The government and the casino operators of Macau need to “not panic” in the current gaming industry downturn. That includes, in particular, avoiding the temptation to sell hotel rooms too cheaply, said Michael Leven, former president and chief operating officer of casino developer Las Vegas Sands Corp. He was speaking in an interview with GGRAsia.
Mr Leven retired last week from the company’s board of directors. He also retired from the board of its Macau subsidiary Sands China Ltd. It was his first in-depth interview since he left the Las Vegas Sands group.
“[The government and the casino operators] should continue to make sure they really watch their rate structures and not let happen in Macau what happened in [Las] Vegas in 2008 and 2009. All the hotels there dropped their rates so significantly, that they’ve had a tough time recovering… You don’t want to have a situation where you drop too low on rates; and you are seeing some of that happening in Macau now,” Mr Leven told us.
The average cost of a Macau hotel room during the first two months of 2016 was MOP1,439 (US$180) per night, show data from the Macau Hotel Association. That was a fall of 17.5 percent from the prior-year period.
The decline in hotel room rates is occurring against a backdrop of increasing supply. At the end of February, Macau had 32,100 hotel rooms, up by 13.9 percent from a year earlier.
Investment bank Morgan Stanley said in a recent report on the Macau gaming market that “stable demand” was “facing significant capacity addition” between the third quarter of 2016 and the first quarter of 2017 – via 6,000 rooms and an estimated 750 new tables from three new Cotai resorts including Sands China’s Parisian Macao – that could result “in either cannibalisation or rise in competition – thus, margin erosion”.
“You are going to have a supply-demand imbalance for a while” in the Macau market, Mr Leven said in his interview with GGRAsia.
“The market was really a very undersupplied market for a while, and that tends to raise price. Well, [now] prices will get hit in the short term, and those products that can’t compete will… drop their rates. I think the fine properties in Macau – such as the ones that are being built and some of the very good older ones – should continue to make sure they really watch their rate structures.”
Mr Leven has extensive experience of the international hotel industry, including as president and chief operating officer of Holiday Inns Worldwide from 1990 to 1995.
Asked if he was surprised by reports that some Macau casino resort operators have only recently ramped up direct selling of hotel and other services to the public, having relied previously on middleman agents, Mr Leven said: “It’s not an unusual situation. Hotel companies tend to take the demand as it sits [exists] when they start. And then as supply grows, they start to build up a sales organisation.”
He added: “But it does take time. Remember you were talking about a very, very fat market a few years ago… We [Las Vegas Sands] have had a big direct sales force in terms of tours and business like that… from operations in the United States and other places where we’ve run those kinds of leisure sales activities.”
Mr Leven’s phrase “fat market” alludes to the phenomenal growth of the Chinese VIP gambling market and associated spending on luxuries in Macau – in particular following the regional recovery from the global recession of 2008-2009. Now that market has shrunk, weighed down, say some investment analysts, by factors including China’s anti-corruption campaign and economic slowdown. VIP casino gross gaming revenue (GGR) fell by 40 percent year-on-year in 2015, and 19 percent year-on-year in the first quarter this year, according to data from the city’s casino regulator.
“Remember that Macau has been dependent for 90 percent of its business on Hong Kong and the [Chinese] mainland. And from that standpoint, if you find that business starting to fall off, you’re losing a big share and you have to replace it,” Mr Leven said.
A note on Friday from brokerage Union Gaming Securities Asia Ltd suggested that when taking into account “table reclassification” in Macau casinos, it was likely that mass-market casino GGR actually grew year-on-year in the first quarter.
“I think [Sands China] built buildings… that completely dominate what is the growing [mass-market] part of the marketplace. So from that standpoint I think we were prescient,” said Mr Leven.
Referring to Las Vegas Sands’ founder and chairman Sheldon Adelson, Mr Leven stated: “What we brought to the table was a balanced environment between gaming and mass-market activities (entertainment, conventions, etc) and those strategies that were put in the ground by Mr Adelson – and then executed by our team – [were] essentially built for the long term of Macau and other places, in particular Singapore as well.”
Asked if the Las Vegas Sands board had anticipated the Chinese VIP gambling market would fall as far and as quickly as it has, Mr Leven said: “I think all of us – [including] the people who are still there: Mr Adelson, Mr Goldstein [current Las Vegas Sands president and chief operating officer Rob Goldstein] and others – always had some real concerns about what was going to happen to VIP… For Macau in particular, I don’t think you want to have any part of any business that’s so dependent on one particular segment. And when 65 percent of your GGR comes from VIP, to me that’s a danger sign. You want to be balanced.”
He continued: “The people that run Macau – not just the government but the people that run the buildings [casino resorts] – have to not panic. It’s going to be a slower growth, but there’s still going to be a growth.”
As of March 31, casino GGR in Macau had dropped for 22 consecutive months as measured in year-on-year terms.
“You have to run the businesses [in Macau] properly from a cost standpoint,” Mr Leven stated. “You can’t just continue to inflate the cost of doing business – in terms of things such as energy costs, wage costs and the cost of goods. You have to be patient and you have let the market run, and take advantage of the market when the opportunities come,”
The veteran executive, now 77, joined the board of U.S.-based Las Vegas Sands in 2004, the year it opened its first Macau property, Sands Macao, on the city’s peninsula.
In 2009 he was asked to become president and chief operating officer of Las Vegas Sands. In 2014 he retired from those roles, remaining as a director.
In 2010, while still group president, Mr Leven had a spell as acting chief executive of the casino group’s Macau unit after the dismissal of Steve Jacobs as local CEO.
During Mr Leven’s tenure as group president, the firm opened Marina Bay Sands in Singapore in 2010, and Sands Cotai Central in Macau in 2012.
“When we started, our [group] EBITDA [earnings before interest, taxation, depreciation and amortisation]… was US$700 million roughly, and by the end, it was US$5.4 billion. So financially we had a pretty significant success,” Mr Leven said in his interview with GGRAsia.
On April 11 Mr Leven finally ended his professional relationship with the Las Vegas Sands group. His retirement as a director took immediate effect.
Mr Leven told us: “People ask me all the time, ‘Did you retire because you thought Macau was going to go bad?’”
He added: “I say, ‘Of course not’. Every market I’ve ever been in for 55 years has had its ups and downs. Fundamentally, unless gaming were to expand dramatically in the PRC [People’s Republic of China] or somewhere contiguous to the PRC – and I don’t see that happening – Macau’s in a very unique position.”
Macau is the only place in the China where casino gaming is legal.
Mr Leven stated: “I think the diversification of the Macau market – to have things other than just gaming – will help to bring in more foreign tourists to Macau. But there’s no question it’s going to take some time, and the next couple of years will be tough.”
Asked if in hindsight he would have done anything differently during his time helping to manage the group’s business in Asia, Mr Leven said: “I think the mistake that may have been made is that we didn’t put enough people in the field – or as many as we could have – to generate enough contacts with the mass market, early enough. Nevertheless I think the company holds a big share of that [the mass market] right now, because of the kind of buildings that have been built.
“Being connected to major [hotel] brands, like the Sheraton and the Holiday Inn and the Conrad, the St. Regis and the Four Seasons – and being connected to those brands as they expand in the PRC and other Asian countries – I think that actually also helps build the mass market.”
Commenting on his overall role in Asian operations as Las Vegas Sands president and chief operating officer, Mr Leven stated: “From my standpoint they were the most exciting six years I’ve ever had in an operations capacity.”
Tough times, Jacobs
One of the most challenging times for the Las Vegas Sands group came in 2008, during the global financial crisis. The company was close to violating loan deals with lenders and almost faced bankruptcy. Through a series of moves – including Mr Adelson and his family injecting around US$1 billion into the firm – the company was able to steady its course.
In 2010, Mr Leven went on record praising the role the then Sands China CEO Mr Jacobs had played in helping to turn around the fortunes of the Macau operation. “The Titanic hit the iceberg. [Mr Jacobs] arrived and not only saved the passengers, he saved the ship,” Mr Leven stated at the time.
Months later Mr Jacobs was dismissed from Sands China for what the firm said was “cause”.
“I think people misinterpreted that particular thing and the praise,” Mr Leven told GGRAsia.
“Steve Jacobs led a group of people that helped the [company] turnaround before the Cotai Strip opened up [expanded]… At that particular time, he did a job that he was asked to do,” stated Mr Leven.
“He failed in what happened afterwards… In handling his relationships with individuals in the property [the Venetian Macao], in handling his relationships with his peers, in handling his relationships with the government. Those were serious deficiencies. But I wouldn’t take away what he accomplished before that.”
Since then Mr Jacobs has brought court actions in the U.S. against Sands China, Las Vegas Sands and Mr Adelson, including a claim of wrongful termination. Among materials filed by his side is an allegation that he was asked to compile a dossier on sensitive issues connected with Macau officials. Sands China and its parent have strenuously denied the claim, and Mr Adelson said in court testimony the idea for the dossier actually came from Mr Jacobs.
Asked if litigation – now in its sixth year – involving Mr Jacobs was likely to be a drag on the company, Mr Leven said: “I think all companies have these types of things and I think eventually that will end, just as [did] the FCPA investigations. I think it will end in a very favourable situation for the company.”
Mr Leven was referring latterly to the Foreign Corrupt Practices Act, a U.S. statute that forbids the bribery of foreign officials. On April 7 the U.S. Securities and Exchange Commission (SEC) announced that Las Vegas Sands would pay a US$9-million fine to settle a regulatory investigation by the SEC. It had looked at what the body described as the firm’s “payments to a consultant in Asia”.
The casino firm said the settlement resolved a five-year SEC investigation involving the firm’s compliance with the act. The company said in the statement that “it neither admitted nor denied” any of the SEC findings.
One door closes
Summing up his experience in the group’s Asian operations, Mr Leven told us: “I think Sands China in particular has a great future because of its balance [between mass market and VIP]. But it’s going to take time because the market is definitely continuing to change.
“I think the Parisian is going to be a dramatic success. I don’t know what kind of a beginning it will have in that market, but I think it’s a very unique product; I was very involved in the design and the conception of that property.”
Mr Leven said his decision to retire from the Las Vegas Sands group was in order to spend more time with his family.
“[Working for Las Vegas Sands] was a very unusual situation and a very unusual opportunity… I particularly liked what we did in Asia… and lots of the investigations we did on other Asian opportunities such as Japan and Vietnam and other areas,” he said.
Such work included exploring an opportunity to build a huge resort in Spain, an idea which in the end came to nothing.
“It isn’t too often that somebody at 71 years old takes on that kind of assignment and works it ‘til they are 77… But it all takes a lot of energy and a lot of time. Just like a professional athlete, there comes a time when you’ve got to hang it up,” Mr Leven told GGRAsia.
Jan 15, 2021Recent advisory notices issued by a number of local authorities in mainland China, calling on residents not to travel during the February Chinese New Year (CNY) break, further clouds the prospects...
Jan 15, 2021
“We expect Las Vegas Sands to not have any material change in strategy. The focus remains developing Macau and Singapore”
Vitaly Umansky, Kelsey Zhu and Tianjiao Yu
Analysts at brokerage Sanford C. Bernstein