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King of Vegas

The ageless Kirk Kerkorian leads a wave of private money into the latest transformation of the desert playground
Michael Kaplan
From the Print Edition:
Richard Branson, Sept/Oct 2007

(continued from page 2)

Like Howard Hughes, whom he knew and to whom he's often compared (friends say unfairly, insisting that the low-profile Kerkorian is not the recluse that he's sometimes painted as being), Kerkorian made his first-stage fortune through aviation. At 24, fresh from a rough-and-tumble boyhood in Southern California, he obtained a pilot's license and transported airplanes from Canada to Europe for the Royal Air Force. This work was dangerous, but the pay was fabulous ($1,000 per flight). After the Second World War he flew charters between Los Angeles and Las Vegas (Bugsy Siegel and Nick "The Greek" Dandolos were among his passengers) before putting together enough capital to get into the business of buying and selling airplanes. On the side he made millions through wheeling and dealing Vegas real estate, including the land on which Caesars Palace now stands. In 1969, he took the plunge and built a place of his own: the International Hotel (site of one of Elvis Presley's highly successful Sin City stands). It was the first of three casinos that he would build, manage and coddle into Vegas hot spots.

Over the years he sold his airline, bought and sold a pair of movie studios and built the first MGM Grand, which is now Bally's. Though Kerkorian isn't the type to stay married to his investments (last year he sold his 9.9 percent stake in General Motors) or to his wives (he's been divorced three times), he has not broken away from the second MGM Grand. Opened in December 1993, it began as a family-oriented casino, featuring a theme park for kids and a main entrance through the gaping mouth of a lion. According to The Players, the retiring Kerkorian considered appearing on stage during the grand opening festivities only after his friend Cary Grant insisted that he stand up and take credit for building a spectacular hotel.

Kerkorian did it, but he did it reluctantly.

You can make a good argument that the current stage of Kerkorian's professional life—and, indeed, the life of Vegas—began in 1999 when he made his initial move to buy Mirage Resorts, the gilded company owned by Vegas's master of the spectacular, Steve Wynn. Key to the transaction's success, which was consummated in March 2000 for $6.4 billion, was that Kerkorian recognized something in Las Vegas that nobody else seemed to. "It was all about the land," explains Murren, who played a critical role in the Mirage Resorts takeover, which included Mirage, Bellagio, Treasure Island, a property in Biloxi, Mississippi, and additional real estate. "The value of the Mirage [deal], most people felt, was a smaller company buying a larger company at a reasonable multiple of cash flow, improving its profitability, and making it a creative acquisition. But that was only a small part of it."

The quiet genius of Kerkorian is amplified as Murren gestures around his office and says, "Where you sit right now, Steve Wynn bought this land for less than $500,000 an acre. We bought it from him and now it's worth what? Thirty million an acre? Who even knows what it's worth, when you consider that we paid $17.2 million an acre for the land down near Circus Circus"—which, he does not need to say, is worth nothing close to the raw value of the property on which the Bellagio stands.

Now that everybody else has got a grip on how Vegas is all about the land—after all, the Strip is the city's equivalent of Manhattan's Fifth Avenue, and there's a finite amount of that prime real estate—the logical conclusion is to build up. Speculation, for example, is that loads of condo-friendly undeveloped property behind the Rio is part of what drove Apollo Management and Texas Pacific Group to get into the casino business. It's a reality that promises to transform Las Vegas. About to bear a closer resemblance to most other great cities, the low-lying Vegas is on the verge of becoming an urban jungle of skyscrapers. Gorgeous, modern towers, designed by starchitects and funded by slots and roulette, will soon complement the reigning riot of neon and make touching down at McCarran Airport all the more thrilling.

As has been the case historically, Kerkorian and MGM were the first to see the possibilities. Back in April 2005, nearly five months before City Center was announced, the company purchased Mandalay Bay and its group of casinos, not because its executives wanted to have more gaming tables in Vegas but because they wanted the excess land that came with the deal. "We knew about City Center and our buddies at Mandalay did not," explains Murren. "Wall Street got it wrong again with that one. They thought we were doubling down. But that was 10 percent of the story. Ninety percent of it was land."

To get the land around Mandalay Bay, some of which would eventually become part of City Center, MGM needed to buy the company, as the land would not have been for sale on its own. "From the moment we announced City Center to the moment we closed on Mandalay, I didn't get three questions from Kirk about how the deal was going with Mandalay," says Murren. "Every discussion was about City Center. Right from the start, Kirk had the idea that we could do something profoundly different in Las Vegas. That interest carries on to this day."

More than likely, it drove Kerkorian to desire ownership of City Center for himself. And while nobody—not Lanni, not Murren—knows what was really going on in his head, what drew him to initiate discussions on the takeover and later to withdraw, there is little doubt that the Vegas land grab will continue and that prices will keep on surging.

To local insiders, this makes sense and is long overdue. Among casino bosses, there has always been slow-burning resentment toward Wall Street, which tended to treat the casino industry like a bit of a stepchild, valuing hotels higher than gaming resorts, finding the notion of making money from gambling to be distasteful, a little too risky and not quite diverse enough. This has opened the door for private equity players, who see the valuations as stunningly cheap. They're drawn by real estate and cash flow. "There was only one reason for [casino developers] to go into the public market: we couldn't get the money we needed on debt," explains Anthony Marnell. "But now you have very wealthy people, like Kirk Kerkorian, and the private equity guys, and they have access to all the money they could possibly want from a debt perspective."

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