why is Las Vegas Sands eyeing Spain?

the news on Spain…

I was very surprised when I read a newspaper article last week trumpeting LVS’s negotiations with the Spanish government to open a $13 billion-$20 billion casino resort project in that country.  After all, it wasn’t so long ago (late 2008) that LVS was:

–cutting back on expansion (the steel skeleton of the aborted Palazzo expansion still graces the Las Vegas Strip),

–cautioning that the company could be in violation of its debt covenants, and

–the Adelson family was injecting $1 billion of its own money into the company to help reduce its leverage.

…comes from Singapore

The report seems to have been based on a briefing by LVS of reporters in Singapore, although the company has issued no press release I can find, nor has it filed a statement of its plans, which may include casinos in Madrid and/or Barcelona, with the SEC.  LVS is apparently far enough along with that project to be meeting with contractors in Spain in a couple of weeks.

a rosy present

Of course, the situation for LVS is a lot better today than it was back then.  Las Vegas has turned cash flow positive (although it’s still losing money).  More important,  Macau generated ebitda (earnings before interest taxes depreciation and amortization) of $341 million in the fourth quarter.  And the recently opened Marina Bay Sands in Singapore produced ebitda of $306 million during the same period, even though the resort complex isn’t quite finished.  Business in both Asian regions is growing, with LVS thinking the Marina Bay might generate ebitda of $2 billion in 2011. (I’m pencilling in $1.5 billion for Macau.)

Spain makes some sense

In addition, the Spain idea may not be as far-fetched as it sounds at first.  How so?

Making the very crude (but probably still accurate enough) assumption that depreciation and amortization (an addition to cash flow) and interest expense (an outflow of money) cancel each other out, Macau + Singapore could together generate $3.5 billion in cash, before taxes, this year.  Presumably 2012 would be stronger, at the very least because the Marina Sands will have been completed. But business there is also continuing to grow so rapidly that LVS is worried about running out of hotel rooms.

We’ll have a much better sense of LVS’s financial obligations and its debt repayment schedule when the 2010 10-K comes out, but my numbers are at least directionally correct.  They illustrate three emerging characteristics of LVS:

–the company is generating a ton of cash

–most of that is outside the US

–LVS’s mountain of debt doesn’t look so bad anymore.

What does LVS do with its cash?

Well, we know what LVS doesn’t do.  It doesn’t repatriate any more of this money to the US than it has to, since the funds sent stateside become subject to federal income tax at up to a 35% rate.  Burning the money in the street instead would at least allow you to roast hot dogs.

To my mind, it also doesn’t keep a lot of spare cash in the bank in Singapore.  Why not?  Although Singapore’s economic development model is based on Japan, its legal and political systems grew their roots during Singapore’s time as a British colony.  For the British, no monopoly–like LVS and Genting have in the casino business in Singapore–lasts forever.  And the faster a monopolist makes money, the sooner the rules that are allowing windfall profits change.  No, I’m not worried that the decade or so LVS and Genting have as exclusive casino developers will be altered.  My question is about taxes.  I think having bank balances in the billions in Singapore just invites the government to raise the gaming levy.

Interestingly, apparently in response to a question from the audience in Singapore, LVS management also said it has no intention of taking the Marina Bay Sands public, citing the illiquidity of the Singapore and Hong Kong stock markets (arguably true in Singapore’s case, but not relevant, in my opinion).  I draw three conclusions from this answer:

1) LVS doesn’t need the money,

2) LVS would like to keep 100% of the Singapore cash flow potential, which could be mind-bogglingly high, for itself,

3) Marina Sands could easily be the vehicle LVS uses to establish and fund Spanish operations, since there are no potentially pesky minority shareholders to object.  Also, Sands China will likely have its hands full with further expansion in China.

it’s how they roll

Once you get past the headline shock and realize the LVS has the looming problem of how to reinvest its Asian cash flows, Spain doesn’t look so crazy after all.  An aggressive move, yes.  But that’s just how LVS rolls.




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