LAS VEGAS SANDS MOVES TOWARD HONG KONG INITIAL

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001628 SIPDIS STATE FOR EAP/CM E.O. 12958: DECL: 08/21/2019 TAGS: ECON EFIN EINV ETRD MO HK CH SUBJECT: LAS VEGAS SANDS MOVES TOWARD HONG KONG INITIAL PUBLIC OFFERING, CONSULTS USG ON TWO PROPOSALS Classified By: Acting Consul General Chris Marut, reasons 1.4 (b) and ( d) ¶1. (C) Summary: Las Vegas Sands (LVS) announced on August 20 that it submitted an application to complete an initial public offering (IPO) in Hong Kong. The move to sell a minority interest in its Macau-based operations came approximately one month after competitor Wynn Resorts made a similar announcement. Although visitor arrivals and gaming revenues in Macau remain significantly below 2008 levels, and the timing for an IPO is less than ideal, LVS requires external funds to restart construction on its multi-billion dollar, half-finished hotel/casino projects in Macau. As a means to increase its expected operating earnings and boost its IPO proceeds, LVS wants the PRC to loosen restrictive visa policies toward Macau that were implemented in 2008. LVS on August 18 approached the U.S. Department of Commerce (DOC) in Washington on two proposals: the first to create a trade show and convention visa for PRC visitors to Macau, and the second to establish an "anti-corruption" task force composed of PRC and USG officials together with casino operators in Macau. Post understands that LVS has asked the DOC to arrange a meeting soon with Ambassador Huntsman in Beijing to discuss their proposals. End summary. ¶2. (C) Comment: LVS and Wynn are attempting to complete IPOs in Hong Kong during the most severe gaming downturn to hit Macau in years. The regional economic outlook shows improvement but remains uncertain, the PRC's visa restrictions remain in place (though rumors of near-term easing abound),and publicly traded gaming company shares remain far below their prior year valuations. Each company's unique circumstances have driven their IPO decision-making processes. Wynn is one of the world's financially strongest casino operators and does not need additional capital to survive or complete its ongoing construction projects. Industry observers thus believe Wynn's IPO will likely sell only a small minority interest in its Macau operations and position the company to quickly complete a much larger follow-on share offering in 2010, if market conditions significantly improve. Those funds could be used to purchase or build additional Macau properties on an opportunistic basis. LVS, on the other hand, has required large cash infusions during the past year from its majority shareholder and Chief Executive Sheldon Adelson. An IPO in Hong Kong would likely enable LVS to raise the funds needed to complete its construction projects in Macau. The LVS request for USG consideration of its two Beijing-directed proposals should be examined not only on its own merit, but also understood in light of the planned IPOs of Wynn and LVS. Public knowledge of USG support for LVS' proposed initiatives would likely increase the attractiveness (and net proceeds) of the IPOs. Gaming investors welcome any signal that the PRC may loosen its visa restrictions. End comment. Macau Gaming Slump Drags On -------------- ¶3. (U) Macau remains mired in the first extended gaming slump since foreign concessionaires began opening casinos in 2003. PRC restrictions on Mainland Chinese visitors to Macau, fears about H1N1 influenza, and the global economic slowdown have combined to push Macau's gaming sector into negative growth. Visitor arrivals and gaming revenues declined 11 percent and 12 percent, respectively, during the first six months of 2009 on a year-over-year basis. Las Vegas Sands to List Its Macau Operations -------------- ¶4. (U) Despite the economic downturn, LVS on August 20 submitted an application to the Hong Kong Stock Exchange (HKSE) to complete an IPO of a minority interest in the company's three casinos/hotels in Macau. The Hong Kong-traded holding company will own only LVS assets in Macau, and the Hong Kong shares will trade independently of LVS shares on the New York Stock Exchange. Following the IPO announcement, LVS shares gained over three percent in New York. LVS must now wait at least 25 business days for a hearing with the HKSE's Listing Committee, to be followed one week later by the Listing Committee's decision to proceed with the IPO. The LVS announcement followed a similar application in July 2009 by Wynn Resorts to move forward with its own IPO. Given the specialty sector status of Macau gaming shares, industry observers believe the two companies will compete for a limited pool of institutional funds/investors. HONG KONG 00001628 002 OF 002 ¶5. (U) The Hong Kong IPO application by LVS was enabled by an agreement reached on August 13 between LVS and its lenders that amended the terms of the company's USD 3.3 billion Macau credit facility. In addition to granting approval for the IPO, the credit facility amendments included six quarters of financial covenant relief and approval to issue up to USD 1.5 billion of new debt, subject to certain conditions. The Macau credit facility's interest rate increased to LIBOR plus 5.5 percent - a large spread commensurate with LVS' poor credit risk ratings. LVS Maneuvers In Advance of IPO -------------- ¶6. (U) IPO proceeds are typically underwritten and fixed in advance of the IPO date, when the company and its investment bank advisor agree upon a valuation for the company. That figure is designed to closely approximate the market's expected valuation of the company on the first day of trading in the company's shares. Two primary factors govern the company's market valuation: its perceived sustainable earnings power, and the valuation multiple assigned by investors to the company's expected earnings. Should the PRC decide to loosen visa restrictions on Chinese visitors to Macau, the earnings of Macau's gaming operators (and probably also the multiple assigned to those earnings) would increase. This would boost market valuations for Macau's gaming companies and enable LVS and Wynn to increase their IPO proceeds on that portion of ownership they decide to sell. ¶7. (C) LVS recently approached the U.S. Department of Commerce (DOC) in Washington to discuss two proposed company-sponsored initiatives. The first would involve PRC creation of a special visa class "for Chinese citizens wishing to travel to Macau to attend trade shows, conventions, exhibitions, and other meetings." LVS believes this step would facilitate diversification of Macau's economy to include greater non-gaming revenues - a goal shared by both the PRC and the government of Macau. The second proposal calls for creation of "a public-private task force on corruption" in the PRC, to include representatives of the PRC, USG and the casino operators in Macau. The latter initiative would be designed to help address Beijing's concerns about corrupt government officials gambling away public funds in Macau - concerns that likely continue to play a central role in the PRC's restrictive visa policy toward Macau. The LVS proposals were forwarded by DOC to the Department's Hong Kong desk. Through its DOC contacts, LVS is attempting to arrange a meeting with Ambassador Huntsman in Beijing to discuss the proposals. MARUT