LVS’s Macau Crystal Ball

Posted: May 1, 2009 in Uncategorized

Contributed by: Expert IR

(https://expertir.wordpress.com)                                                                                                 earth

Under the current dire situation that causes many gaming/casino companies in the US including LVS (Las Vegas Sands) to be in the “perfect financial storm”, one would wonder how LVS is going to navigate its long-term investment in the territory of Macau SAR.

LVS’s most likely reaction and recovery measures without Bill Weidner and Brad Stones will be closely watched by its investors and competitors alike.  The next two quarters will be a demanding stress-test for LVS as explained in my prior article that LVS is rushing against time to offload assets, reduce costs and finding sustainable new revenue sources.

In the following illustration I would attempt to highlight the probable scenarios in association to LVS’s ultimate fate in Macau and what will be the most likely courses of action taken by LVS (or rather, Mr. Adelson) that may change the course of history for this great yet interesting gaming company’s bold move into Asia six years ago.

 Focal Issues

 There are at least four (4) sets of focal issues which LV Sands would have to confront and resolve them in Macau, in the process of deriving at a credible strategic decision.  Without doing so, LV Sands would likely to be overwhelmed by its short to mid-term dire financial pressure and left with no options.  

 The focal issues are:

(1)     Indefinite Suspension.  This is a real and apparent threat to LVS as far as Macau Cotai Strip Project is concerned.  This issue is at the back of the mind of Sands and the Macau authority, as well as investors (& creditors) financed the project.  Several interest groups will be hard hit by this eventual outcome if the issue still remain only a long-term possibility by mid 2010. 

(2)     Resume Project.  This direction will be most welcomed by LVS, Macau authority and investors.  The timeframe maybe a tricky factor but so long as a clear decision is reached by LVS with credible supporting evidences, it means that LVS would have arrived at a critical milestone in which achieving sustainable financing to resume project in Macau is no longer a problem.  Whether such an indication will be a reality remains uncertain. 

(3)     Joint Ventures.   This is a most practical issue that should be considered by LVS or it may be hinted by Macau authority. Whether or not mainland Chinese investors are allowed to take part in joint venture bids for LVS’s Cotai project is yet to be seen, in view of Chinese central government’s invincible hands on the territory’s affair.  To break open the lock (land sales issues) yet to better manage investment risk in the territory, it is viable that LVS and Macau authority free up this “Asia’s Las Vegas” vision to allow open-bidding in conjunction with joint venture options and hence, go for the much needed change and to give confidence to new investors and marketplace as a whole.

(4)     On Its Own.  This issue is mainly dependent on what’s in the mind of LVS’s visionary – Mr. Adelson, who is best known for his acute business judgment and he might be adamant about sticking to his ideology of going down the road all by himself. That said, creative financing solutions are definitely required to save LVS from the current dire situation in order to proceed with Macau project either in the near term or after a substantial (e.g. 18 – 24 months) holding off period.    

Crystal Ball Gazing

Basing on the above illustration of focal issues, the most probable scenarios would be as follows:

Assumptions (critical factors)

To play out the probable scenarios, it is critical that the following assumptions are included.

(1)     That Macau authority remains highly flexible in its administration of the territory’s investment and strategic recovery plans, for a healthy growth of gaming industry in the territory. 

(2)     That the Chinese central government will maintain a consistent policy towards the territory.  So as to reinforce confidence of investors and in general the marketplace.

(3)     That the businesses of VIP and Mass gaming in the territory will show relatively stable trends going forward. Margins should be made viable for operators. In the process, Macau authority might have to review its high gaming tax regime in such a bad time.    

                                                                                                                                                 scenarios2

Outlook of the LVS Crystal Ball 

With reference to the scenarios diagram, the four (4) quadrants each will represent a probable scenario.  Hence, there are 4 scenarios illustrated:

 

 

 

 

 

 

 

 

 

 

 

 

 (1)   Scenario 1.   This is represented by the right top corner quadrant that is crossed by Resume Project (near term) and Joint Venture Options. 

Under the scenario, things will move in the direction of

–         With Macau authority’s facilitation.

–         Willingness of LVS to accept a truly joint venture arrangement.

–         Secure additional financing through 3rd party buy-in of stakes. Forget about this one-side leasing arrangement.

–         Improved investor confidence.

(2)   Scenario 2.   This is represented by the quadrant crossed by Resume Project (near term) and Proceed On Its Own. 

Under the scenario, things will move in the direction of

–         Unless LVS suddenly attains much goodwill from its lenders and able to restructure its balance sheet and loan condition.

–         That the Cotai development might be scaled down to much manageable modules.

–         Might still end up just a “Start and stop” syndrome, very much dependent on LVS’s cash flow and Chinese government policy impact on the territory.

(3)   Scenario 3.  This is represented by the quadrant crossed by Indefinite Suspension and remains On Its Own.

Under the scenario, things will move in the direction of

–         “Wait and see” mentality for the next 2 years.

–         Lack of support from Macau authority (?) If this scenario happens.

–         This is apparently the worse scenario. Potential of declare for bankruptcy and sell-out.

(4)   Scenario 4.  This is represented by the quadrant crossed by Indefinite Suspension and Joint Venture Options.

Under this scenario, things will move in the direction of

–         Sell-out of substantial LVS stakes to private equity funds or 3rd party investors.

–         Restructuring of capital and debts, hold on for the next two years till financial crisis is over.

–         Possibly of going back to the drawing board on the project development scheme, redo this “Asia’s Las Vegas” with new inputs and ideas.

Whatever happens to LVS with its “Asia’s Las Vegas” dreamland will leave such a big impact on project financing of Asian gaming resorts landscape. The myth of, “If we build it, they will come” is no longer true when oversupply, policy-intervention and high costs become the order of the day.

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