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Adelson Proves Skeptics Wrong

17 December 2004

Las Vegas Sun

by Liz Benston

LAS VEGAS -- Casino executives know how to count.

And they count Sheldon Adelson as the industry's richest man.

Five years after Venetian owner Sheldon Adelson opened his all-suite resort, casino competitors agree that his convention-focused strategy and timely investment in Macau has been a spectacular success.

About eight years ago MGM Mirage President and Chief Financial Officer Jim Murren, then a Wall Street analyst, sat through a presentation given by Adelson.

The Venetian owner envisioned Las Vegas as the nation's top convention market as well as home to casino resorts where profits were driven by high-priced rooms paid for by convention-goers rather than gamblers, Murren remembered.

"There was a high degree of skepticism, but he has proved those skeptics wrong," Murren said. "I've never been one of them. I think he has every right to feel vindicated."

Adelson, chief executive of the newly minted Las Vegas Sands Corp., presided over an initial public offering Wednesday that boosted his net worth on paper to an estimated $15 billion.

It's an impressive return for a man who contributed $95 million in cash and $225 million in land to build the $1.5 billion Venetian resort. The property, which opened in 1999, was financed with junk bonds at rates as high as 14 percent. The Venetian now has about 4,000 rooms with the mid-2003 addition of a 1,013-room hotel tower.

From a starting price of $29, shares of Las Vegas Sands shot up 61 percent on its first day of trading and another 5 percent Thursday. Today, shares fell 65 cents to $48.46 per share.

At Thursday's share price, Adelson raised $11.7 billion from an offering that registered 23.8 million shares -- only about 7 percent of the company's outstanding stock. Adelson and his family have an 88 percent stake in the public company. Las Vegas Sands is now worth roughly $16 billion -- which will be bigger than any casino company until next year's expected megamergers among Strip competitors.

"I'd like to have his valuation -- our stock would be over $100 if we did -- but I think it's great," Murren said. "My hat is off to him and his team. I know how hard he has worked over the past decade."

Analysts are equally praiseworthy.

"The company should be given kudos," said Joe Fath, a gaming analyst with T. Rowe Price & Associates. "People want to bet on a really strong management team."

Analysts say Mandalay Resort Group's 1.8 million-square-foot convention center and its luxury hotel tower, which also opened in 2003, is proof that the Venetian's business model worked.

The convention business was a driving force behind higher room rates and increased profits on the Strip this year. It has also been cited as a reason behind MGM Mirage's acquisition of Mandalay.

Adelson found success in going against the grain. While other executives stuck to tried-and-true methods of luring high rollers and small-time gamblers,

Adelson opened the Strip's first all-suite hotel with luxurious rooms designed to lure convention-goers at higher room prices.

"Even today, Las Vegas is a small town with a pretty close-knit community at the top, particularly in gaming," said Dan Reichartz, who runs the MonteLago casino at Lake Las Vegas. "There were questions raised about what Sheldon wanted to do."

Reichartz, president of Caesars Palace in the mid-1990s, said Adelson and his single Strip property should be given credit for helping to fuel the tremendous growth of Las Vegas over the past few years.

"I think he did the right things right out of the box," he said. "I was never of the opinion that Sheldon's business model was wrong. Likewise, there were a lot of people who thought our business model was wrong when we put the Forum Shops in Caesars Palace. He's got a great team, they stayed on point and you can see by the numbers that it worked."

Some of the industry's skepticism centered on the fact that Adelson, who founded the Comdex computer trade show in the 1980s, wasn't a casino operator. Adelson sold Comdex to a Japanese company for $800 million in 1995.

"We recognized that he'd make money selling rooms to convention customers mid-week," said Duane Krohn, chief financial officer of the Riviera hotel and casino. "What we didn't know is whether he'd be able to make it on the casino end."

The Riviera, located near the Las Vegas Convention Center, has operated a convention center for 20 years and built its newest convention area about five years ago, Krohn said. The property sells up to 35 percent of its rooms to convention customers.

The Venetian was a different animal from anything that came before, however, he said.

"It was a matter of whether he could build that large of a facility and get a premium (room) rate," Krohn said. "And when you hook it into a casino, you have high paying convention guests who normally don't gamble as much. You have to be able to juggle that mix between the gambling people and the convention people. He's just a lot better at it than we were. And if you can charge enough (for rooms), it doesn't matter."

Convention and other large groups accounted for 39 percent of rooms sold at the Venetian in 2003, with 116 show days and 894,000 visitors at the adjacent Sands Expo Center, according to the company's annual report. Average room rates were $204 per night and midweek occupancy -- driven by convention-goers -- was 94.2 percent compared with 81.6 percent for the Strip as a whole.

Adelson never shied from controversy. He criticized competitors and took on the Las Vegas Convention and Visitors Authority and the powerful Culinary Union -- two groups that had enjoyed long-term support from casinos up and down the Strip.

In a long-running public debate, Adelson accused the LVCVA of having an unfair competitive advantage over privately run convention centers because its Las Vegas Convention Center was financed with public funds.

The Venetian filed suit against the Las Vegas Convention and Visitors Authority in 1999 and twice more in 2000, alleging that the board violated state law when it financed an expansion of its Las Vegas Convention Center with $150 million in revenue bonds. The LVCVA considered filing suit against the Venetian, blaming the company for delays in building the Convention Center's 1.3 million-square-foot South Hall expansion. But the agency later backed off.

Adelson has also criticized the LVCVA for being slow to promote a town that was rapidly shifting from a gambling haven to a resort destination known for entertainment, shopping and dining. Adelson said the LVCVA's ads at the time focused on attracting low-budget customers but should have appealed more to high-end visitors.

With the recent recognition of the Culinary Union at the Aladdin resort, the Venetian remains the only major Strip property that has rejected the union.

Adelson is keenly aware of his independent streak as well as his influence on the Strip.

"It's true that imitation is the sincerest form of flattery," Adelson said in a 2002 interview with In Business Las Vegas, a sister publication of the Las Vegas Sun, referring to the 2003 opening of the Mandalay Bay Convention Center and other recent efforts to turn convention center and other noncasino amenities into profit centers.

But he also has acknowledged doing some copying of his own, taking some cues on incorporating fine art into his resort from Steve Wynn, another equally independent-minded and aggressive competitor.

Both Adelson and Wynn were the first U.S. operators to win concessions to build casinos in Macau, a rapidly growing enclave in China that analysts believe will soon eclipse Nevada as the world's biggest casino market.

While Wynn moved more cautiously, Adelson ran full steam ahead, opening the Sands Macau resort in May and beginning work on a Macau version of the Venetian resort, which is expected in 2007.

Las Vegas Sands' bet on Macau has caught the attention of Wall Street.

With roughly 3 billion people living within a five-hour flight from Macau and bordering China's wealthy Guangdong province, which has a population of over 90 million, the former Portuguese colony is "arguably blessed with better demographics than any gaming market worldwide," according to a recent report from money management firm Gabelli & Co.

The company also is leading a partnership that expects to build a Las Vegas Strip of sorts in Macau, complete with multiple hotels and resorts and the kind of luxury amenities for which Las Vegas is known.

In Las Vegas work has begun on the $1.6 billion Palazzo, a 3,000-room resort next to the Venetian that will open in 2007.

Sands Macau is expected to yield more than $300 million in cash flow over the next 12 months, which isn't bad for a casino that cost $265 million plus another $65 million in improvements, Fath said.

"If they can mirror anything like that at the Venetian site (in Macau), the numbers would be extraordinary," he said.

The company is expected to generate more than a billion dollars in cash flow over the next several years, he said. Other potential casino projects, such as developments in the United Kingdom and Pennsylvania, haven't been factored into that growth yet.

"This is kind of a unique situation," Fath said. "There's so little stock offered and a lot of people want to own the name. It will probably trade at the highest multiple (in the gaming industry) because of that."

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