Around the world, the coronavirus caused casinos to close down for months, costing billions of dollars in revenue and putting tens of thousands of jobs on the line. The recovery in existing markets is expected to take at least a couple of years.
Could the impact on world economies and corporate bottom lines also hamper markets in the making, such as Japan? GGB News asked gaming analyst Brendan Bussmann if operators may start to question the value of Japan and other new markets—or the massive price tags.
Sayonara, LVS
The Japanese parliament first approved casino gaming in 2016, with an eye toward opening the country’s first three integrated resorts sometime after 2025.
From the start, Japan was called the next Holy Grail of gaming, with early market estimates as high as $40 billion, though later valuations came in much lower, in the $8 billion to $25 billion range. That seesawing didn’t stop leading operators—the Las Vegas Sands Corp., Wynn Resorts, Melco Resorts, Genting, Galaxy Group and MGM—from lining up for a bite at the pie.
In mid-May, during the ongoing Covid-19 shutdown, the mighty Sands Corp. withdrew from the race, but according to Bussmann, the exit had little or nothing to do with the virus, and everything to do with lingering questions about the regulatory framework in Japan.
“While we know most of the parameters, some of finer details are still missing,” he said—including tax rates and the ownership division between operators and their domestic partners. Some of the regulations are considered almost punitive, such as limiting gross gaming area to 3 percent of an entire resort complex, which could affect profitability, and entry fees and limitations on visits for locals.
“LVS likely said, ‘Look, we just don’t know if it’s going to work out here, let’s just move on to other opportunities that offer the same amount of return, where we can further enhance our MICE-driven model,” said Bussmann.
He pointed to comments made by Sands China President Bob Goldstein last October, long before the coronavirus became a global health threat: “No matter how good you are at this business, (you must) stop and think, ‘Is this prudent, can you really deploy, can you get the return?’”
Goldstein also worried about the investment, saying, “I don’t think anybody is going to do it for less (than $10 billion), unless you’re going to do something sub-par. You could spend the equivalent of what Sheldon (Adelson) has spent in China for many casinos and retail malls (on) one IR in Japan.”
Another factor, at least for LVS, could be the emphasis by the Japanese government on local development partners. LVS is not known for being deferential to partners in big projects. “They have a proven model that works, and they prefer to make sure they’re the dominant partner,” said Bussmann. “That might not be possible in Japan, where local partners are expected to carry their own weight and influence.”
Reshuffling the Deck
With Sands out of the picture, what does that signal to other operators—that it’s time to reevaluate, or that the race just got a lot less crowded?
“I think every operator’s had both thoughts,” said Bussmann. “Why did Sands pull out? What do they see that we don’t see? And then, where does that mean in terms of opportunity for me? There are other operators of the same stature still in the market, but taking one of those giants out of the mix mostly provides opportunity for others to continue their development plans. I believe every operator today is still very strong on the opportunity in Japan, and the market that it can be.”
Would any potential investor be justified in putting off major developments for now? Or can it be argued that it’s a good time—or at least not a bad time—to plan for the future?
“Obviously, each operator needs to see where they are once things start to reemerge” as the industry reopens, said Bussmann. “How is their current balance sheet? Are revenues returning? Yes, this could be a great time for expansion and M&A for operators who are well-positioned, who have good liquidity and strong balance sheets. Any time there’s a disruption, there’s also going to be opportunity for people to benefit.”
Early on, MGM Resorts pledged its “Osaka Only” policy, choosing Orix as its Japanese partner. Bussmann believes MGM is still in it to win it, despite the disruption that caused the restructuring of its U.S. executive ranks in May, and may lead to the layoffs of 63,000 U.S. employees in August.
“I really don’t see them making any changes to their current plan, unless something dramatic happens. Listening to the last earnings call, acting CEO Bill Hornbuckle continued to be bullish on the market (in May), and the leadership team on the ground with Ed Bowers is very strong. They remain very committed to seeing that development through, and even if Tokyo raises its hand, they would still stay in Osaka.”
With LVS out of the picture, the big contenders now in are Wynn, Melco, Galaxy and Genting, he said. “SJM still has a desire to develop something there, and Suncity and Clairvest have shown interest in Wakayama. It’s yet to be determined who will bid on Nagasaki, and if Nagoya and Tokyo raise their hands in the next couple of months, that may shift some of the players or bring new interest to the market.”
If there’s any benefit at all in the timing of the process, now interrupted due to Covid-19, it may be that developers in Japan will be able to take advantage of advancements that result from the pandemic.
Bussmann called it “IR 2.0.”
“Whether it be in Japan or another jurisdiction, those technological advances as well as the overall design and function of those facilities will likely include more open space, enhanced filtration systems, use of natural light and the advancement of technology into the building.
“This is definitely a moment of acceleration in development, with the use of technology balanced with importance of listening to the customer and staff as we look to the design of future integrated resorts.”
Cyprus, Greece and Brazil
In the Greek-controlled Republic of Cyprus, Melco Resorts & Entertainment is building the €550 million City of Dreams Mediterranean, which reportedly will be the largest IR in Europe.
Four satellite locations shut down due to the coronavirus in March; they’re expected to reopen June 14. Last month, construction resumed on the flagship property when the Council of Ministers lifted restrictions on the construction sector. When it opens, possibly in late 2021, Bussmann thinks the project will succeed. “Melco has a good product and their (satellite) casinos have done well in Cyprus.” The IR with a 500-room hotel is expected to attract an additional 300,000 tourists per year to Cyprus.
Then there’s Greece, and the $8 billion development complex planned for the former Hellenikon International Airport, including a $1.1 billion casino resort, Inspire Athens. Bussmann said groundbreaking could be delayed for “several years” by the battle between Mohegan Gaming & Entertainment, which won the IR license, and Hard Rock International, which insists the bidding was flawed and has filed a legal challenge. “I don’t see that battle ending anytime soon,” Bussmann said.
“Another challenge is making sure they have the capital to do everything they want to do there. Mohegan is one of many operators that has had some financial issues recently because of the coronavirus. But it’s an absolutely beautiful site, and once that area is developed, it can really be a special place in Athens. I’m very bullish on the development.”
Brazil is also talking about bringing back casinos. Sands Chairman and CEO Sheldon Adelson has said he would gladly spend $10 billion to break open that market. Will it happen?
“Never say never,” said Bussmann. “I think it can be a strong market, with IRs bringing in investment, jobs, economic development and tourism.”
The problem there may be the man at the top: Brazilian President Jair Bolsonaro. The so-called “Trump of the Tropics” has shifted his position several times on the subject of casino resorts—most recently, he was against them—and his sluggish response to the coronavirus has critics calling for his removal.
With or without Bolsonaro, should casino legislation moves forward in Brazil, “They have to get the right regulatory structure in place that allows good quality operators to invest and build in a meaningful way,” Bussmann said. “In addition to LVS, MGM, Melco and Wynn also have shown an interest down there. If we got to a formal process, you’d get other major operators, like a Galaxy or a Genting. It’s no different than what you’re seeing in Japan and other major jurisdictions. While Brazil is great, I think it’s still a few years off.”
