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Aladdin Execs Say the Las Vegas Strip Project Will Open this Summer

by Gary Thompson

Aladdin Gaming executives are confident Las Vegas' newest mega-resort is on track for a successful opening this summer despite rumors sweeping the Strip that the $1.4 billion project is in trouble.

Their optimism is shared by high-yield securities analysts who have issued "buy" ratings on the company's publicly traded debt, citing the resort's superior location, strong financial support and inventive capital structure.

About $52 million in additional construction costs and a technical default on Aladdin's bank debt last year fueled speculation funding wouldn't be available to complete construction of the resort's first phase.

Adding to the negative speculation was the disclosure that Park Place Entertainment, which owns the nearby Paris Las Vegas and Bally's Las Vegas hotel-casinos, had bought a significant chunk of Aladdin's senior discount notes.

Park Place Chairman Arthur Goldberg acquired about a third of Aladdin's $221.5 million of 13.5 percent notes, establishing a strong bargaining position if Aladdin doesn't meet financial projections and needs to reorganize.

A more likely prospect, though, is that the Aladdin will prosper, giving Park Place and other bond holders a good return on their investments, said high-yield or "junk" bond analysts for Morgan Stanley Dean Witter, Donaldson Lufkin & Jenrette and Jefferies & Co.

Morgan Stanley's Ashley Craig and Lincoln Isetta issued a "strong buy" on Aladdin's debt, saying the securities represent a good total return opportunity and strong value relative to other high-risk gaming credits.

Lawrence Klatzkin and Robert Welch of Jefferies said if the property opens successfully, the bond prices should climb sharply from their current levels, affording investors high potential returns.

"The location may be the best place to build on the Strip, and the interior offers a multi-level entertainment experience that is very engaging," said DLJ's John Leupp.

In a recent interview, Aladdin President Richard Goeglein and Cory Klerk, the company's senior vice president and chief financial officer, were equally sanguine about the future.

"We're confident we can make the numbers," said Goeglein of analysts' projections of cash flow between $100 million and $118 million for the first 12 months of the resort's operations.

That compares with the estimated $130 million of cash flow Paris Las Vegas will generate this year. Yet, as Goeglein noted, Paris has fewer restaurants, retail and entertainment attractions than the Aladdin will offer.

Even at the low estimate, Aladdin's projected cash flow would be more than enough to cover the $80 million of annual debt service and other fixed costs for the period.

"We've watched properties such as Paris, Bally's, Mirage and Mandalay Bay because we believe that, except for the high end of the business, their customer profiles are similar to ours," Goeglein said.

Aladdin's proximity to the 8,700 rooms at Paris, Bally's and Bellagio should help boost walk-in traffic from customers eager to experience the Strip's newest resort, which will boast elaborate depictions of mythological legends from the Tales of Sinbad, Scheherazade's Palace and other themes.

"It's 100 feet from the front door of Paris to our north gate, and Bellagio is right across the Street," Goeglein said.

Phase I of the Arabian Nights-themed resort is now projected to cost around $1.15 billion. About $900 million will be spent building and equipping 2,567 rooms and suites in the hotel tower and 116,000 square feet of casino space and renovating the Aladdin Theater for the Performing Arts, a 7,000-seat entertainment facility.

Desert Passage, a 522,000-square-foot retail shopping and dining area housing some of the resort's 21 restaurants, will cost another $250 million. Phase II, a $300 million expansion that would add 1,000 rooms, a 1,400-seat nightclub and a 50,000-square-foot casino, is at least two years from debuting.

"We're clearly concentrating on Phase I, making sure that opens successfully," Goeglein said.

"We don't have much concern on the revenue side, though getting to full stability and efficiency on the cost side will take a little longer," he said.

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