When the Dubai government's investment arm, Dubai World, rode into Las Vegas in 2007 with a multibillion-dollar plan to buy a big stake in The Strip, it seemed a brilliant move. It bought a large holding in MGM Resorts International (MGM 0.02%) and a 50% stake in the half-finished CityCenter complex, cementing its role as a central player in Las Vegas.
Dubai World paid nearly $5 billion for the assets, but the bet quickly soured. The recession ravaged Las Vegas, and CityCenter never performed as well as expected. Seven years later, the United Arab Emirates' leading city has lost billions in Las Vegas.
MGM Grand is MGM Resorts' flagship hotel and a cornerstone of the Las Vegas Strip. Image source: Wikimedia Commons.
MGM is a fraction of the company it once was
When Dubai World made its original deal with MGM, it intended to invest $2.7 billion in CityCenter and $2.4 billion in MGM stock, offering $84 per share for 28.4 million shares. But the stock ran well over its $84 tender offer price, so Dubai World didn't actually acquire 28.4 million shares. This might be the only silver lining in Dubai World's bet on Las Vegas, and it was unintentional.
Dubai World instead acquired 21.05 million shares for a total cost of $1.74 billion. The acquisitions were made between $80 and $84 per share, more than quadruple the stock's current price of $19.10. But the stock loss could pale in comparison to what CityCenter cost Dubai World.
CityCenter is one of the biggest resorts in Las Vegas, but also one of the least profitable. Image source: Wikimedia Commons.
CityCenter might be the biggest disappointment in Las Vegas history
CityCenter was supposed to be the next-generation megaresort, with condominiums, restaurants, nightclubs, shopping, a spa, and much more. But the project never quite lived up to its billing, and the financial results have been less than stellar for MGM Resorts and Dubai World.
Even if we gloss over the fact that the Harmon tower, which cost $400 million, is being torn down without ever having residents move in, the rest of CityCenter has been a disappointment. In the last 12 months, CityCenter has reported just $18.3 million in operating profit and $333 million in EBITDA "related to resort operations," which is a generous valuation metric.
If we use the reported EBITDA figure, a common valuation metric in gaming, the value of Dubai World's stake in CityCenter is a big loss. MGM as a company is trading at an enterprise value of 8.6; using the same multiple for CityCenter provides a total value of $2.86 billion, probably the right ballpark considering the recent $1.73 billion sale of the neighboring Cosmopolitan.
Pull out CityCenter's $1.55 billion in debt and MGM's 50% stake, and Dubai World's holding in CityCenter is only worth about $656.9 million. I think this is a reasonable valuation, but MGM has put the book value of Dubai World's stake at $1.325 billion, so I've used the range between the two figures below.
|
2007 |
Today | |
|---|---|---|
|
CityCenter-50% Stake |
$2.96 billion |
$656.9 million-$1.325 billion |
|
MGM Stock |
$1.74 billion |
$520 million |
|
Total |
$4.68 billion |
$1.18 billion-$1.85 billion |
Source: MGM Resorts and author's calculations.
These values assume Dubai World could even sell its CityCenter stake, a transaction that would face significant scrutiny from MGM and regulators in Nevada. But even using these metrics, Dubai World has lost 60%-75% of its original investment. You might think this would have taught Dubai, and the rest of the UAE, a lesson about betting on Las Vegas.
Not the last lesson learned on the Las Vegas Strip
Despite Dubai's losses, other members of the UAE's inner circle continue to bet on Las Vegas. Hakkasan Group, funded by Abu Dhabi's Sheikh Mansour bin Zayed Al Nahyan, is taking over the Las Vegas restaurant and nightclub scene. It built the $100 million Hakkasan nightclub in the MGM Grand, bought Enlightened Hospitality Group this year, partnered with MGM to build nongaming resorts, and is rumored to be acquiring Morgans Hotel Group's stake in Light Group.
Dubai World's acquisition of MGM shares and half of CityCenter was made at the peak of the real estate boom, and I can't help but wonder if Hakkasan is betting on Las Vegas at the peak of the party scene. At least this time around there aren't billions of dollars at stake, just a couple hundred million. That's a low-stakes gamble compared to Dubai World's bet on Las Vegas
