The Worst Investment in Gaming

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It's important to review the performance of our investments, both good and bad. We can learn from our success and also our mistakes. But I prefer to learn from someone else's mistakes so I can tilt my investment scale more toward successes.

So let's go back to a much simpler time. When money came easy, the economy was booming, and there seemed to be an endless supply of 20-somethings willing to spend $20 per drink at Las Vegas nightclubs. Let's go back to the days when Las Vegas was the place to be.

It all started with rose-colored glasses
In the summer of 2007, Dubai World agreed to buy 14.2 million shares of MGM Resorts (NYSE: MGM  ) at $84 per share and made a tender offer to shareholders at the same price. But the stock zoomed higher than the offer price and Dubai World ended up with only 14.55 million shares, a purchase that looked like a steal at the time. How could this possibly go wrong?

Yes, sir, I'll have another
Dubai World didn't just want shares in MGM; it wanted a piece of the most expensive private development in the U.S. After all, if you have ties to Dubai it's "go big or go home," right? So for a cool $2.96 billion, Dubai World got a 50% stake in CityCenter, one of the worst-timed developments in the history of mankind.

The hair of the dog
Like a gambler on the morning after a long night partying on The Strip, Dubai World may not want to check to see how much cash is left in its wallet. If we look at the return on these two investments and discount the additional cash Dubai World has had to pour into saving CityCenter and MGM, the picture isn't pretty.

MGM's shares trade at $13.10 as I write, so an initial $1.22 billion investment is now worth $190.6 million, an 84.4% loss even after the stock market's speedy recovery.

What is CityCenter worth today? I would argue it isn't worth the debt it has outstanding, but that can be debated. In the most recent quarter, the giant investment generated just $16.3 million in adjusted EBITDA. What we know for sure is that the value is nowhere near the $2.96 billion Dubai World originally invested.

Competitors Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (Nasdaq: WYNN  ) have been to the depths and back, but even if you had bought at the peak and held on you would be ahead of Dubai World's MGM investment.

Learning from Dubai World
Being fearful when others are greedy is a tough task, but it's especially important in gaming. Investors definitely got greedy in 2007 and have paid for it since.

Location, location, location. Keep on top of the hot gaming spots and whether they get overheated. Macau and Singapore have the advantage of government restrictions preventing overdevelopment. That may keep Las Vegas Sands, Wynn Resorts and Melco Crown (Nasdaq: MPEL  ) from repeating the dive we saw gaming stocks take in 2008.

Stay on top of all that's going on in the gaming world by adding these stocks to My Watchlist.

Fool contributor Travis Hoium owns shares of Melco Crown. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Melco Crown Entertainment is a Motley Fool Global Gains choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2011, at 4:38 PM, Senescent wrote:

    I have to say Dubai World takes the prize for bad timing. Although why anyone would want to invest in the $8 billion boat anchor called City Centre escapes me. (LVS built the diamond mine called Marina Bay Sands in Singapore for just $5 billion). But don't forget the missteps of Caesar's (formerly Harrahs) under the auspices of "genius" Gary Loveman. It's hard to beat buying a golf course in Macao but he's trying. Now he wants to build a Ferris wheel on the strip - tacky and stupid.

  • Report this Comment On March 30, 2011, at 3:29 PM, ionthemarket wrote:

    There sure seems to be a lot of conversation about gaming investments. Maybe that is because the market is becoming more and more like a gaming house. Although the odds seem to be becoming way too rigged in this "house".

    Melco Crown is one of the few that seems like a decent short term trade.

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