Thanks to the S&G reader who provided me with that ready-made headline. Yes, Morgans Hotel Group has closed the book on Scheetz’s Folly, the $770 million purchase of the Hard Rock Hotel & Casino. The Sun‘s Liz Benston lays out the litany of disaster that followed. It’s resourceful spin-doctoring by CEO Fred Kleisner to claim that Morgans’ ownership stake was whittled down to an eventual 13% as a strategic response to “strong headwinds” but the company was repaying DLJ Merchant Partners with chunks of equity long before the Great Recession hit. Nice try though, Fred. Now Morgans is scot-free but Credit Suisse sock puppet DLJ is still on the hook.
“We will ultimately dominate the most attractive segment in Las Vegas,” blustered then-CEO Ed Scheetz after Peter Morton took him to the cleaners, then pressed and dried him for good measure. Scheetz’s goals were — in no particular order — to resume condo construction, party a lot, raise room rates, party some more, then increase EBITDA, which stood at $40 million a year in 2006.
So what’s his legacy? Condos? None (prudently). Higher ADRs? They were $128/night last year … after averaging $169/night before Scheetz came along (his business plan was predicated on steady room-rate increases through 2009, despite the intended doubling of the HRH’s room inventory).
Improved cash flow? The Wall Street Journal says 2010 EBITDA was only $22 million — with Morgans’ share not sufficient to even make interest payments; a far cry for the visions of $140 million in annual cash flow dancing in executives’ heads when they planned bloating the HRH into a 1,800-room megaresort. Even shucking the Hard Rock-related encumberance leaves the hotelier wobbling beneath a 23:1 ratio of debt to cash flow. Yikes!
In other words, nothing went according to plan. Had the HRH been on the Strip it might have worked. But it’s not and it didn’t. If Boyd Gaming is serious about finishing Echelon and if Morgans still figures in the grand scheme, someone needs to stage an intervention and put that co-dependent/abusive relationship to an end. Echelon’s fate was sealed the day Ed Scheetz tied the Hard Rock millstone around Morgans’ neck. I believed it then, believe it now and am confident history will record a similar verdict.
At one stage, Morgans desperately generously offered Golden Gaming an opportunity to shoulder some of the burden, to the tune of a $100 million equity investment, but CEO Blake Sartini clearly knew a boondoggle when he saw one and begged off. He did, however, briefly manage the casino under a burdensome financial arrangement that nonetheless burnished Golden’s resumé. (Sartini doubtless knew he couldn’t make two nickels off the deal but would enhance his stature considerably by being associated with the HRH. It sure didn’t hurt him when jockeying for a Kansas casino later.)
The whole sorry chapter is just the latest one in the annals of total Vegas newbies (like Morgans, Swiss Casinos, London Clubs International and James Packer) who come in and blow a bunch of dough on a market they don’t yet understand — or in some cases, make no effort to understand. In the instance of Morgans, it was like a fifty-something guy having a mid-life crisis taking up with a girlfriend young enough to be his daughter and maxing out his credit cards on the flashiest, highest-maintenance sports car in the showroom. With the Hard Rock, Morgans bought an Alfa Romeo and converted it into a DeLorean. Nice going, lads.
Dave, Who is Swiss Casinos and what was their involvement in LV?
Whoops, I forgot to add Cosmo progenitor Ian Bruce Eichner to the list of Vegas newbies who have gotten their clocks cleaned. Anyway …
Swiss Casinos built The Resort at Summerlin (now Rampart Casino) back in the late Nineties. They spent exponentially more than Station or Coast were doing on their properties and the business plan was to market it as a golfing getaway with an amenity casino. In other words, a resort for all those people who come to Vegas — in order to get away from Vegas. The imported development/management team was rather snooty, made no bones about how it was reinventing the Vegas experience and was said to have made it a matter of pride NOT to set foot in *any* locals casino. Rather than looking on Boyd, Station, Coast, etc. as competitors, Swiss Casinos saw them as somehow beneath them.
Long story short, the project cost too much, was too remote, had the usual crappy “soft” opening and went bust in fairly short order. Suncoast opened nearby and completely crushed R@S. Various companies have been trying to make a go of it since. The original boss of the property is now a saloonkeeper in Vegas.
Thanks Dave! I remember the place going bust shortly after it opened; however, I was still a beginner in LV casino happenings. Very Interesting….Eichner as well. I thought he was off his rocker when he proposed the place with a price tag around $700 million!