Gaming's Master: Steve Wynn - Investment Outlook - September 2003

Ever the inventor and showman, Steve Wynn has sold his IPO, is building a must-see casino-resort in Las Vegas and planning a 700-room resort in Macau, where the enormous potential for success makes him nearly giddy with anticipation.

By Staff -- HOTELS Magazine, 9/1/2003

Steve Wynn poses beside his Picasso masterpiece, La Rêve.

nsensical, understand that Wynn, a serious art collector, is a big dreamer who looks to the arts for inspiration and, in most cases, finds what he and, evidently, the traveling public is looking for. “It wasn’t until the 20th Century with Picasso and Matisse realizing two-dimensional art, if it was to be art, had to reach the soul and emotion of the viewer—that art was about the emotion it could create and evoke,” says Wynn as he explains the thinking behind his new US$2.4 billion, 2,701-room Wynn Las Vegas, which originally was going to be named after the Picasso masterpiece in his possession called La Rêve (“The Dream”) and later changed for global branding purposes. “A great hotel is no different. It is measured by the emotional intensity of the guest experience.” Ever the visionary and entrepreneur with the guts, the cash after selling Mirage Resorts to MGM Grand in 2000 for $6.4 billion and a self-confessed terminal builder’s disease, Wynn is now creating what he and his investors at Wynn Resorts, Limited hope is the next generation of casino resorts that will attract the hordes of gapers, gamblers and guests—first in Las Vegas with hopes of opening in March 2005 at the site of the former Desert Inn and later in Macau.

What he is convinced will lead to his success is the approximate 50-50 mix of gaming and non-gaming revenue—something he says his competitors and critics did not understand when he first came to The Strip in 1989 to open the $600 million Mirage. At the time, no one had ever spent more than $200 million. “Like Deep Throat said to Woodward in the garage in All The President’s Men, ‘Follow the money.’ I say, ‘Follow the non-casino revenue,’’’ says Wynn with his two German shepherds laying at his side in the conference room next to his office at the only remaining tower of the old Desert Inn, which overlooks the construction site of Wynn Las Vegas. “We didn’t just do $400 million in casino revenue the first year at Mirage; we did $400 million in non-casino revenue. We shattered all Las Vegas records, but we were also the only one with 50-50 revenue. We owned our own stores, we had more rooms, better convention operations and we were getting more for our ballroom space. We had a better hotel and I tried to tell everyone, ‘Look at the non-casino portion. It tells you the story.’”

Wynn’s message is that Las Vegas is never overbuilt as long as the rooms and experiences can be fanciful, representing something that takes the imagination of the public to the next level. “You can’t stop people coming to Las Vegas-even if you try to put up a barricade outside the airport,” says Wynn.

Karen Johnson, senior vice president of Jones Lang LaSalle, agrees. “Everyone hypothesized in the 1990s that Las Vegas would die as a result of the proliferation of river boat and Indian casinos,” she says. “As it turns out, they are the bush leagues for Las Vegas. This is where they learn. Disney for adults is a clear mission for Las Vegas that works.”

Adds Marc Falcone, gaming analyst with Deutsche Bank Securities, one of the underwriters of the Wynn Resorts IPO, “The way Las Vegas works, quality, new supply induces incremental demand. It is not new hotel towers that stimulate more demand. We have seen three years of flat visitation growth, so expectations are that when this property opens we will witness another massive development wave because competitors have a chance to follow suit.”

Moving The Focus Inside
As for his new projects, this time in Las Vegas he is moving the show off the sidewalk as he did with the volcano at Mirage, the pirate show at Treasure Island and the choreographed water show at Bellagio. In fact, a series of 16 to 20 emotion-provoking environments will only be found inside the fountain-less hotel, behind a 150-foot-tall, 5-story mountain that will have a perpetual cloud at the top. Without wanting to reveal many details and nor offering renderings or sketches of his plans, Wynn did say all the beds in the large, 630-feet rooms will face floor-to-ceiling windows, bathrooms will be huge, hallways will be short, all18 restaurants will face a garden and each bar will have an indoor/outdoor experience. There will be 200,000 square feet of meeting space with each room having its own floor-to-ceiling window facing a garden. His 2,000-seat stage show is about the comedy that surrounds life’s struggle and will make use of water as it did with the “O” spectacular at Bellagio—but this time Wynn says producer Franco Dragon has figured out how to make the water rise and fall around the audience. To top it off, the hotel will have 28 retail shops (including Ferrari and Maserati auto dealerships), two wedding chapels and a gallery to display Wynn’s art collection, which recently grew when he bought a Cezanne self-portrait for $17 million and a Rembrandt self-portrait for $11.3 million.

One feature that will allow Wynn Las Vegas to truly separate itself from the competition is the presence of a golf course—the only one on The Strip. In fact, the old Desert Inn maintained the highest average room rate on The Strip—all because of the presence of golf. “Having golf on the facility is a very important thing to us—not just as an amenity where we can charge $300-400 a round with full utilization every day—because it is about the environment and we have integrated the building into the golf course.” This scene will include 18 golf course villas for high rollers and a country club restaurant. Villa residents will walk about 35 feet to the pro shop and another 50 feet to the first tee. “That sounds great to me,” says Wynn. “There is no travel time. I guess that spells more casino time.”

And Wynn is also out to prove that a huge property with nearly 3,000 rooms can be intimate. “Intimacy and size are not inversely proportional when you know everything about your guests,” says Wynn, who understands Las Vegas visitors have a very set way of behaving, from what time they wake up, go to the pool, go to their business meetings and play in the casino. “When you know all this about your guest, you can create neighborhoods and put everything at their fingertips. And we have studied this as if we had never been in the hotel business before.” To that end, Wynn Las Vegas is being designed with an iron-fisted discipline that will intensify and enrich the guest experience within the hotel, whatever they may be doing, over a three-day stay.

Macau Makes Wynn Giddy
In Macau, if everything goes according to plan, including the passage of critical gaming regulation reforms that allow casinos to give credit, Wynn says he could happily spend the next 10 to 15 years building casino-resorts there. The staggering demographics and untapped nature of this market leads one to believe he is not kidding. Simply put, there are about 250 to 300 million prosperous, middle-class Chinese who lust to travel. There are about 100 million of the richest Chinese within a three-hour drive of Macau and one billion within a two-hour airplane ride. From a hospitality perspective, nowhere is there a comparable population density of potential travelers with improving wealth. In addition, just last month, the Chinese government piloted a program to allow individual Chinese to travel to Macau, whereas previously they needed to be part of a tour group to get a travel visa.

The government recently ended a 40-year monopoly on gaming in Macau and accepted three bids for concessions, granting operators a 20-year opportunity to build and operate an unlimited amount of casinos. SJM, operated by incumbent Stanley Ho, has pledged to invest $585 million and is in the process of upgrading his flagship Hotel Lisboa and reportedly has been talking with MGM Mirage to grow his business. Wynn plans to take a $600-700 million stake and Venetian Macao Limited (VML), a subsidiary of Las Vegas Sands Inc. (LVSI), which owns and operates the Venetian Casino Resort in Las Vegas, has committed to invest $1.1 billion.

But, perhaps the most exciting aspect of Macau can be found in the casino take, which averages more than 10 times the win you get in Las Vegas. The market win was $2.8 billion with 350 tables in 2002. The win at Hotel Lisboa was estimated at $32,000 per table, per day. That compares to $2,179 in Las Vegas. “You can’t win $900 million in a Las Vegas casino. You can here (in Macau),” says Wynn with a grin.

In the same breath, however, Wynn says he will not break ground until Macau CEO Edmund Ho lives up to his promises to change the gaming credit laws, which should disconnect the Triads, who have been offering credit to players for years. Wynn anticipates Ho will complete the legislation in October 2003 and eventually lower the gaming tax by a few percentage points. “I’m going to be stuck in there for $600-700 million. I want to know it is a stable place before I let my money fly,” says Wynn. “I have about $350 million in restricted cash and mortgage financing with banks. It’s not a question of money. It’s a question of doing the plans properly, knowing the market and having a regulatory environment in which we can do business without looking over our shoulders. Macau is a potential goldmine. It is staggering. You get silly looking at it.”

Bear Stearns estimates cash-on-cash returns of more than 65% can be achieved and Falcone adds the Macau chapter of the Wynn Resorts story could become the most exciting. “Don’t overlook Macau,” Falcone says. “There is enormous opportunity for the size of the market. It could be a home run when the appropriate regulatory structure is in place.”

When and if the climate changes to his liking, Wynn’s first phase, $200 million plan calls for the development of a 700-room hotel and casino “reminiscent of anything we have done in terms of quality and takes Asian preferences and priorities to a new level.” “What would be appropriate for Las Vegas would not be appropriate in Macau,” says Wynn. “The issue here is can Macau rise to a level of service comparable to Hong Kong, London and New York, which it cannot do now. It’s about human resources and training. That is the big challenge this town has to meet.”

Again, when it came to details on the Macau project, Wynn, who says he likes to talk small and build big, was light on the details, only saying, “I am building a destination hotel and the theme is quality. I am going to use a curved tower as a signature.”

However, when Wynn further considers his move to Macau, he admits he is intimidated. “The biggest thing I am taking to Macau is humility. Knowing the territory is everything… So we have to be self-conscious and circumspect about what we build and how we operate it.”
So first he will build one property to learn the market first hand. “I want to be a home-boy there. I want to do exactly what I said I would do when I made my presentation for a concession. The theme will be quality.”

Wynn will not be alone, nor will he be the first American to operate in Macau as Sheldon Adelson, chairman and CEO of LVSI, is planning to develop multiple casino hotel resort properties. First, VML, a subsidiary of LVSI, will construct, own and operate a 48-suite, Las Vegas-style casino hotel called Las Vegas Sands Macao, located near the Macau Hong Kong Ferry Terminal. The project, expected to open during the first quarter of 2004, will include a “gaming stadium,” VIP club, specialty restaurants, spa and an 800-seat show theater.

LVSI’s more ambitious venture is the $5-10 billion development of the Cotai precinct, which will be anchored by its branded 1,500-room, all-suite Venetian Macao resort. The development will include 20 mega resorts with 60,000 hotel rooms. Seven additional parcels will be developed, with VML entering into a long-term lease with hotel investment partners for a section of each building to build a casino and showroom facility.

The IPO Process
While Wynn insists history dictates his plans in Las Vegas will succeed and is optimistic about Macau, convincing investors of the same when he was on the road trying to sell his IPO was by no means as easy as the dreaming that inspired Wynn Las Vegas. Wynn’s coattails from his past successes didn’t seem to matter much as people were worried about Las Vegas as a soft target for terrorists, waiting three years for cash flow, Wynn’s reputation for cost overruns, which he says is completely unfounded, going into the uncharted territory of Asia and an overpriced offering. After making 47 calls and getting only 11 institutions to buy in, the closely held IPO finally sold more than 34 million shares that raised $427 million on October 24, 2002, at close to a 50% reduction in the original price at $13 per share. Wynn had hoped to sell about 20 million shares for between $21 and $23 each. Immediately following the IPO, the company raised about $343 million through the sale of $370 million of 12% second mortgages, an additional $1 billion from a bank credit facility and $188.5 million in FF&E financing. And after the dust had settled, Wynn and his original investment partner, Kazuo Okada, a huge slot machine manufacturer from Japan, each committed to own about one-third of the company, Barron Capital, New York, had 10% and the public had 20%.

Wynn attributes the cool response to his offering to the fear of Iraq and the economy. “We were the only ones out there,” he says. “Even Merck had pulled their deal at the same time. It just was a bad time, but I was time for me to break ground. We were done with the budgets and it was time to move ahead.”

In the end, Wynn says he got what he wanted. “This was never presented as an instant thing. It was presented as a chance to get involved with a development company,” he says. “I wanted certain shareholders from good, solid institutions and the only way to do that was to make room for them in the deal. I would have loved to have it at a higher price, but I got great investors.”

And for those investors worried about Wynn’s health (he suffers from retinitis pigmentosa, which causes degeneration of the retina) because his persona is so important to the Wynn Resorts brand, he says he had a battery of tests during a physical for the life insurance policy the company has on him—and he was indeed pronounced healthy and fit with no cardio-vascular problems.

“Frankly, there was no one who could have accomplished an IPO, regardless of the challenges it faced, unless it had Steve Wynn’s name attached,” says Falcone.

Creating Team Wynn
So after breaking ground in October 2002, it was time to build a formidable management team—and he didn’t have to look much farther than his old team at Mirage Resorts. Wynn’s Chief Operating Officer Marc Schorr built and opened Treasure Island before becoming president of Mirage. Chief Financial Officer John Strzemp was president of Treasure Island and became the number two man at Bellagio. Chrisann Flatt, the woman who ran convention sales at Mirage, opened Bellagio and was the senior salesperson at Mirage Resorts is now in the same position at Wynn Resorts. And the list goes on to catering, convention services and special entertainment functions, human resources, executive chef, surveillance, baccarat, roomservice and even horticulture—they call came from Bellagio to Wynn Resorts. “They came back because they were my people,” says Wynn. “We were always a family. It didn’t matter that I sold the company… Now they are rushing to put everyone under contract at Bellagio, but the horse has left the barn.”

In total, Wynn plans to hire about 11,000 people, of which 3,000 are for Macau. Wynn says it will cost $20,000 to run the Asian marketing office, but the Las Vegas office will not incur that expense at all. The biggest bonus coming out of the Macau office will be the access they gain to Asian players who have never been to Las Vegas.

Of course, access to all players is a big key to marketing, in general, and Wynn Resorts only has the old Desert Inn database at its disposal. But Wynn does not seem to worry about databases. “Who do you think is going to Las Vegas without coming to see us?” says Wynn. “When I opened Mirage, I only had the Golden Nugget database. What happened? We were the first company to win $400 million year… Customers come to Las Vegas and check out the newest places. If you have the game figured out, they stay with you. But who is not going to come to my hotel? Think about it. Is that my problem? I don’t think so.”

At the same time, Wynn has created a global brand to identify his properties and in June entered into a strategic alliance with Societe des Bains de Mer (SBM) of Monaco to exchange management expertise, develop cross-marketing initiatives and joint development opportunities in Europe. As part of the deal SBM invested $45 million to buy three million shares of Wynn Resorts. While Wynn is not ready to talk about future development plans between the two companies, it is clear that the arrangement will give Wynn Resorts access to the high-end customer base in Monaco.

Wynn has expressed interest in the UK and is among the bidders with a real estate development partner for an existing casino license in the Chicago area. “Sure, we are up for global expansion,” says Wynn. “Wynn Resorts will be at the front of that no matter what.”

The Future Of Gaming
When asked about the future of the gaming industry, Wynn sits back and ponders. With a bit of hesitation, he says, “It is a complex world and in a world of change that spells to certain people opportunity and to others danger. A lot of it is in the eyes of the beholder and their ability to be agile and compete in such a situation… What will determine where the industry goes from here will be the imagination and nerve of the players in it. The world is out there just dying to experience something new and wonderful. Do the men and women that have control of the destiny of these institutions have the nerve to understand the public’s need and provide a product that will meet that need? If they do, they will be highly rewarded. If not, then the stuff that is around today will just get older.”

Now look at Steve Wynn, who has a history of dominating the market against all competitors, overcoming dire predictions from the media and contemporaries. And in every case, Wynn says the vision of the project overcame and set new limits to the marketplace’s capacity. “I can’t explain why no one looks at the facts, but that has been the pattern.

“If you put together a good organization, take your time, have the capital, pick a good property and build a nice place, you will do well—no matter what the economy.”