King of Vegas
The ageless Kirk Kerkorian leads a wave of private money into the latest transformation of the desert playground
From the Print Edition:
Richard Branson, Sept/Oct 2007
(continued from page 3)
MGM Mirage president and chief financial officer Jim Murren, widely considered to be one of the most astute casino executives in Las Vegas, remembers his first encounter with Vegas legend Kirk Kerkorian. In 1998, Murren, fresh from Wall Street, had signed with what was then known as MGM Grand Inc. Attending his first MGM board meeting, Murren sat on a squeaky chair in a notoriously bare-bones boardroom on the ground floor of the cinematically themed MGM Grand Hotel & Casino—itself a shadow version of the luxe joint it would soon become.
Recognizing Murren as the new kid in the company, a casual Kerkorian introduced himself and wondered if he had ever told his newest employee the hungry alligator story. Murren knew Kerkorian hadn't, as the duo had never before spoken. To Kerkorian, however, Murren simply answered in the negative and listened to him tell his tale: a simple story of an alligator that rests at the bank of a river, watching all sorts of delectable goodies—ducks, birds, fish and the like—pass in front of his lethal mouth. Although he can eat anything he wants, he doesn't waste his time munching on the mundane. It is only when something truly juicy passes by that he bothers to snap at it.
Kerkorian asked Murren if he recognized the message in this allegory. In truth, Murren had no idea. But he gave the correct answer: "Yes, sir. I know exactly what you mean."
I ask Murren if he was supposed to be the hungry alligator. Or was the point of the story that the alligator is Kerkorian? "I don't think he was talking about himself or about me," says Murren, sitting in his well-appointed office at the Bellagio. "I think he was talking about an investment philosophy that is opportunistic. He was talking about a company that gets into as strong a financial position as possible in order to be opportunistic and to act at an appropriate time when its competition is less financially viable."
That model was put into motion two years later when Kerkorian and MGM snatched Mirage Resorts, the publicly traded paradigm-shifting company that had been helmed by Steve Wynn. It proved to be a satisfying meal that transformed Kerkorian into the King of Vegas. Now, the hungry alligator is striking again. In May, Kerkorian made overtures to buy the Bellagio and City Center—the latter a $7.4 billion condo and hotel project that sprawls across 76 acres, approximating a city within the city of Las Vegas—from MGM Mirage, the very company of which the 90-year-old Kerkorian has a 56 percent stake. Then, MGM purchased 44 acres just north of Circus Circus (yet another property owned by the company).
These two gambits represent the latest bold maneuvers in a series of moves that are intended to physically transform Las Vegas and its casino industry. Over the last couple of years, private money (like Kerkorian's) and private equity have been swooping in and buying up gambling properties with previously unseen intensity.
Sometimes, as is the case with Colony Capital, the deals revolve around a partnership with management. Colony teamed up with Frank and Lorenzo Fertitta, sibling forces behind the hugely successful locals-oriented Station Casinos chain (they're taking the once publicly traded company, started by the Fertittas' father, private). In other instances the moves involve buying up behemoth corporations that used to seem impenetrable. Such is the case with Apollo Management and Texas Pacific Group, which collaborated to spend $27.8 billion on the purchase of Harrah's Entertainment (it owns Vegas properties such as Caesars Palace and the Rio, as well as 30 non-Vegas casinos across the country).
Considering that the new buyers are ponying up far more than Wall Street investors think the casinos are worth, valuations are rising in kind. And the überwealthy are grabbing properties as if they're scarves on sale at Filene's Basement. Sam Nazarian, the Los Angeles nightlife kingpin and real estate scion, recently purchased the rundown Sahara. Rumor has it that he's going to oversee a many-million-dollar renovation and theme the place around spin-offs of the greatest nightclubs from around the world. A Vegas version of Miami's famed Fontainebleau is going up at the northern end of the Strip, on a spot that previously served as the home of the Wet and Wild water park. Boyd Gaming demolished its Stardust property and will create a 65-acre complex, budgeted at $4.8 billion, called Echelon Place—complete with five luxury hotel/casinos, a convention center and a retail promenade.
Potential owners are scrambling for the Riviera; George Maloof is building a condo tower (it'll house a Vegas outpost of Sunset Tan, which is the subject of a show on E! Entertainment Television) adjacent to his trendy Palms Resort and Casino; the Hard Rock was recently purchased by the Morgan Group and will shed its goofy memorabilia for something much more sophisticated, dashing and in line with the company that owns Ian Schrager's old places. For a hint of what's to come, New Yorker Amy Sacco, of celeb-infested Bungalow 8 fame, has been brought in to consult on the nightclubs.
With so much action, it's no surprise that land prices are soaring. This past May, Elad Group, an Israeli company that made a billion dollars through its condo-ing of the Plaza Hotel in New York City, announced the purchase of the land on which the New Frontier Hotel now stands. Elad will demolish the building and, in conjunction with IDB Development Corp., another Israeli company, build a hotel/casino, apartment and shopping complex called the Plaza. The private-ownership group paid nearly $35 million per acre and has the entire project budgeted at $6 billion to $8 billion. As Murren puts it, "Are they crazy to pay $1.2 billion for that land? Or are they smart?"
Anthony Marnell, whose father originally built the Rio, and who is now working on his own casino deep in the southern precincts of Las Vegas Boulevard, with Kerkorian's MGM Mirage as a partner, enthuses, "Everything here is in play. And everyone is reexamining every asset. They're asking what these assets are really worth."
The existing players in the Vegas casino game are doubtlessly pleased with what they're hearing, none more so than Kerkorian— whose MGM Mirage owns three miles of Strip frontage.
It's been said that before Steve Wynn lost his hold on Mirage Resorts, he referred to Las Vegas as Kirk Town. This is a fitting nickname when you consider the impact that Kirk Kerkorian has had on Las Vegas and the seismic shifts he continues to affect, seemingly at will. Just by announcing his interest in buying City Center and the adjacent Bellagio, he has caused confidence in the city to increase tremendously. It's certainly reverberated through MGM: its stock price rose a whopping 37 percent. Shares have since dropped back a bit, but not nearly to where they were prior to the announcement.
By wanting to partially tear himself away from the company that he controls and go it alone with the casino and mega development, notoriously press-shy Kerkorian seemed poised to make a gargantuan bet on the future robustness of Vegas. It was bullish in the extreme, from a man who is known for being right. "[Kerkorian's] instincts in developing things, in creating things, even selling things, are without parallel," says Bob Maxey, former president of MGM Grand, in the book The Players: The Men Who Made Las Vegas. "This guy doesn't make mistakes. But he does it by instinct."
That he suddenly ceased the City Center/Bellagio negotiations on June 20, less than one month after he began talks, and has since led MGM into a deal with South African casino magnate Sol Kerzner (owner of the Atlantis, who, himself, recently took his company private) to partner on a project that will sit on MGM's newly purchased parcel near Circus Circus, might be interpreted as a bit of a mixed signal. Then again, there's a belief that his opting out of the deal may indicate that he sees the Wall Street valuations coming into line with what he thinks the properties are truly worth. Whatever the case, Jeff Hwang, who covers casino stocks for The Motley Fool Web site, believes, "Eventually MGM will get taken out and it will be all Kerkorian. Eventually he will take the whole company private."
If history tells us anything, Kerkorian's pullback is no indicator that he's completely lost interest in grabbing City Center and Bellagio for himself. After all, feigning and jabbing fit the style of Kerkorian, a lifelong fight fanatic and one-time amateur boxer with a record of 29-4 (his nickname was Rifle Right). Back in 1999, while Steve Wynn was still overseeing Mirage Resorts, Kerkorian took a small position in the company. It looked to some as if he might make a move on the operation. Then he sold his interests and apparently vanquished the likelihood. So much so that Terry Lanni, who was then chief executive officer of MGM, stepped down when the acquisition seemed to have fallen by the wayside ("I felt that we had accomplished all that we could," says Lanni). Soon after, however, as Lanni puts it, "An opportunity arose for the acquisition and I came back [he is currently chairman of the board and CEO]." So it is far from inconceivable that Kerkorian will revisit City Center and Bellagio and decide that he wants them after all.
Regardless of what he does, the reverberation will be felt throughout Vegas. Investment banking firms such as Credit Suisse, Morgan Stanley and Deutsche Bank all want in on action that is both profitable and sexy. To prove it, they have adorned their boardrooms with aerial shots of the Strip, depicting the various properties, who owns them, what they're worth and what they'd be likely to sell for.
The interest is not just confined to prime real estate. Already Goldman Sachs has purchased the low-rolling, north-of-the-Strip Stratosphere (the neighborhood directly behind the casino used to be known as Naked City), chef Charlie Palmer has announced plans to build an eponymous non-casino boutique hotel in a way-off-Strip location, and a real estate developer from Bloomfield Hills, Michigan, is angling for 70 acres that will bridge downtown and the Stratosphere with casinos, hotels and a 22,000-seat arena.
"Eventually the whole industry will be private," opines Hwang. "Private equity has a lot of money, and casinos are appealing investments; they're predictable and have stable cash flow." They also are conducive to the five-year plans of private equity investors, who like to buy at a discount, build a business and take it public or sell it within a relatively narrow time frame.
Directly and indirectly, a good deal of the prevailing interest in Vegas can be attributed to the growth and success of MGM Mirage and its top dog. What makes this Vegas icon all the more extraordinary is that Kerkorian is as un-Vegas as they come. "Kirk is low-key; there is no micromanagement and he gives me the freedom to do what I do," says Lanni, who received a limitless budget when he built the exquisite Mansion at MGM, a Mediterranean-style hotel within the hotel that still reigns as Vegas's magnet for super-high-limit players. "I've never heard him say 'my company,' even though he owns 56 percent of MGM Mirage. He pays for everything himself, never sends us a bill for airfare, and all he ever gets for free is lunch at the board meetings. He doesn't get comped, he pays full freight, and is as bright a human being as I have ever met."
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."
In effect, the need to go to Wall Street has become moot. In the new scheme of things, tapping the public market feels like an antiquated, disadvantageous way of raising money. When you consider the drawbacks of having to report to impatient stockholders on a quarterly basis—and the mega profits that can be realized by doing it on your own—going the private equity route brings palatability to the arduous scrutiny that comes with getting licensed to own a casino. "So now, if the public shareholders don't give respect to the publicly traded casino companies, and bid the prices up to a certain amount, these guys will come and take it," continues Marnell, pointing to Harrah's and Station as prime examples, and a harbinger of what's to come. "They say, 'Fifty dollars a share? Seventy-five dollars a share? No thank you. I think this company is worth more, and now I will buy it. Then you can take the money and go home.'"
Echoing Murren, who's seen aerial photos of the Strip adorning investment-banking boardrooms, Marnell concludes that good old-fashioned capitalism is driving the vertigo-inducing action. "There is way more demand than we have supply," he says. "There are way more people who want to come in and take ownership of these things than there are businesses to be bought."
And that leaves Kirk Kerkorian in the catbird seat. The scuffler and amateur boxer, turned professional pilot, who morphed into the greatest casino mogul of our time, sits quietly atop the jewels of Las Vegas. He rumbles a little bit, and billions of dollars in equity rise up from the ground. Notoriously big-picture, physically fit, mentally sharp and still turned on by the challenges of making deals in the desert, he seems invincible, regardless of what he chooses to do with the company he controls, and oblivious to his already encroached old age. "Mike Milken says that 90 is the new 70," muses Terry Lanni. "But in Kirk's case, I think 90 is the new 40. In fact, forget about his age. Kirk doesn't look at things that way. He'll be here 20 years from now and will probably have the best vision of what Las Vegas will be."
Michael Kaplan is a Cigar Aficionado contributing editor.
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