Devil in the Detail
Performance clauses are a key element in Macau’s VIP gaming business
Commissions are the real battleground of the VIP trade. The formulae used for deals between the properties and the agents can look pretty dense to the casual observer, but as with most systems, they can be boiled down to a few key principles. In this case it’s about cost versus benefit, incentives, and levels of sales performance that determine whether a VIP agent makes a reasonable living or a good one. Typically performance clauses are structured so that the achievement of a certain volume of roll triggers an improvement in commission paid by the casino operator, and thus it goes on down the line of what is in effect a pyramid-marketing scheme.
Depending on one’s point of view, the complexity of the agreement formulae is either deliberate (to divert attention from who actually contracts the debt with the player and thus who actually enforces it if necessary) or it’s an accidental by-product of the spider’s web of sub deals done with sub-agents delivering players to the venues.
Symbiosis
Here’s what our columnist Mr Chang wrote in his piece ‘Long Live the Middle Man’ in October 2007.
“Whatever its origins, the VIP room has evolved into what is today a symbiotic and highly specialised marketing operation that exists not side by side but within the host gaming operation, to provide a pipeline of customers who not only have the propensity to gamble, but also the means.
“The VIP room does this in a manner that hides the darker side of these operations, particularly regarding the extension and collection of credit, and helps the casino operator disavow knowledge of the source of the funds or what happens when the players fail to pay their debts.”
Aggregation
One of the developments particularly in the latter part of 2007 and into 2008 in the Macau VIP market was the appearance of stock market-listed junket consolidators. The rationale presented by different interest groups in the Macau gaming industry for the existence of these companies covered three main points. The first was their ability to raise working capital from outside investors; the second was their economies of scale as aggregators of smaller agents. The third was their ability to negotiate improved commissions from casinos by their ability to deliver much-prized volume. The timing of the emergence of such aggregators was also linked by some commentators to a belated move by the Macau government to register and regulate agents, giving the trade a degree of respectability it previously lacked in Macau and in the wider community.
Here’s what Mr Chang said about the consolidator trend in his article ‘House of Cards’ in November 2007:
“The business model the junket operators seeking financing have put together for their potential investors does not even make much sense.
“According to Amax, the sub-junkets currently get 0.7% to 1.0% from the main junket operators who in turn get 0.9% to 1.2%. After Amax’s new subsidiary AMA takes over all the junket operators, the company intends to pay—wait for this—0.9% to 1.2% to each of them. What’s the change? Nothing that I can see, insofar as the junket operators are concerned.
“All Amax is proposing to do is to interpose itself between the casino operators and the junkets. So what is the attraction for the junket operators to come in under A-Max? Darned if I know. I’m sure the investors have asked all these questions, or have they?”
Transparency
Arguably one of the arguments in favour of Amax and the like is a degree of business transparency not previously available when casinos were dealing with privately-run agents and their informal aggregation deals with sub agents. This is likely to be of particular appeal to publicly owned casino operators regulated overseas.
Paperwork for deals between Macau casinos and VIP agents and sub agents used to be done on scraps of paper in the old days of Dr Ho’s casino monopoly. Sometimes investors were lucky even to get a scrap of paper. On one famous occasion after the ending of the monopoly in 2002, a Hong Kong company engaging in due diligence on plans to buy an interest in a Macau casino junket operator couldn’t even find a paper trail to confirm whether there was a business to buy.
Under the modern aggregator model, there is at least a clear paper trail. The recent agreement between Galaxy Entertainment Group’s StarWorld Casino and Neptune Group, the Hong Kong-listed casino cruise ship operator and junket consolidator, is one example with which IAG is familiar.
It’s worth bearing in mind that such agreements are typically subject to review by the contracted parties and may be renegotiated in order to respond to changing market conditions. The terms stated here are those applying at the time of the deal last autumn. We mention them here for purposes of illustration.
A junket deal illustrated
The technicalities of the deal last autumn to deliver high rollers to StarWorld (done indirectly to comply with the regulatory requirements of the Hong Kong stock exchange) were that Rich Pearl, a wholly-owned subsidiary of Neptune Group, acquired 100% of the equity in an investment company called Best Max for HK$4.32 billion (US$554 million).
Under the aggregator model, Lucky Star, a gaming promoter, was indirectly loaned up to HK$6 billion by Neptune Group via a third party company to provide the liquidity to pursue VIP promotion. In return, Lucky Star was to pay Best Max 100% of the commission derived from monthly rolling turnover (up to HK$20 billion) at 0.45%. If monthly rolling turnover rose above HK$20 billion to a maximum of HK$45 million, then the 0.45% commission was to be split 10:90 between the gaming promoter and the intermediary loan company. If the monthly rolling turnover topped HK$45 billion then the 0.45% commission was to be split 45:55 between the promoter and the loan company. We mention this at length because there’s nothing like an example to illustrate what otherwise might seem like an abstract and rather obtuse point.
Another possibility raised by Mr Chang in relation to the aggregators’ need to raise extra capital (though we make no suggestion that such practices have been pursued or condoned by Neptune Group or any other aggregator company mentioned in this article) is that VIP rooms are running in some cases a virtual casino by way of side bets.
Capital injection
Here’s what Mr Chang said in ‘House of Cards’ in November 2007:
“Having chatted with various junket operators, the feedback I received is that a two times (2x) multiplier is common in every VIP room in Macau, and it does go up to ten times (10x). Yup, you read it right folks. For every thousand dollar bet in the VIP rooms, the real bet can be either two thousand or ten thousand.
“I am sure you can see where I am going with this. With the increasingly bitter competition between the junket operators, their own margins are being squeezed (higher labour costs, higher percentage given back to the players, cost of credit extended etc). I have been told that 1.8% is now offered freely in any VIP room in Macau (on the basis of a two times multiple). Figure it out. On the surface, the operators get 1.2% to 1.4% (depending on how candid the casino operators are with you). They in turn give the players 0.9% to 1.0% on the official bet. Taking the 0.9%, if a two-times multiplier is in effect, the players will get 1.8%, and the junket gets the rest of the pie on the side—with the casino and government tax effectively removed from the equation,” he stated.
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“Take the multiplier up to ten times, and you might see why some of these long-established junkets may need massive capital injections. They are now operating a virtual casino—and a potentially more profitable one—in close parallel to the brick and mortar one they are operating inside.”
