Las Vegas tycoon gambles on opulent $2.4 billion casino
Originally published October 23, 2002

By Matt Krantz
USA Today

Las Vegas is no stranger to volcanoes and over-the-top stage shows, but one of its biggest spectacles ever is set to erupt. After years of anticipation about the next move of Las Vegas tycoon Steve Wynn, shares of Wynn Resorts are expected to begin trading this week following an initial public offering of roughly $450 million in stock.

The IPO will help pay for what is planned as the most expensive and lavish casino ever built. Wynn — the mastermind behind the Mirage, Bellagio and other top-name Vegas properties — will have the $2.4 billion he needs to build the opulent Le Reve.

For the millions of visitors who have turned Vegas into the nation's biggest tourist destination, Le Reve — French for "The Dream" — is intended to be the crowning jewel in a glitzy mecca where gamblers drop half a billion dollars each month.

Le Reve will boast its own mountain and lake; 2,700 rooms ranging from 620 to 7,000 square feet; a 111,000-square-foot casino with 2,000 slot machines and 136 tables; and 18 restaurants, one of which will feature the food of world-famous chef Daniel Boulud. Not enough? Toss in a Ferrari and Maserati dealership.

Wynn's disciples say betting on him and Le Reve is a no-brainer. "Steve understands what will amaze and fascinate people," says Shannon Bybee, who ran Wynn's Atlantic City properties and is now a professor at the University of Nevada-Las Vegas. Well-known investors have signed on: One, Baron Funds, paid $40 million for a 5 percent stake.

But critics say to bear these concerns in mind:

• Vegas is at the end of a multiyear megaresort building boom that has added thousands of hotel rooms. This boom, inspired by Wynn's success with the Mirage casino, which opened in 1989, has helped drive occupancy rates down to 89.7 percent in August. That's well below 2000 levels of 91.4 percent. That might not seem like a big drop, but in a town with 127,000 hotel rooms to fill, it means an additional 2,100 are unused each night.

All the luxury hotels have plans to expand. Wynn Resorts estimates that its top competitors alone will add 3,000 rooms in coming years.

• Wynn is asking investors to put a lot of faith in him. All that exists now of Le Reve is a vacant lot where the Desert Inn once stood. The project is "just a dirt lot with a chainlink fence around it," says Ben Holmes, president of MorningNotes.com.

Le Reve will sit on a 192-acre plot of land — much larger than the 90 acres occupied by the Bellagio and the 83 acres by the Mirage. Construction couldn't start until the IPO was completed. And the opening isn't expected until April 2005.

• Wynn doesn't always win. The king of Vegas is best known for creating the most profitable casinos on the strip, including the Bellagio. Mirage was the first casino to generate $1 million a day in revenue.

But it wasn't Wynn who presided over the ultimate success of Bellagio. In fact, shareholders were getting increasingly discouraged with Wynn in 2000, when shares of Mirage Resorts fell from $30 to $10. Among his missteps: spending so lavishly on Bellagio that even though it was profitable, it couldn't generate the expected returns. Also, Wynn built a casino in Mississippi that was too upscale for the market.

Investor outcry helped pressure Wynn to sell Mirage Resorts to MGM for $6.4 billion, or $21 a share, in cash, which although more than double the stock's low was also 30 percent below its high.

Wynn, through a spokeswoman, declined to comment for this story. But his fans point out that investors who bought at the beginning of Mirage and held averaged 24 percent annual returns up until the sale.

The Mirage Resorts experience made Wynn vow to never take a company public again. But he has no choice but to brave the IPO market because he was able to raise only $1.2 billion in bank debt, roughly $400 million in junk bond financing and $800 million from other various investors.

And the timing could be better, considering that the IPO market is coming out of its worst drought in years. Still, Wynn Resorts is priced for perfection. At the middle of the expected IPO range, the company is worth $1.2 billion. That's a rich valuation if you consider some of its existing peers.

Industry analysts estimate Le Reve could generate $300 million a year in cash, since that's what Bellagio brings in. At that rate, the company would be valued at roughly 4.0 times cash flow.

That's close to the 4.1 times cash flow value the stock market affords MGM Mirage. But MGM Mirage owns all the other Vegas casinos that Wynn started or revamped, including the Golden Nugget, Bellagio, Mirage and Treasure Island. And MGM Mirage also is an operating business with an established track record.

The Wynn Resorts IPO has already run into trouble. It was originally priced at $21 to $23, but the company dropped the range to $18 to $20. The IPO was originally scheduled to be priced last night, but was held at the last minute and now is expected to be priced tonight.

Some analysts say even the lower price still carries a lot of risk. "We haven't really seen something this speculative in a long time," says Nodia Mir of IPO.com.

And finally, in a period when any sort of cozy insider relationships are a lightning rod for scrutiny, the line between Steve Wynn and Wynn Resorts sometime blurs. Wynn Resorts paid $10 million to buy a company, owned by Wynn, that owned his corporate jet. Kenneth Wynn, Steve's brother, will oversee the construction of Le Reve. And Steve's wife, Elaine, sits on Wynn Resorts' board of directors.

Despite the potential concerns, Wynn's fan say doubters will be proved wrong again. "Those that have gone with him for years made a lot of money," Bybee says.

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