High Stakes Gamble Costs Dubai World-MGM Plenty

Dubai MGM City Center

As a deal is reached in legal battle with MGM over CityCenter Tower, Dubai World’s colossal loss very much alive.

In 2007, when Las Vegas seemingly recovered from the recession in the mid and late 2000s, the Dubai government and their investment arm, Dubai World, decided to invest in MGM. In the hope to show that they were a central player in Las Vegas, they bought a large holding in MGM Resorts International at The Strip, Las Vegas’ hip land-based and mobile casino gambling high street.

Dubai World also had a fifty per cent stake in the un-finished CityCenter complex. It spent almost $5 billion on both projects. However it was a bet that cost them plenty. With the precedent recession CityCenter wasn’t up to par and seven years later, Dubai World went cold.

Dubai World forfeited MGM’s 50% investment in CityCenter but with the resort’s debt at $1.55 billion debt, the initial $2.96 billion is currently worth just $696 million. Both the acquisition of MGM shares and half of CityCenter was made at the peak of the real estate boom.

What the deal was

The deal was that Dubai World would invest $2.7 billion in CityCenter and $2.4 billion in MGM stock. Dubai World offered $84 per share for 28.4 million shares. However the stock cost more than the $84 bid. Dubai World therefore ended up buying less than the original 28.4 million shares they bargained for. Perhaps, for them, it was a lucky thing they didn’t buy it all.

As it happened, Dubai World could buy only 21.05 million shares, which cost them $1.74 billion in all. This meant they paid around $80 and up to $84 for each share. This was actually 4x more than what it is worth today, at $19.10 per share.

CityCenter – one of those Las Vegas gambling tragedies

The CityCenter’s next-generation mega-resort with condominiums, restaurants, nightclubs, shopping and a spa flopped. In the last year or so, CityCenter had an operating profit of just $18.3 million.
According to EBITDA data, Dubai World’s $333 million stake in CityCenter was deemed a failure.

• MGM now a smaller company
• MGM and Dubai World demolishing vacant Harmon this year
• MGM Grand is MGM Resorts’ flagship hotel

Compared to the recent sale of neighboring Cosmopolitan for $1.73 billion, MGM’s worth as a company is trading at an enterprise value of 8.6. When the same multiple is used for CityCenter, this gives a total value of $2.86 billion.

And that’s how CityCenter ended up with a $1.55 billion debt. MGM’s 50% stake, and Dubai World’s holding in CityCenter is now only worth about $656.9 million. MGM has put down the value of Dubai World’s stake of being around $1.32 billion.

Hakkasan’s lower-stake gamble

Critics thought that Dubai World would wise up and sell the CityCenter stake. The transaction probably would have resulted in an investigation from MGM and US gambling laws regulators in Nevada. But even using these metrics, Dubai World still lost between sixty and seventy five percent of the money it invested anyway.

Though Dubai World lost its bet, it seems some valuable lessons may have gone by unheeded. Others are following in the same path. United Arab Emirates’ Hakkasan Group, funded by Sheikh Mansour bin Zayed Al Nahyan of Abu Dhabi, just built the $100 million Hakkasan nightclub in the MGM Grand.

The Enlightened Hospitality Group is in partnership with MGM to build a non-gambling resort. Speculations are on about the acquisition of the Morgans Hotel Group’s stake in Light Group. In comparison to the Dubai World-MGM deal, this is a low stake gamble of only a couple of hundred millions at stake.

For MGM, shares are worth just $520 million today which basically means they sustained a $1.2 billion loss. Let us hope that with the close of the 4th quarter in 2014, Hakkasan and other rich UAE investors will see a better return on their investments.

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