Dicey Outlook for New Casino
The paint has barely dried on this city’s newest monument to gambling--the $1.3-billion Aladdin Resort & Casino--and already the death watch has started.
The gaming industry acknowledges that the Strip is overbuilt and the economy is cooling. Vegas-watchers expect the Aladdin to be the most spectacular casualty, calling it a case study in what not to do and how not to do it when building a casino.
Parent company Aladdin Gaming Holdings maintains that the resort will overcome its difficulties, but it will take time. Analysts say the annual earnings statement, due out this week, will provide the first comprehensive indication of the magnitude of Aladdin’s problems.
A Vegas tourist, however, doesn’t need a spreadsheet to spot some obvious miscalculations.
Take the casino building. A 17-story Moroccan fantasy of bazaar archways, cliffs and a waterfall, it lacks a grand, sweeping entrance from Las Vegas Boulevard to entice traffic to the casino doorstep. The short entrance is easy to miss, quickly dipping underground and out of sight.
The resort hugs the street so closely that passersby risk neck strain to see Aladdin’s castle, 170 feet above. The casino doors are, by Vegas standards, underwhelming and sit far enough above street level that pedestrians are forced to climb a set of unappealing stairs to reach them.
Once inside the casino, potential gamblers--the lifeblood of the business--can skip the slot machines and gaming tables and go straight to hotel rooms or enter an adjacent Arabian Nights-themed shopping mall, barely setting foot on the carpeted casino floor.
Behind the scenes, the problems are even more daunting. When it opened in August, the resort joined the battle against deep-pocket gaming giants without the benefit of a tie-in to a national reservation network or even the most basic ingredient for success: a database of loyal gamblers. The financial pressures have created bad blood between Aladdin’s partners. And now a competitor has snapped up a third of Aladdin’s depressed bonds and appears to be poised for a takeover.
“This is not a matter of if it goes bad, it’s a matter of when,” said William S. Newby, who manages Bank of America’s entertainment, media and gaming investment group. “Is it headed for Chapter 11? I wouldn’t bet against it at this point.”
Yet Aladdin’s owners rely on the notion that, in Vegas, luck can change in an instant. More than a few properties have been pronounced dead only to defy the odds and flourish. Aladdin executives, though acknowledging that they’re scrambling to correct some of the resort’s basic flaws, say their casino will do the same.
“People have short memories,” said the resort’s president and chief operating officer, William L. Timmins. “There are a lot of properties around this town that took a significant time to ramp up. . . . I don’t think we’re in a vastly different situation.”
New casinos always have start-up headaches, experts say, but the Aladdin’s have become a throbbing migraine. In its most recent financial filing, management disclosed that the resort had a $40-million loss during the three months ended Sept. 30, which included the casino’s first month-and-a-half of operations.
The daily average slot machine revenue slid from $90 during opening weeks to $80 in October, a level that Newby said is below the industry average of $108. “You’re seeing pretty poor performance, and what it usually means is they’re not getting bodies into the casino,” he said.
Now as they try to dig out of that hole, Aladdin officials face a new threat: a wilting economy, especially in California--which accounts for nearly a third of the visitors to Las Vegas casinos.
They say Californians, spooked by spiraling electricity rates, are now eyeing other gaming alternatives, such as day trips to nearby Indian casinos. As a result, hotels up and down the Strip saw their hotel-room occupancy dip 5% to 10% in January.
“Someone who has their budget pinched, who is not psychologically feeling like they’re in Fat City, will say, ‘Let’s go to Barona for the day,’ ” said Richard J. Goeglein, a minority investor in the Aladdin, as well as its holding company’s president and chief executive.
The idea of rebuilding the Aladdin was born in headier times. Conceived as an independent challenger to such gaming giants as Park Place Entertainment Corp., which owns Caesars Palace and the new Paris Las Vegas, the new Aladdin is the brainchild of Jack Sommers, scion of a New York apartment and commercial development family.
In 1996, needing to roll over $62 million in profit from the sale of a Park Avenue office building in New York, the Sommers Family Trust bought the original Aladdin, by then a seedy property with a checkered past. Once controlled by organized crime syndicates, it was also where Elvis Presley exchanged wedding vows with Priscilla Beaulieu.
The value of the Aladdin, of course, wasn’t in its history but in the location: smack-dab along the middle of the Strip, which was at the peak of a building boom that gave birth to such behemoths as Steve Wynn’s luxurious Bellagio resort, across the street.
“This is singularly the most desirable piece of dirt on the Las Vegas Strip,” Goeglein said about the Aladdin, adding that 200,000 visitors a week visit casinos and hotels on either side of the property. “It’s almost at ground zero.”
In 1998, the old Aladdin was dynamited to make way for the 35-acre resort, the last in a wave of mega-casinos to appear on the Strip in recent years.
Focus-Grouped Architecture
The original plans called for a music-themed hotel, but those were scrapped when sponsor Planet Hollywood, one of the original development partners, declared bankruptcy. Left to guide the project were the Sommers trust and London Clubs International, a European gaming giant for which the project represented a foothold in the lucrative U.S. market.
At the core of their mixed-use development is a 2,567-room hotel and a 116,000-square-foot casino. An Arabian-themed mall with nearly 500,000 square feet of retail space, built in conjunction with TrizecHahn Corp., surrounds it on three sides like a horseshoe. Also inside the horseshoe is a 7,000-seat theater, and behind the complex is a 4,800-car garage.
The partners agreed with Clark County planners to help relieve Las Vegas Boulevard traffic by putting Aladdin’s main entrance on Harmon Avenue, a side street, with the understanding that the secondary road would be widened to a six-lane highway by opening day.
Bowing to focus groups, Aladdin broke from a Vegas tradition of funneling all foot traffic to the casino. Rather, the new design allows travelers to enter and exit the mall--the Desert Passage--or go to their hotel rooms without exposure to the seductive slots or the click of dice on green felt.
“We looked at the blueprints and said it was wacky,” said Newby of Bank of America, a major gaming investor that passed on financing the Aladdin.
Newby said Aladdin’s casino entrances are unspectacular and the resort’s lack of an eye-catching driveway from the boulevard was a big minus.
“Look at . . . Paris,” Newby said of the casino next door to Aladdin. “You drive in the entranceway. You go past the balloon. You go by the Arc de Triomphe and the Eiffel Tower. And you have people ready to sweep you into the casino.
“If you go to the Aladdin, you’d be hard pressed to find the entrance to the casino.”
Still, Sommers and London Clubs were able to secure about $850 million in bank loans and bond financing, promising to pay anything over that out of their own pockets. Eventually, the casino and hotel’s price tag ballooned to more than $1 billion, in part because of last-minute decisions to more than double the pool area and build 15 feet closer to the boulevard. (The tab does not include $300 million spent to develop the shopping mall.)
Yet when it came time to pay for the overruns, there was a rude awakening. The Sommers trust, which had agreed to pick up 75% of the excess tab, didn’t have the extra $100 million-plus, according to the companies. London Clubs eventually was forced to sink a total of $200 million into the project, about four times what it had expected to spend.
Sommers bristles at the suggestion he blindsided his partner. “London Clubs was fully aware of the condition of the Sommers Family Trust, with whom it was partnering,” he said.
Vegas Rival Shows Unwanted Interest
But it was a bitter pill for London Clubs, whose price on the London Stock Exchange plunged 50% in one day in mid-December when it announced that the Aladdin project had created a cash crisis for the company. The shares, at 53 cents Friday, continue to swoon, prompting analysts to warn that the gaming giant, with casinos on three continents, could tank if it loses its shirt in Vegas.
“I think it’s no secret we’ve been very disappointed by our partner’s inability to come up with extra funds for this project,” said Aladdin’s Timmins, who formerly worked for London Clubs. A spokesman for London Clubs did not return calls.
Meanwhile, the project’s precarious financial position has drawn unwanted interest from rival Park Place. The firm quietly bought up a third of the Aladdin’s $220 million in high-yield zero-coupon bonds at an estimated 20 to 30 cents on the dollar. That puts it in a solid position to make a takeover bid if the Aladdin is nudged into bankruptcy.
“I do think that Park Place Entertainment, which is the largest bondholder, will end up owning that property,” said Jason Ader, a gaming industry analyst for Bear, Stearns & Co. in New York.
Timmins says he is unconcerned about Park Place’s investment, which he calls a smart move. Even if the rival doesn’t take over, it stands to profit handsomely from Aladdin’s success.
Betting on an Improved Layout
Hotel occupancy now is up to a respectable 90% and Timmins said he is satisfied with the performance of the resort’s luxury gaming room, which is run by London Clubs in an area separate from the main casino floor. The room--which, with its speckled marble and polished wood rafters, evokes the kind of European casino James Bond would frequent--has done well at drawing high rollers, typically those with credit lines exceeding $100,000.
Aladdin management has also reconfigured the casino floor to thin out the slot machines by nearly 25%, from 2,800 to 2,270. The higher number was required as part of the financing deal, but management said they cluttered the casino.
The management concedes, however, that the Aladdin is at a decided disadvantage in the competitive Vegas market because it is starting from scratch to build a database of gambling customers, a commodity considered essential for gaming houses that need to conduct marketing campaigns and gain customer loyalty.
The resort is collecting 1,000 names a day and has hired three vice presidents to help find more players, especially for the high-end slots.
As for the resort’s physical limitations, Aladdin executives said they’re looking at plans to make the casino entrances more distinctive and replace the stairs with people movers. They acknowledged that the sidewalk stairs have been a hindrance.
“People are--I don’t want to say they’re lazy, but if they don’t care where they’re going and if they can walk flat, rather than walk up stairs, they’ll walk flat,” said Goeglein, Aladdin Holdings’ president.
Still, there are factors outside management’s control that have a direct bearing on the Aladdin’s survival. Besides the economy, the biggest is Clark County, which promised to have Harmon Avenue widened by the time the casino opened last summer.
Now, county officials say construction won’t start until July. And they have not determined the final configuration of the street and how it will affect development of a next-door vacant lot, now an eyesore.
The lack of improvements on Harmon is “what I would call a . . . big negative for this property but eventually would become a positive,” Timmins said.
The Aladdin partners are gambling that widening the street and other measures will improve the resort’s performance enough to enable it to cover $80 million a year in fixed costs, of which $55 million is construction loan principal and interest. That’s not counting an additional $23 million a year that must be paid when the public bonds come due in March 2003.
Maneuvering for a Showdown?
Meanwhile, a showdown may be brewing between Aladdin’s partners, with each maneuvering to increase its share in the resort. Sommers said his family trust is “exploring certain opportunities” to increase its stake in the Aladdin.
And Timmins said London Clubs is seriously considering converting its holdings of preferred Aladdin shares into common equity, which would give it more than 80% ownership.
Asked whether this would be a move to oust Sommers, Timmins said: “I wouldn’t say it’s a way of squeezing Mr. Sommers out. It is an economic reality of where the real financing came from.”
Industry experts say Aladdin management may have staunched the flow of red ink and is now generating a positive cash flow from Aladdin’s gaming tables and hotel rooms, but not enough to cover those payments. Hence the death watch.
“This property is never going to stop operating,” Goeglein said. “The question is, will the people who created it . . . have sufficient time to see it through?”
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Numbers Game
Aladdin, Las Vegas’ newest themed gambling resort, boasts one of the larger casinos on the Strip. But its gambling floor was cluttered with too many slot machines. Since reporting statistics for last year, Aladdin management has reduced the number of slots to 2,270 machines, a ratio of machines to floor space more in keeping with other resorts. Las Vegas Strip hotels, statistics for 2000:
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Casino space Hotel Meeting space Hotel (sq.ft.) Slots Tables rooms (sq.ft.) MGM Grand 171,500 3,589 152 5,034 380,000 Bellagio 155,000 2,485 139 3,005 99,100 Mandalay Bay 135,000 2,287 130 3,700 125,000 Caesars Palace 125,000 2,000 109 2,454 171,000 Luxor 120,000 2,031 107 4,404 20,000 Venetian 116,000 2,150 119 3,036 1,650,000 Aladdin 116,000 2,651 96 2,567 75,000 Rio 111,000 2,368 106 2,548 110,000 Excalibur 110,000 2,436 80 4,008 12,000 Riviera 110,000 1,520 46 2,100 160,000 Circus Circus 109,000 2,249 79 3,744 11,300 Mirage 107,200 2,300 122 3,044 130,000 Las Vegas Hilton 100,000 1,347 85 2,944 225,000
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Casino space Hotel Meeting space Hotel (sq.ft.) Slots Tables rooms (sq.ft.) Stratosphere 96,000 1,550 60 1,500 9,200 Monte Carlo 90,000 2,073 72 3,002 22,900 Harrah’s 86,700 1,819 75 2,613 25,000 Paris Las Vegas 85,000 2,000 100 2,916 130,000 New York-New York 84,000 2,250 70 2,024 15,600 Treasure Island 83,800 1,940 83 2,885 16,000 Bally’s 83,000 1,500 100 2,814 175,000 Flamingo Hilton 81,000 1,900 80 3,626 66,000 Stardust 75,000 1,600 79 1,506 35,000 Imperial Palace 75,000 1,870 53 2,700 25,000 Tropicana 62,000 1,651 45 1,877 100,000 Barbary Coast 30,000 660 36 197 Not avail.
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Source: Bank of America