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Passing Go, Vegas-Style

Mirage may have bought Boardwalk, but the game here is just beginning.

1Oct

If all the hotel building by corporate players along the Las Vegas Strip seems vaguely familiar, it may be because you've done it yourself -- on a Monopoly board. Even the finance chiefs of Las Vegas's hotel-casino concerns see the game reflected in their real- estate activities. On a recent road show, Mirage Resorts Inc. CFO Dan Lee used a slide taken from the rules of the Parker Bros. game to explain the advantage of having a single owner for a number of hotel-casinos in one row: "If a player owns all the lots of any color group, the rent is doubled." That Mirage's latest property acquisition happens to be called Boardwalk only enhances the analogy. (The Monopoly board actually is designed around an Atlantic City, New Jersey, street plan, but in a town that boasts its own New York skyline and is building a faux Paris, complete with a scale-model Eiffel Tower, that hardly seems a problem.)


"You want to stack your hotels and try to get the customer to land there," says Glenn Schaeffer, president and CFO of Circus Circus Enterprises Inc. The company has taken the Monopoly strategy to extremes by placing three properties--the medieval-themed Excalibur, Egyptian-themed Luxor, and the soon-to-be- opened Mandalay Bay--in a row along the west side of the Strip. There they abut Monte Carlo, jointly owned with Mirage. And it's aiming for more. Indeed, Circus is "the only company that has a contiguous mile of frontage," which should provide it with enough land for a decade of future expansion, Schaeffer says. "We know what Project Z is, where it sits, how many rooms it has, how it fits with the tropical theme of Mandalay Bay." The only question, besides financing, involves when enough new visitors will justify a new round of building. "We'll see about the absorption rate in Las Vegas," Circus's president says. "Then we'll act when the dust clears."



A Hippo in a Bathtub

Both Schaeffer and Lee have proved themselves adept at business techniques that would serve Monopoly players equally well.


Take friendly alliances, for example. Few are warmer than theirs. Former neighbors, they worked closely together on Monte Carlo, and continue to exchange finance-related information from time to time. "We sort of share best practices between us," says Schaeffer, including, for example, what terms they get on bank loans. "It doesn't hurt our negotiating stance" to enter talks aware of arrangements other companies have worked out, he says. Further, the two men are in contact about possible monorail service connecting their properties north and south of Monte Carlo. (They are at odds, however, over a Mirage-Circus deal in Atlantic City that went sour. Schaeffer calls their personal relationship "compartmentalized" to allow for such disagreements.)


Lee and Schaeffer are adept, too, at blocking positions--strategic purchases of land that stop rival players. Working together, the Mirage and Circus CFOs pulled off a doozy a few years ago, buying a Carrows lease that prevented MGM Grand Inc. from buying the restaurant, tearing it down, and using the land to expand its profitable New York­New York property. "It must be the most expensive lease of a Carrows in the U.S.," notes Schaeffer, but it's worth it to Circus and Mirage because "we just don't want our competitors to own it." Lee calls New York­New York "a hippopotamus in a bathtub," because the building is too large for the land that supports it.



A Billionaire in a Wagon

One player that doesn't appreciate such strategy is MGM Grand. "To make deals to block expansion is defensive and backward thinking. We don't do that," says executive vice president and CFO James Murren. But if there's ever been a master of the property-acquisition phase of Monopoly, Murren adds, it's MGM Grand's controlling shareholder, Kirk Kerkorian. The billionaire "has bought and sold more of Las Vegas than anyone alive, and his financial success speaks for itself."


Murren agrees that "we need an absorption period here in Las Vegas before we turn to more development." He fears more than his CFO brethren that Las Vegas will have problems filling its new capacity. "It's going to be a bloodbath," he says, though blood won't be shed evenly across the industry. "There has never been such a borrowing spread in Las Vegas. We borrow at 6 and change while companies next door borrow at effective rates of 15. The weak will get weaker, and the strong will get stronger."


Helping MGM Grand, Murren adds, will be Kerkorian's personal example. "We have the kind of leader who keeps you humble. He drives a 1992 Sable station wagon. It keeps things in perspective."


And like a Monopoly conservative, MGM Grand currently refuses to spend on the expansion game. Proud of "the best balance sheet in the industry," Murren believes a recent buyback of 6 million shares for $200 million was a strong statement that investing in its own stock is a smarter move. "We can make land acquisitions," Murren says, but there's also a lot that can be done with, say, an MGM theme park that "ultimately... may not be the best use of the land."


A fourth major player, Hilton Hotels Corp., also acknowledges that success in the game is "not rocket science; it's about location," according to spokesman Marc Grossman. The growth strategy of the company, best known for its huge, off-Strip Las Vegas Hilton, concentrates on properties at the intersection of the Strip and Flamingo Road. "Look at what we have," he says. "The new Paris will be next door to Bally's, which is across Flamingo Road from the Flamingo."


In the view of Circus's Schaeffer, few investors understand the gaming business. "Wall Street thinks Las Vegas is like the Mojave desert," with miles and miles of land ready for hotel development. "But it's more comparable with Manhattan island"--a very limited number of sites with desirable locations. Schaeffer has lengthened the board so that the Strip extends to property Circus owns near the airport--potentially "the gateway to Las Vegas."


"You really want to accumulate a mass position," he says. "And you don't want to run out of money before the other guy does."

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