The announcement by Las Vegas Sands that it will not pursue a Japanese casino license is no great surprise.
The company has been publicly expressing doubt about Japan since October, when COO Rob Goldstein addressed the subject on Sands’ third-quarter conference call.
It also should be no surprise to readers of this column who know we’ve been longtime skeptics of Japan, going back to when the general business press was breathlessly reporting casinos would be running in time for the Olympics, and some equity analysts went as far as to impute the value of a Japanese casino into Las Vegas Sands’ stock price targets.
Japan has several problems in terms of casino development. The population opposes casinos. Even the government’s ruling coalition is split, with minority partner Komeito Party—often described as Buddhist-oriented—going along reluctantly. The impediments put on casino development have grown: a 30 percent gaming tax, a small amount of space reserved for gaming, and the expected need to share ownership with locals—all for price tags of $10 billion or more.
It’s hard for such a project to pencil out, even in wealthy and populous Japan. Even if a company could make money there, how does that compare with money that can be made in South Korea, Philippines or, in Las Vegas Sands’ case, reinvesting in Macau and Singapore?
Now Japan may have a bigger problem. The Las Vegas Sands Corp. has developed the integrated-resort model Japan wants to near-perfection. So, if Las Vegas Sands doesn’t find Japan attractive, who with prudence and a $10 billion pocketbook will?
In bowing out, Las Vegas Sands also places itself in a stronger Asian competitive position. It can reinforce its value to Macau prior to casino concession renewals without the potential conflict of interest of a competing resort in Japan. It also opens possibilities in Korea, which can tap huge and very underpenetrated northern China without cannibalizing Macau.
And if Japan doesn’t get its act together, well, it’s just a short hop for customers from the Land of the Rising Sun to the Land of the Morning Calm.
Is Cash Trash, or Is It King?
When everything is hunky-dory, it’s easy to say that cash is trash. After all, why earn a few percent on bonds when you can earn a heck of a lot more with borrowed money?
But when tough times come, cash is king. Las Vegas Sands is the prime example of that principle.
A lot of companies today are loading up their balance sheets with high-interest debt, just to ride out the Covid-19 crisis.
Companies that were complacent about their 5-1 debt ratios are now nervous as they run them up to 7-1 and 8-1 by borrowing just to pay their bills, knowing they’ll shoot up much higher as revenues collapse. And that, of course, means making concessions to creditors, which is always expensive.
Not Las Vegas Sands.
With low debt-to-EBITDA, CEO Sheldon Adelson has had to endure criticism from investors that he wasn’t borrowing enough money, whether to buy back stock, raise dividends or fund growth projects.
Adelson has insisted on keeping debt low, while still being able to fund growth, like the $2 billion Londoner project in Macau and the $3.3 billion renovation and expansion in Singapore. All the while, Las Vegas Sands also bought back shares and paid a good and growing dividend. Those repurchases and dividends are suspended for the duration of the crisis, but Las Vegas Sands is positioned to restore them. As Adelson said on his recent conference call, he still believes in “Yay, dividends!”
So here we are, companies scrambling to get the resources to survive while Las Vegas Sands—for the first time in its history—is on the hunt for acquisitions. And you can bet there will be companies and/or trophy properties available at bargain prices because, in a crisis, cash is king.
Give Penn a Pat on the Back
The guys at Penn National have shown how to raise cash in today’s uncertain environment.
PENN is raising up to $690 million, including overallotments but before fees, with approximately equal sized stock and convertible note sales.
Creating equity by selling stock and then borrowing an equal amount is a nice way to raise cash while shoring up the balance sheet. In borrowing through a convertible note, PENN got a comfortable interest rate of 2.75 percent. And with a conversion price of $23.40 vs. $16 and change as of this writing, the value of shareholders’ stakes is not diluted.
