These Vegas Titans Might Be Rolling Snake Eyes

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US Casinos Macau Headache
Kin Cheung/APCasino workers stand at gaming tables inside the Sands Cotai Central in Macau.
Gambling isn't just the activity most readily identified with Las Vegas, it underpins the economy of the city. Of course, that's largely because the American consumer's favorite casinos are located there.

But a pair of high-stakes lawsuits are dogging two of its most important casino operators. And it's not melodrama or hyperbole to say that either case could seriously alter the fate of the glittering Vegas megaresorts these big-time players operate.

Shifting Sands

In spite of its name, Las Vegas Sands (LVS) derives most of its revenue from its properties in the Chinese enclave of Macau. That's not the best position to be in just now -- mostly due to a government crackdown aimed mainly at illicit activities related to gambling, overall revenue from Macau has fallen sharply over the past year or so.

Compounding this is a pending wrongful termination lawsuit brought against the company in 2010 by Steve Jacobs, the former CEO of its key Macau subsidiary, Sands China. In the lawsuit, Jacobs alleges that his onetime employer engaged in numerous illegal activities that include collaborating with organized crime and paying bribes to officials.

The company -- which operates the popular Venetian and Palazzo resorts in Vegas -- is contesting the lawsuit. Hindering this is CEO Sheldon Adelson's testimony in a pre-trial hearing. In numerous statements regarding Jacobs' accusations and other matters, Adelson seemed to contradict both the testimony of his own lieutenants and official correspondence from company officials.

Compounding this setback, last month the judge in the hearing ruled that the lawsuit will be heard in Nevada, as opposed to Macau. The Jacobs side favored the former, as it gives them a chance to use material collected by the U.S. government in ongoing investigations into those alleged illegal activities.

If solid evidence is dredged up linking Sands to organized crime, this could bring the investigations to an unfavorable conclusion. In a worst-case scenario, the company's license to operate its prize gambling facilities in the U.S. could be pulled by Las Vegas authorities.

On the back of such evidence, the Chinese government -- already deeply suspicious of the activities occurring in and around Macau's casinos -- might also stop the company from doing business in the enclave.

Wynn Loss

Marital strife is difficult to begin with; it's infinitely harder if it affects the operations of a big company.

That's the situation with casino magnate Steve Wynn and his ex-wife, Elaine. After they divorced -- for the second time -- in 2010, they agreed to a set of conditions regarding their respective shareholdings in Wynn Resorts (WYNN), the company that operates the iconic Wynn Las Vegas Resort and the connected Wynn Encore on the Strip. The conditions included a provision that neither party can sell their shares without the consent of the other.

That matters, because Steve's position as the company's CEO depends on the holdings of Wynn Resorts' creators. As of 2012, he and Elaine each held around 8 percent of its outstanding stock, while co-investor Kazuo Okada had just under 20 percent (this stake was ultimately sold, then converted into bonds, amid a dispute he had with the company).

Meanwhile, that same year Elaine filed a lawsuit to be allowed to sell her shares independently of Steve. Perhaps this was a key reason that she lost a re-election bid for her seat on the company's board this past April. The loss, of course, weakened the Wynns' collective power even more.

If Elaine were to prevail in her case, then exercise her newfound right to sell the stock, it would cast her ex-husband adrift with his shareholding. This could be the death blow for his CEO tenure, since several institutional shareholders hold big stakes in Wynn Resorts and could theoretically form their own bloc to gain control of the company... or at least push through their favored initiatives.

The fate of the company's famous assets could then be thrown into uncertainty. At this stage, it's hard to speculate exactly how this might shake out. But a regime change and/or a power shift usually brings changes in a company's operations. Those institutional investors might just be interested in a big asset sale. And the company's major U.S. assets are those celebrated resorts towering over Las Vegas.

New Players?

Luckily for them -- and, by extension, the many people who visit Las Vegas for a holiday -- there are plenty of willing buyers to go around.

In 2013, Malaysia-based Genting Group scooped up 87 acres of property formerly owned by Boyd Gaming (BYD) for $350 million. It's currently being developed into the Resorts World Las Vegas project, which is to boast around 3,500 rooms in its first phase of construction.

Meanwhile, last year Australia's Crown Resorts coughed up $280 million for a 35-acre parcel of land on the Strip. The company will, naturally, develop a casino resort on the site. Although it hasn't said much about the scope of the project, the investment and the location indicate that it'll be sizable.

So developers are itchy to get their hands on Vegas real estate, and frequently, build out as much as possible. Although the Wynn and Sands properties are already large, Vegas is a place where there always seems to be more room for expansion.

And this is beneficial for lodging prices. Since 2007, room count has risen by nearly 20,000 to just over 151,000. The average room rate has come down since then -- it's around $123 these days, while in 2007 it was $132.

That doesn't seem like a coincidence. After all, one of the oldest economic principles is that when supply increases, prices decline.

So if Wynn and/or Sands crap out in the current casino game and their assets are transformed into even bigger gambling palaces, we can probably count on room prices continuing to move south. That'll make Vegas holidays cheaper for the city's many visitors, putting more money into their pockets.

Hopefully, they won't lose that extra cash at the tables during their stays.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. Check out our one great stock to buy for 2015 and beyond.
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