MGM puts its chips on Macau casino
By Muhammad Cohen
HONG KONG - There's no mistaking the aroma of life's winners at play that
infuses the Borgata. At this casino resort the perfumed rich sip drinks under
multicolored Dale Chihuly glass chandeliers as waitresses in skimpy black
dresses flit by.
On the gaming floor, at the show desk trying to get tickets to see stars like
Eric Clapton perform, or along the rope line for its night clubs, people look
like they just stepped off a movie set, not a tour bus. But the US$1.1 billion
Borgata isn't in Las Vegas. This fabulous fantasy factory is 3,565 kilometers
(2,228 miles) away in Atlantic City, New Jersey. With its ban on tour buses, it
stands head-and-shoulders above the blue-collar crowd that caters for
pensioners who roll up in groups to play the slot machines before getting back
on board.
Played out in Macau, Asia's casino capital, the equivalent bus
ban would be a casino closed to mainland Chinese - on whom the southern China
administrative region's gambling companies are totally dependent.
Yet Borgata, a joint venture of Boyd Gaming and MGM Mirage, has been rewriting
the rules for Atlantic City since it opened in 2003. It's the one place in town
where the hip crowd from New York or Philadelphia aren't embarrassed to be
seen. MGM liked the property so much that it planned a new $5 billion resort on
an adjacent parcel. In fact, the only objections about Borgata came from New
Jersey's Casino Control Commission (NJCCC), the local casino regulator.
Daddy's girl?
When Borgata applied to renew its gaming license in 2005, the New Jersey
commission began an investigation centered on MGM's relationship with Pansy Ho,
its joint venture partner in the MGM Grand Macau, which opened in December
2007. It was Ho's father, Stanley Ho, who put Macau on the map when he held the
casino monopoly for 40 years from 1962. Ho's long been accused of ties to
organized crime, allegations that he's denied and that remain unproven. Pansy
Ho, who runs Shun Tak, the property and transport group that her father
controls, insists that she is independent from her father.
MGM professed little concern as the investigation droned on for four years with
no sign of conclusion. MGM's top executive in Atlantic City, Bill Hornbuckle,
called the company "very fortunate in Macau to have Pansy Ho as a partner"
during an interview in 2008.
Last May, the commission's Division of Gaming Enforcement (DGE) declared Pansy
Ho an "unsuitable" partner for the company. If the commission endorsed the
finding, MGM Mirage would have been forced to forfeit its gaming license and
leave Borgata. That could have also invited scrutiny from other US regulators,
including those in Las Vegas, where MGM has its most extensive interests,
including the recently opened $11 billion CityCenter complex.
MGM Mirage and the commission reached a settlement last week. MGM, controlled
by billionaire investor Kirk Kerkorian, agreed to sell its share of the Borgata
and the adjacent acreage, ending New Jersey's jurisdiction over the company. As
part of the settlement, DGE released its report on Wednesday, detailing links
between Pansy and Stanley Ho as well as MGM's attempts to keep that information
from regulators.
"We have the utmost respect for the DGE but disagree with its assessment of our
partner in Macau," Jim Murren, MGM Mirage chairman and chief executive officer,
said in a statement. "Regulators in other jurisdictions in which we operate
casinos have thoroughly considered this matter and all of them have either
determined that the relationship is appropriate or have decided that further
action is not necessary. Since the DGE takes a different view, we believe that
the best course of action for our company and its shareholders is to settle
this matter and move forward with the compelling growth opportunities we have
in Macau."
Chinese menu
In essence, MGM chose Macau, where its property struggles to achieve a
double-digit market share among six licensees, over Atlantic City, where it's
the clear market leader, with 16% of gaming revenue among the city's 11
casinos. Choosing Macau means remaining subject to the whims of Beijing, which
can turn off the flow of mainland visitors at will.
Choosing Macau means keeping faith in the integrated resort model that has
generated little enthusiasm in Asia beyond the casino floor. It means trying to
sell a MGM brand - next as part of a $4.2 billion beachside casino resort in
Vietnam - that simply doesn't resonate with Asians. To them, the bronze MGM
Lion guarding the hotel entrance in Macau doesn't roar Gone With the Wind,
The Wizard of Oz, or Ben-Hur. "I think that dumping Atlantic City
for Macau is sheer lunacy," Lipsher Accountancy Group principal and author
Laurence E Lipsher says.
Others see it differently. "Within the global gaming market there is no more
important market than Macau," Sean Monaghan, the managing director of AG
Leisure Partners, says. "While MGM's market share is relatively small in Macau
it is improving and the profitability of the Macau property is actually quite
reasonable. Management has been working hard to improve both revenue and
operating efficiencies so I would expect further growth in profits."
Monaghan notes that Shun Tak's One Central residential and retail development
integrated into the MGM Macau property recently opened, adding, "This should be
a good driver of growth going forward."
Going for growth
"Although MGM has a dismal market share in Macau, it is a growing market,"
Ricardo Siu, the University of Macau gaming management coordinator, says. "On
the other hand, the gaming market in Atlantic City is contracting rapidly.
Generally speaking, investors have felt quite negative about the prospects of
Atlantic City, at least in the coming few years."
Atlantic City's gaming revenue is in the midst of a four-year slide, falling
from $5.22 billion in 2006 to $3.99 billion last year compared with $14.92
billion in Macau. Borgata's 16% market share brings gaming revenue of $638
million, while MGM Grand Macau's 8% share bags $1.19 billion. Even factoring
that gaming revenue is roughly 70% of total revenue at the Borgata (versus 90%
at MGM Grand Macau) that leaves the Atlantic City property short. Worse, while
Atlantic City's revenue fell another 12% in the first two months of 2010,
Borgata's revenue fell by more than the average.
Tapping into the potential for gaming riches in Macau, Steve Wynn's Wynn
Resorts and Sheldon Adelson's Las Vegas Sands, owner of the Venetian Macao and
Sands Macao, raised billions last year in share sales.
MGM last year cited the credit crunch when postponing plans to build next to
Borgata. Meanwhile, the company is preparing a Hong Kong stock offering for its
Macau interests that could raise as much as $500 million. Under the weight of
CityCenter debt and the global recession, MGM was teetering on the brink of
bankruptcy little more than a year ago. Las Vegas Sands faced similar problems
but still managed to raise money selling shares.
Analysts estimate selling the Borgata could bring in another $500 million to
bolster MGM's balance sheet.
"MGM had no choice but to retrench after overleveraging itself," Aaron Brown,
hedge fund manager in New York and author of The Poker Face of Wall Street
observes. "Selling the Borgata both raises cash and eliminates one set of
regulators, which simplifies life for the company."
But Brown believes MGM made a larger strategic decision. "I see the choice as
less New Jersey versus Macau as whether the company's core competency is to be
manager of a global brand or development partner in worldwide ventures.
"On one hand, it's odd that they're leaving the business model they have done
well with and moving toward the one that has been a dismal failure so far. On
the other hand, they may be selling the Borgata at the top in order to
concentrate on a business in which they can only improve."
It suggests they have decided the Euro Disney-type plan of tapping on global
capital markets to repackage Las Vegas/Hollywood for non-US consumers is the
wrong road, and it's more promising to enlist domestic people, ideas and
capital in coming up with new approaches; building on the US experience and
moving beyond it. It's an exciting dream," Brown concludes, "but I'll put my
money on Steve Wynn."
Macau Business magazine special correspondent and former broadcast news producer Muhammad
Cohen told America's story to the world as a US diplomat and is author
of
Hong Kong On Air,
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financial crisis, and cheap lingerie. Follow
Muhammad Cohen's blog for more on the media and Asia, his adopted home.
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