed the company's interest about three months ago when he told the Las Vegas Sun that the company intended to raise about $200 million in a public stock offering this fall.

Company officials have declined further comment on the primary purpose for the IPO, saying the company had entered a "quiet period" since Friday when it announced the possibility of a public offering in a press release.

In an interview with a Hong Kong newspaper in April, Adelson said his company was pursuing an IPO in order to be able to issue stock options.

"We want to attract talent and, in order to do so, we need to have stock options and we can only do that by listing shares," Adelson told The Standard newspaper.

But analysts say Adelson -- whose company has publicly-traded debt but no public stock -- has other goals in mind for his IPO.

Wynn Resorts has already generated more than $3 billion in equity value largely on boss Steve Wynn's track record financing and building some of the most profitable casinos in the world, analysts say. Las Vegas Sands has a similar operation in that the company has both a Strip casino and a Macau casino under way. But it also has the advantage of generating cash flow from existing casinos in Las Vegas and Macau, they said.

"(Wynn Resorts) hasn't produced a dime of cash flow and they have a lot of debt," Lehman Brothers bond analyst Jane Pedreira said. "Can you imagine what the Sands might be worth if they have cash flow?"

"I can't imagine (Adelson) is doing this just to be nice to his employees," Pedreira added.

Wynn Resorts has a market capitalization of $3.1 billion based on its Monday share price of $34.80, an increase of 7 cents per share from Friday.

Issuing stock also will allow the company to move faster on projects than it could by simply relying on existing cash flow, Pedreira said.

Having public stock marks a "natural progression" for Las Vegas Sands, which has so far been successful financing its expansion projects primarily with bank debt and bonds, Merrill Lynch bond analyst John Maxwell said.

"It makes sense to be a public company if they have growth prospects, which they do," Maxwell said. "And the equity markets for gaming have performed very well. Las Vegas is doing remarkably well this year -- much better than when Wynn did his offering" in 2002, he said.

The IPO also will appeal to bondholders because stockholder claims on assets will be subordinate to bond owners, he said.

Being public has its disadvantages, analysts said.

"A public company has to start managing a little more for the short term. No company wants its stock whipsawed on a quarterly earnings release," Maxwell said.

While the company's public debt means its books already are public, the company will no doubt be subject to more intense scrutiny after it issues stock, Pedreira added.

"This is a huge undertaking and it has a lot of bearing on how you conduct yourself. You've got a bigger constituency to worry about (with stockholders). With Sheldon owning 100 percent of his company's stock, he has a lot more liberty to make decisions. He doesn't have to worry about what shareholders think."

Maxwell said Adelson would likely still control the majority of company stock even with a public offering.

Companies don't need to go public to issue stock or stock options, which can be appraised by independent companies and distributed in private offerings, analysts say. Las Vegas Sands already has an agreement to issue up to 75,000 shares of stock to officers and other key employees.

Las Vegas Sands also isn't in urgent need of cash. The company in May sold its Grand Canal Shoppes mall at The Venetian for $766 million to General Growth Properties Inc. of Chicago and said today it plans to use the proceeds to help fund its planned Palazzo resort adjacent to The Venetian. Last month the company said it would raise $975 million in additional debt for the Palazzo and to refinance existing debt.

Pedreira said the company likely has enough cash for the Palazzo resort and would use IPO proceeds to help finance the company's second resort in Macau.

In its Friday press release, the company would only say it expects to use the proceeds of the offering "for general corporate purposes including for its global expansion."

Separately, Las Vegas Sands today reported second quarter profit of $454.6 million versus $9.6 million in last year's second quarter. The 2004 quarterly results include a $419.9 million gain on the sale of the Grand Canal Shoppes.

Revenue grew in part thanks to the opening of a new 1,013-room hotel tower at The Venetian at the end of the second quarter of 2003 and the opening of the Sands Macau casino May 18.

Cash flow rose 66 percent to $89.5 million and casino revenue at The Venetian rose 20 percent to $76.2 million. The Sands Macau casino reported casino revenue of $57.6 million.

The Venetian continues to command some of the highest returns on the Strip.

The hotel's occupancy rate rose about 1 percent to 98.8 percent and average rates increased $15 to $221 per night.

In a research note today, Deutsche Bank Securities gaming analyst Marc Falcone said the Venetian results show "continued solid demand in Las Vegas" and bode well for operators such as MGM MIRAGE and Wynn Resorts Ltd.

Some analysts appeared more interested in the positive performance of the Macau casino so far and said it's a good indicator of how well future competition by Wynn and MGM MIRAGE in Macau will fare.

"In our view, these early results are a confirmation that Wynn Macau is a potentially high (cash flow) return project," Fulcrum Global Partners analyst Joe Greff wrote in a separate note.

In another note, Bear, Stearns & Co. analyst John Mulkey said "results have been impressive" and that the Macau casino is on track to produce a 100 percent cash flow return on the company's $265 million investment there.

Sands Has More Reason for IPO Than Stock Options is republished from