Rising beyond a manmade lake that erupts with more than a thousand computerized fountains, Bellagio is Mirage Resorts Inc.’s $1.6 billion bid to create the most fabulous fantasy yet along the glittering Las Vegas Strip. When the hotel opens on October 15, its 3,000 rooms will go for a nightly average of $200–tops in town. Among Bellagio’s attractions are offshoots of some of the world’s poshest shops and eateries, and $300 million of Renoirs, Monets, Van Goghs, and other master- works– any of which you can take home if you hit a lucky streak at the tables.
“Nobody’s going to beat this for a long time,” beams Mirage’s CFO and treasurer, Daniel R. Lee, as he shows a visitor the flourishes being added to the cavernous casino. If he’s cautious at all about the prospects, it’s only because he knows that the devil is in the details. “We’ll spend a year basking in accolades and fixing problems,” he says.
But on the eve of Bellagio’s grand opening, Lee is also glowing over a far less glamorous triumph: Mirage’s acquisition of the Boardwalk, a modest little casino attached to a $49-a-night Holiday Inn. If you notice it at all, it’s because it is so dwarfed by the opulent Mirage megaresorts surrounding it–not just Bellagio, but also the flagship Mirage hotel-casino, Treasure Island, and Monte Carlo, the last a joint venture with Circus Circus Enterprises Inc.
“A Lot of Convolution”
Be it ever so humble, the Boardwalk is the key to Mirage’s future in Las Vegas. And its purchase says much about Dan Lee’s enormous role in positioning Mirage to dominate the city’s lucrative luxury-resort market. The property was the centerpiece of a whirlwind $258 million accumulation of Strip buildings and parking lots–properties whose very plainness belies the complexity of the deals that the CFO had to orchestrate to assemble them. It was only last summer that the 41-year- old former gaming-industry analyst, who also has a degree in hotel administration, began his stealthy assault on Boardwalk Casino Inc. It culminated in Boardwalk shareholders’ May approval of a $36 million acquisition by Mirage, the heart of Lee’s real-estate acquisition plan.
One day, the Boardwalk and neighboring buildings will be leveled to their 23 raw acres. This plot, combined with 32 acres left over from Mirage’s 1993 purchase of the old Dunes hotel-casino and golf course, will be the stage for the next Mirage megaresort, with a theme yet to be designated.
CFOs often leave real-estate dealings to others in the corporation. But like other hotel-casino CFOs, Lee sees buying Vegas land as similar to any other investment a CFO might make. “It’s not that different; it’s all basically legal contracts,” he says. “It’s one way of growing the company, and I think of myself as the VP of growth.”
Watching Dan Lee negotiate, “I was highly entertained and absorbed, because the negotiations dealt with a lot of convolution,” says Steven A. Wynn, the charismatic chairman, president, and chief executive officer of Mirage Resorts. He trusts his senior staff members, who “march to the beat of a different drummer,” Wynn adds. “If you’re checking with the CFO every 20 seconds, you’ll never get the job done.”
A Town of Few Secrets
Investing for growth in the gambling capital of the world is itself risky–and never more so than during Las Vegas’s current steep capacity escalation. The Bellagio, Mandalay Bay, Paris, and Venetia hotel-casinos, all along the same stretch of Las Vegas Boulevard, will add an astounding 16,000 rooms before the millennium, swelling the room total by 14 percent.
“This is uncharted territory,” says Bruce Turner, a Salomon Bros. Inc. analyst. “The one thing we know is that there will be unprecedented new supply, with signs of weakness in demand increasing at the same time.”
The jury is certainly still out on the $11 million per acre that Mirage paid for what are essentially teardown buildings. Lee, of course, believes it could turn out to be a bargain. The $70 million purchase price for the 164-acre Dunes was thought steep by many, but Bellagio and Monte Carlo now occupy parts of that Lee acquisition. Lee’s rivals generally praise the way Mirage pulled together the Boardwalk properties. “I think Mirage did a fantastic job,” says James Murren, who recently took over as CFO of MGM Grand Inc. “They basically stole it from under the nose of Caesars.” Caesars Palace, the luxury resort now owned by Starwood Hotels & Resorts Worldwide, occupies the block just to the north of Boardwalk. “Being able to put together a structured transaction for property here is a real skill,” adds Circus Circus CFO Glenn Schaeffer, an old friend and sometimes- ally of Lee’s. “The intelligence has to be very good. It’s hard to have secrets in Las Vegas.”
One tool Lee uses is his boyish appeal. He talks about how his mother still enjoys working as a banquet waitress in his hometown of Syracuse, New York. And he makes folksy references to his first hotel job–watching the front desk during high school. “Dan has a great history of charming people into transactions,” says Pauline Yoshihashi, who worked with Lee last year when she was an investment banker with Donaldson, Lufkin, and Jenrette (DLJ). “But he doesn’t do it in a manipulative way.”
Even a young Los Angeles entrepreneur who confronted Lee over Lee’s efforts to purchase a restaurant lease Mirage needed, came away with a grudging respect for the CFO. Lee is like a “rocket scientist who works for God,” says Dan Rubin. And in Las Vegas, anyway, “Steve Wynn is definitely God.”
A 10Q as Beach Reading
It was early last summer that Lee began thinking in earnest about the Boardwalk as a possible cornerstone for expansion. Mirage, which strives for 20-percent annual earnings growth, was planning to open the Beau Rivage Hotel in Mississippi next year. But there wasn’t a good parcel in Mirage’s Las Vegas inventory for another of the luxury resorts Wynn favors. The next project would have to be big, Lee knew, because 20 percent would be harder to attain with annual cash-flow generation soaring to $500 million after Bellagio and Beau Rivage came on stream.
Lee figured it was up to him–not his boss, whose expertise lies in tailoring properties for specific markets–to assemble the right properties. “Steve Wynn loves to design hotels. He forgets to buy the land,” says Lee with a laugh.
In the Boardwalk, the CFO saw a property that could be used to block off 1,200 feet of frontage on the Strip, connecting the leftover Dunes acreage and, ultimately, another 11 acres just north that might become available. If other parcels could be purchased, a site nearly the size of the Bellagio lot–and right next door–would belong to Mirage. Lee figured that land prices in Bellagio’s neighborhood would soon rise, so he considered the accumulation of land nearby “a bet on Bellagio, as well as a bet on Steve Wynn’s imagination.”
When Lee and his wife, Susie, vacationed at San Diego’s Coronado Beach in August 1997, Lee brought along a stack of filings covering Boardwalk’s three years as a public company– from the initial public offering to a $40 million bond issue that funded some expansions shortly thereafter. “I read all this stuff, including every 10Q I could find,” Lee says. He spotted financial and management trouble tied to Boardwalk’s overbudget expansion plan and its huge mortgage debt. “It soon became obvious that the first step would be to acquire Boardwalk’s first mortgage bonds,” Lee says. There he saw one big advantage: The bonds, yielding 161/2 percent, maturing in 2004, and not callable until 2001, had a single owner, Franklin Funds. That increased the possibility that acquiring the bonds could be done at least relatively quietly.
The mortgage debt made a direct Mirage bid for Boardwalk Casino shares problematic. The 161/2 percent yield was appropriate for the small, highly leveraged Boardwalk. Because Mirage’s cost of capital was less than 7 percent, though, acquiring the equity first would put funds below the bonds, and that would boost their value–and thus the cost for Mirage to retire them–to about $65 million.
All or Nothing at All
Back from Coronado, Lee presented “this crazy idea” to Steve Wynn. The CEO loved the plan, which involved Lee pursuing the Boardwalk mortgage bonds; Boardwalk itself; an odd- shaped, 1.4-acre adjacent parcel held by golf- shop chain owner “Nevada Bob” Elton; and a 2- acre parcel occupied by Los Angelesbased Country Star Restaurants Inc. under a long- term lease. “It was important that Mirage acquire everything. A single small lot or long- term lease left outstanding would impede Mirage’s development plans and would have enormous ‘hold-out’ value,” according to the CFO. Finally, if Mirage could get it, the adjacent 11-acre parcel might also be available later, swelling the site’s size even more. Secrecy, Wynn and Lee agreed, was vital to prevent speculators or competing gaming companies from thwarting the plan. “There are people,” notes Lee, “who would buy up property just because they hate us.”
To keep Mirage’s name out of the feelers about the Boardwalk bonds, Lee engaged DLJ’s Yoshihashi to approach Franklin Funds first, to feel them out about a price. The offer she made: 80 cents on the dollar. “The response was surprising,” recalls Lee. Franklin “refused to sell, and indicated that, because of the high coupon and certain covenants in the indenture, the bonds were worth much more than their $40 million face amount.” In fact, Franklin indicated that it was close to a deal to sell the bonds for $50 million to a third party based in Europe.
Equally shocking was the special little message Yoshihashi was instructed to deliver to her anonymous clients. “It was something like, ‘Read the indenture, stupid,’” recalls Lee. What he found in the indenture was an unusual yield-maintenance premium designed by the original borrower and seller to sustain the high interest rate of the instrument. Indeed, in bankruptcy or another reorganization plan, the bondholders’ claim was designed to be not the $40 million face amount of the debt, but the present value of all future interest and principal payments, discounted at 100 basis points over the Treasury-bond rate. In current dollars, the claim would be about $65 million.
Since Lee had placed his own value for Boardwalk at $100 million, that meant Boardwalk’s equity would have to sink to around $35 million–or much less than market value. Unless, of course, the yield- maintenance concept was overturned by a bankruptcy judge, something Mirage lawyers Wachtell, Lipton and Irell & Manella said was possible, but not probable. (Why use two top law firms? “Mirage may be in the casino business,” says Lee, “but it’s not accustomed to gambling with its own funds, at least not without a house edge.”)
In the end, Lee topped the existing $50 million offer with one of $50.5 million, “a bet worth making” in part because the high rate of return on the debt would likely exceed Mirage’s cost of capital even if the acquisition drive foundered. Mirage used a street name to protect its identity, preventing Franklin, the bond trustee, and Boardwalk Casino itself from knowing the bonds’ ownership.
Indeed, Boardwalk was still working on the supposition that it would be able to place the bonds with a friendly European casino concern. Boardwalk Casino was planning to announce placement of the bonds at its annual meeting in late September, so Lee knew the company would be shocked when it “discovered instead that the entire bond issue had been sold to an unknown party.”
A Company Under Siege
Furious about Boardwalk’s reaction, Lee “put on some scruffy jeans and an old golf shirt and baseball cap and went incognito” to the meeting. “I was trying to get a read on their board,” says the CFO.
Boardwalk Casino was about to become a company under siege. Not only were its mortgage bonds held by an unknown party, but someone apparently different was preparing to buy the land just north, while Mirage held property on all the other sides. Its expansion plan was dead, earnings were weak, and its debt was onerous–with a $3.3 million mortgage payment facing it on September 30.
Lee was moving on the other parcels, a “complicated chess game” requiring one bit of blatant artifice: creation of a company called Restaurant Ventures (RV) of Nevada Inc. to acquire Nevada Bob’s parcel and Country Star. Lee wanted buyers to think RV was part of a fast-food chain–“one of the few plausibly potential uses of the oddly shaped lot, other than Mirage’s actual plans.” While Nevada records show officers and directors of new companies, shareholders aren’t identified. And RV’s sole shareholder was, of course, Mirage Resorts.
Mimicking the type of offer a restaurant company would make, two Mirage stand-ins made offers at a present value below the amount Mirage was actually willing to pay. One stand- in, a novice real-estate agent and Lee’s neighbor, was a particularly good choice because “no one would expect Mirage to use a start-up real-estate agent for such a job,” the CFO says. One Friday last September, Nevada Bob’s Elton told RV its offers were far below what Boardwalk Casino had been offering as part of its own expansion plan. He questioned the ability of Boardwalk to raise the money, but said he would offer Boardwalk an option to buy the land on Monday.
Lee saw he had to act fast, so RV offered Elton $9.4 million for the 1.4 acres, topping the Boardwalk exercise price, on the condition that acceptance be immediate after RV provided a letter of credit the next day. (It was at that point that Elton figured out who was behind the faux restaurant outfit, notes Lee, who recalls Elton later saying: “It had to be Mirage; nobody else could get a letter of credit from Bank of America on a Saturday.”) Elton declined to comment.
Attention turned to the Country Star land. When the owners discovered that an entity called RV had acquired the Nevada Bob site and cut off Boardwalk’s plans to expand north, they indicated they were willing to entertain an offer, too.
In November, in the first real sticking point for Lee, Dan Rubin, the 26-year-old CEO of Country Star Restaurants, which was the restaurant’s leaseholder, demanded more than the $1.5 million offered by RV. Lee’s tough response to the demand was to drop the contingency, having RV acquire the property itself, and sending an eviction notice to Rubin. But Rubin then put the VegasCountry Star unit in bankruptcy, to retain his rights to the property. “That put Mirage in a bind,” says Rubin, who says he was able to identify Mirage as the party behind RV.
Seeing that Rubin could sell his lease to an enemy of Mirage that might want to block a deal–in fact, Susie Lee had reminded her husband that Mirage had similarly blocked MGM Grand from expanding the New YorkNew York resort–Lee and Wynn decided to meet Rubin’s demands, and fast. “I told Rubin I’d meet him in two hours,” Lee recalls. A private pilot, Lee flew to Los Angeles himself and gave Rubin a check for the amount he had demanded for the subsidiary: $1,650,000.
The Cover Is Blown
Around Thanksgiving, meanwhile, Lee’s cover was blown after a minor incident in a parking lot that Mirage secretly owned through Restaurant Ventures. Despite all of Mirage’s grand strategy, Lee still had to contend with such mundane issues as liability at the properties. One of his ploys was to station a security guard at the former Nevada Bob property to prevent Boardwalk employees from parking there. Then Lee himself spray-painted the markings for a fence on the pavement. But during a confrontation between Lee’s lone guard and Boardwalk guards over rights to the lot, the guard identified himself as a Mirage employee, and the secret was out.
Back on the Boardwalk Casino front, after studying its strained shareholder relationships, Lee decided to work with Avis Jansen, the founder’s widow. Lee and Wynn reached out to her allies in a new strategy: a possible bid for Boardwalk Casino’s shares, which were falling sharply from the $6 level at which they had started the year.
By then, it was too late for Boardwalk, which was going to lose its business to Mirage, willingly or unwillingly. “Mirage had a choice,” says Lee. “It could hold back, watching Boardwalk’s finances deteriorate. Eventually, Mirage might well be able to acquire the company at a cheaper price.” But, he adds, that could take years and might require bankruptcy-court approval. “The other alternative was to negotiate a friendly deal with Boardwalk’s board.” With the stock price down to a low of 33/8 in December, Boardwalk’s entire equity was trading at less than one- fourth the price Mirage was paying for the whole land assemblage–a small price for locking in the acquisition.
The initial $4.25-a-share offer on December 11 was later raised to $5, and the deal was signed. Barry Goold, Avis Jansen’s attorney, credits Lee with an “extremely fine job of doing his homework.” He says Lee was knowledgeable about the position of the parties he dealt with. “He was a tough negotiator but fair, and he stuck to his word.” Lee adds that he doesn’t think Mrs. Jansen would have agreed to sell her shares had he not taken the time to explain his plans to her. One Boardwalk survival plan, forcing her to buy risky preferred stock in a company that was on the rocks, “really angered me,” Lee says. “At a time when she should have been enjoying a comfortable retirement, she was instead dealing with a very troubled company.”
When the final 11 acres in this chain of purchases became available, for $118 million from Detroit attorney Bob Zeff, Lee eagerly undertook the challenge to expand the scope of Mirage’s vision from what had originally been a $140 million series of acquisitions. (Ever playful, Lee created, as a Mirage unit, The April Cook Cos.–named for his girlfriend at his Syracuse middle school. It submitted the bids for the Zeff property.) Lee and Wynn also lobbied successfully with the county commission to have the Strip’s Harmon Avenue crossroad moved north so that it wouldn’t cut through the new Mirage land.
Of the future development plans for the 55 acres, Lee says that for now Mirage is content to keep operating the Boardwalk. Preliminary plans are already being formed for another megaresort at the high end of the market, but Lee sees a golden chance to watch what happens with nearby properties before committing.
If Las Vegas doesn’t absorb the new rooms scheduled to open in the next two years, “then we paid $140 million for land that’s worth 50,” he says. But as he points across the lake to Bellagio, he adds: “With the Boardwalk, there’s a chance to do that again.”
———————————————– ——————————— “We Were Just Unlucky”
Imagine telling investors you missed making your earnings target because of bad luck. For Dan Lee of Mirage Resorts–and other CFOs of gaming companies catering to the market’s high end–it’s actually not that unusual an accounting. And it’s only one of many peculiar explanations that can emanate from hotel- casino companies.
Casinos can pretty easily project their winning percentage for normal-stakes table games like blackjack and roulette: the house wins about 20 percent of the “drop,” or the money paid by gamblers to buy chips. But big bets like the $50,000 per-hand maximums Mirage and others allow for baccarat can skew the final numbers. That’s what happened in the latest second-quarter among Asian high-rollers who favor baccarat, says Lee. Profits plunged 31 percent, to $33.6 million, or 18 cents a share, 4 cents lower than analysts’ consensus number.
“We investigated what happened further,” he says, “and found that the Far Eastern players bought as many chips [as in past quarters], but didn’t bet as long, and went to bed earlier.” Because the odds favor the house, the chances of gamblers losing increase the longer they play. So the shorter table time– and Mirage’s back luck–had an impact: 4.5 cents per share, Lee figures.
Among the other offbeat explanations that quarter: Roy, of the Siegfried & Roy magician team, broke his hand. That led to canceling 42 shows (tickets are $90 each), cutting revenues by $4 million.
The issue of cold streaks at the tables continues to bother the CFO, because there’s no way to insulate earnings against it. “I actually investigated once whether we could change the accounting procedures and set up a reserve for the unlucky periods,” says Lee. How did the study turn out? “Basically,” he says, “Arthur Andersen laughed at me.”