The beginnings of what could become a lengthy legal struggle was launched last week when Wynn Resorts former Vice Chairman Kazuo Okada filed suit in Clark County, Nevada court, charging the some key financial records of the company have been kept from him. Okada charged specifically that data concerning a $135 million contribution from Wynn Resorts to the University of Macau has not been produced. 

Okada indirectly owns almost 20 percent of the company and is the largest shareholder, owning twice as much as Chairman Steve Wynn. He invested $260 million when the company was formed in 2000 and another $120 million in 2002 when the company’s Macau venture was launched. Following his 2009 divorce, Wynn owns less than 10 percent of the company.

According to the lawsuit, Okada objects to the University of Macau donation, which will be paid $25 million upfront and $10 million for the next 10 years. He claims documents related to the donation have not been shown to him, despite numerous requests.

“There was no discussion regarding whether such a large gift, over such a long period, is an appropriate use of corporate funds,” the lawsuit said.

Okada, meanwhile, has been busy in the gaming industry on his own. He is the owner of Universal Entertainment, which owns the U.S.-based Aruze Gaming and is developing an integrated resort in Manila at PAGCOR’s Entertainment City. Okada’s removal from the board was directly related to this project, which Wynn considers competitive, although Okada claims that he and Wynn visited Manila in 2010 to consider a project together. When Wynn declined to participate, Okada went ahead alone.

Okada was removed as vice chairman of the board at the October board meeting (although the company has yet to report that fact to the Securities and Exchange Commission), citing irregularities in the acquisition of the Manila gaming license and the need to insulate Wynn Resorts from any alleged wrongdoing. Okada denied any issues in Manila, or in Japan, where Universal is one of the largest manufacturers of grey market pachinko machines in the country.

Okada’s lawsuit, GGB sources say, is in retaliation for that action. In addition, the lawsuit claims that following the Wynn divorce, a shareholder amendment was put it place that "purports to impose restrictions on the shares of Wynn Resorts owned by Aruze USA (a subsidiary of Universal) and Ms. Wynn and confirm the ability to Mr. Wynn to exercise certain rights in respect of such shares.”

In a press release, the company says it will vigorously defend itself.

“This action is an attempt by Mr. Okada, who was removed as vice chairman of the company in October of 2011, to deflect attention from a dispute between Mr. Okada and the board of directors of Wynn Resorts related to Mr. Okada’s decision to directly compete with the company by pursuing a project in the Philippines despite repeated admonishments from the board,” the release said. “The dispute also involves Mr. Okada’s misuse of his director position to imply the company’s participation in projects that the company had made firm decisions to avoid. The sources and uses of all pre-IPO capital contributions are detailed in publicly available information and Mr. Okada received the same information as all directors with respect to charitable contributions made by the company.”

Universal responded in kind.

“Steve Wynn and the Wynn Resorts board of directors continues to prefer secrecy over transparency,” the company said in its release. “Despite the court petition and repeated requests by Mr. Okada to inspect the company's books and records, the Steve Wynn-controlled board still refuses to comply,'' Okada's company said in a statement Thursday. "Significant questions remain regarding the company's use of Aruze USA's and other shareholders' investments. Mr. Okada believes as a member of the board and the largest single shareholder that Wynn Resorts should openly and directly answer these questions.”

Meanwhile, the battle has impacted the value of Wynn Resort Ltd. Shares of the company fell 4 percent the morning following the announcement of the suit.

Gary Pinge, an analyst with Macquarie Capital Securities Ltd., was surprised by the announcement.

“We are unsure of the reason for the filing of the petition and the obvious questions is why Okada wants to inspect the books,” Pinge said. “However, given the positions that Okada holds, one reason to be concerned with the petition would be if it created any boardroom instability ahead of Wynn Macau's decision to invest in Cotai.”

David Bain with Sterne Agee says the dispute could continue to harm Wynn stock now and future development plans, as well.

“Certain investors have pointed to Okada's business interests in the pachinko parlor business, sometimes seen as gray area gaming, as a drag on Wynn's potential bid into prospective casino gaming expansion in Japan,” Bain wrote in a note to investors. “We note there is no evidence offered in Okada's petition of a quid-quo-pro of any kind between the Macau Government and Wynn in the wake of the company's donation to University of Macau or during the company's Macau licensing formation stages. The legal petition by Okada, which we view as unhelpful to Okada's financial interests in Wynn, may demonstrate that the relationship between Mr. Wynn and Mr. Okada (on a personal basis) is strained, in our view.”

Union Gaming Group of Las Vegas has a different take. In a note to investors, the group outlined the development plans for Universal and believes that the lawsuit could be designed to force Wynn to buy Okada’s share of the company. Union Gaming estimates that Universal has invested about $600 million in what will eventually be a $2.3 billion project, and therefore must find sources of revenue to finish it.

“With scarcity in Philippine resort development financing however, our point is that Universal’s main source of funding is highly probable to be its Wynn Resorts holdings,” the note says.

Union Gaming suggests that Wynn would be amenable to such a purchase.

“With a sharp bond market recovery off of late November lows, and an upsized MGM Resorts bond deal as a favorable proxy, we believe demand and support would exist for Wynn to lever up and purchase the Universal stake (in addition to Elaine Wynn’s stake if all parties are amenable to it). As the combined 34.3 million shares represent 15 days of trading volume, we estimate Wynn could acquire both parties shares for a discounted $3.3 billion. This would result in net leverage of a manageable 3.5 times relative to current pro forma net leverage of 1.3 times.”

By Staff