Inside Asian Gaming

INSIDE ASIAN GAMING | April 2011 8 In Focus time of 28th February—the day before LVS’s announcement to the market about the SEC investigation—and the close of business on 18th March, the company’s market capitalisation shrank by 22%. That’s US$7.48 billion in cash terms. The closing stock price on 28th February was US$46.64—market cap of just under US$33.9 billion. The closing price for LVS stock on 18th March was US$36.34—a market cap of just under US$26.4 billion. But by the time IAG went to press in early April, IBD was reporting that the company’s share price was back up to US$44.84—a recoveryof 23.4%on themid-March low.That seems to support Mr Adelson’s contention that his company’s involvement in Asian casino markets means he is participating in a tide that“carries all boats”—regardless of the fact some boats may experience choppier seas than others. On 31st March, shares in Sands China, the company’s Hong Kong-listed unit, experienced separately a 6% fall when the company announced Hong Kong’s SFC inquiry. But on 1st April—when Macau’s gaming regulator announced gross gaming revenue for March grew 48% year on year to 20.1 billion patacas (US$2.51 billion)—Sands China’s stock put on 6.1%. Barron’s magazine recently described Mr Adelson’s great Las Vegas rival Steve Wynn as “an investor’s friend” when adding him to its list of the World’s Great CEOs. Long/short hedge funds could equally describe Mr Adelson as an investor’s friend. His willingness to spend a lot of money on infrastructure (up to US$6.8 billion) to capture Macau’s higher-margin mass market gamingcustomers rather thanconcentrating on the VIPs (like many of his Macau rivals) arguably offers investors a ‘go-long’ hedge against the uncertainties of the Macau high roller trade and its accompanying junkets. And just as importantly, any investor wishing to short LVS shares in relation to the current investigations by regulators and law enforcement bodies can do so with a clear conscience, knowing that even if the LVS stock takes a hit once the results of the investigations are revealed, it will probably bounce back anyway to the benefit of the entire investment community, carried up on the general tide of optimism surrounding the Macau casino market. But there are valuation opportunities and then there are risky behaviours—the sort pinned on BP in its management of oil rig safety prior to the Gulf of Mexico disaster. When BP had US$81 billion wiped off its share price, the market was reflecting its dissatisfaction with BP management’s performance, its alarm at the medium term implications for BP’s business prospects in the US market and further afield, and its concern at the cost of the clean-up operation and what that could do to shareholder profits. As of this month, the total compensation and clean-up bill faced by BP was estimated at US$30 billion. If BP and the oil rig owner Transocean had done as recommended by an outside contractor and replaced a faulty blowout preventer on the Deepwater Horizon platform, it could have cost them less than US$2 million, according to one piece of evidence put to a US Congressional inquiry. The question some LVS investors are asking is how wise it was for LVS to fight Steve Jacobs’ request for a reported US$7 million compensation after he was sacked as CEO of Sands China in July last year. By the company’s own assessment, the dispute with Mr Jacobs has led directly to regulatory and criminal investigations. The company said in its annual report: “It is the Company’s belief that the [SEC] subpoena may have emanated from allegations contained in the lawsuit filed by Steven C. Jacobs.” The recovery in LVS’s share price, post-SEC revelation supports Mr Adelson’s contention that involvement in Asian casino markets means participating in a tide that “carries all boats” Those investigations at the very least risk negatively affecting local goodwill toward LVS—in a Macau casino market worth US$27.2 billion in gross revenue in 2010. Mr Adelson claims Mr Jacobs’legal action is “threatening, blackmail and extortion” and says corruption allegations made by Mr Jacobs against LVS and Sands China are “lies”. Mr Jacobs has not responded to Mr Adelson’s statement, but clearly feels he has been unfairly treated by LVS. When positions become hardened in this way it’s hard to reach a compromise without recourse to law—whether the civil or criminal kind. But even if some LVS shareholders are alarmed enough by the situation to question Mr Adelson’s position, it appears unassailable, not least because he and his family own a majority of the LVS stock. The end game for a casino operator facing any serious regulatory investigation into its business practices is that it can lose its licence. Law 16/2001—the Macau legislation establishing the framework for a post-monopoly market—gives specific grounds on which a casino operator’s concession (or sub-concession in the case of LVS) can be withdrawn. Article 47 of Law 16/2001 headed ‘Withdrawal due to failure in fulfilling obligation’ states: “1) If the concessionaire failed to fulfil the obligations as required by related laws or contracts, the government can withdraw the concession. 2) Especially any of the following will lead to withdrawal. A) the concessionaire gave up running or stopped running the business without appropriate reasons. B) Violations of this law or other contracts related to its concession. Partial or entire transfer of its operation in interim terms or permanent basis.” Article 48 of Law 16/2001 headed ‘Withdrawal due to public interest’ adds: “1) Whether the concessionaire has fulfilled any of its legal obligations or not, the government has the right to withdraw the concession based on the ground of public interest. 2) In the event of withdrawal on the grounds of public interest, the concession has the right to seek compensation, of which the amount should be based on the remaining time before the expiration of the concession SteveWynn—really more of an investor’s friend than Sheldon Adelson? Macau’s gaming regulator, the DICJ—legal power to sanction operators