Monday, April 18, 2005

Sin City or Wynn City: What’s Under the Covers at Vegas’ Newest Hotel?

Wynn Las Vegas opens its doors to become the most expensive casino and newest resort on the Las Vegas Strip. Filling a void of five years in which no new casino was built on the strip, Wynn Las Vegas boast features such as a three-acre man-made lake, a Maserati/Ferrari dealership, and the strip's only golf course. In contrast with the credo “bigger-is-better”, this new property is designed to be more intimate. With 2,700 hotel rooms and 111,000 square feet of casino space, it is about a third smaller than rivals. It’s a mere $2.7 billion bet on Vegas.

Wynn Las Vegas will be competing head-to-head with established heavyweights Caesar’s Palace, Bellagio, the Venetian, and the MGM Grand for the high-end player market segment. MGM Grand is already fighting back with special tournaments and various activities geared to retain high-end gamblers. Many see this not just as a strategic move by the Wynn Group, but as in any good boxing match, this battle is personal.

Indeed, Kirk Kerkorian, MGM’s largest shareholder, snatched Wynn's Mirage Resorts Inc. away from him in a hostile takeover five years ago. Wynn began plotting his comeback just a month after agreeing to sell Mirage Resorts, when he plunked down $270 million to buy the old Desert Inn. This might explain why the head of HR at Wynn, Arte Nathan, was banded from stepping foot on any MGM properties. This also might explain why 2,000 offers have been made to MGM employees. The Wynn strategy is aimed directly at taking market share from MGM and becoming the premier casino on the Las Vegas strip.

It won’t be easy. MGM controls 60% of the high-end market through its ten heavily marketed casinos. In addition, several of the MGM hotels were previously operated and developed by Steve Wynn. It could certainly be Wynn vs. Wynn.

Interestingly, many in the gambling industry, such as, Gary Loveman, chief executive of Harrah’s, believe that Wynn’s new undertaking will have a favorable impact on the middle-market gamblers. Loveman states, “We…believe that there would be increased tourism as people have not seen anything new on the strip for the last five years.” However, the impact on established casinos which cater to the high-end players like Caesar’s Palace is ominous. Loveman, who also manages Caesars, states: “We will make sure to sustain the Caesar’s Brand.”

Also describing the environment for high-end casinos as ominous is Calyon Securities analyst, Maria Rickert. She believes that the opening of Wynn Las Vegas “…poses a risk to MGM’s Strip properties earnings”. She estimates that the Bellagio, the Mirage and the MGM Grand – all direct competitors to Wynn Las Vegas -- capture 60 percent of the high-end Strip gaming market. Moreover, she believes many employees at casinos once owned by Wynn have likely followed him to the new resort. MGM estimates that 10% of its overall gaming revenue stems from the high-roller segment – money it certainly does not want leaving its tables.

While investors are concerned about MGM prospects, Investors love Wynn. Wynn raised approximately $2.7 billion (stock and bonds) to cover all the costs of this resort including real estate, operations and construction costs. Often referred to as “the Lion of the strip”, Steve Wynn has proved to be an experienced player. With his experience, reputation and eye for perfectionism, he has credibility to deliver to consumers, investors, and skeptics alike. While Wynn was with Mirage Resorts, investors got a return of roughly 25% per year. In fact, with the exception of Sirius Satellite Radio, Wynn Resorts is the only company in the world that has over $6.3 billion in market capitalization with less than $100M in revenues, according to BusinessWeek columnist Robert Barker.

We place our bets on Wynn. Wynn’s reputation and track record of success makes this new venture a likely success. In the history of Las Vegas gaming, Wynn is a proven visionary that delivers to investors and consumers, while being a formable force for competitors. Always the innovator, Wynn Las Vegas has already implemented attractions that consumers will line up to experience, such as a multimedia light and water show over a three acre lake. Unlike other impressive shows such as Bellagio’s water fountains, the consumer will either have to buy a room or eat at one of the Wynn Las Vegas’ posh restaurants in order to enjoy the show.

Wynn’s timing seems to be just right. Volume is up and record profits are being reported. Wynn is able to capitalize on the lack of new construction over the past five years on the strip. Wynn is betting that the conditioned Las Vegas high-end consumer will be enticed to see the hottest, new resort on the strip. In Vegas, newer is better and Wynn’s strategy of the highest quality product will likely draw much attention from gamblers.

Also, the gaming industry is undergoing significant consolidation: MGM is in the process of merging with Mandalay Resort Group (MBG ), and Harrah's Entertainment (HET ) is buying Caesars Entertainment. Wynn can utilize his competitor’s restructurings as a window to seize his target market.

Learning from his own lack of control over the hostile takeover of Mirage, Wynn Resorts is essentially controlled by Steve Wynn. As such, the maestro is able to conduct the creation as he sees fit. While other gaming corporations are aiming for rates of return in excess of competitors and would think carefully about cost overrides, Wynn’s ability to spend an unbudgeted additional $300 million on a second theater shows Wynn’s disdain for worrying about costs. In addition, Wynn is able to focus on the details that differentiate one casino from another in the eyes of his targeted high-end gamblers. To some degree, Wynn is able to leverage his attention to detail and extravagance into offering gamblers a seat at a table which no other casino can replicate.

Stephens, Karnik and Gupta

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