Macau proves a risky bet for Las Vegas Sands

March 4, 2011

By Lisa Lee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

NEW YORK — What happens in Macau may not stay in Macau for Las Vegas Sands. The U.S. casino operator’s shares have lost nearly 7 percent, equivalent to a market value decline of more than $2.1 billion, since it said on March 1 it was being probed for potential corruption in the Chinese gambling enclave. It’s not that investors expect moral perfection, but Sands’ global aspirations mean it has a lot to lose.

Macau has delivered a winning streak for U.S. gaming groups Sands, Wynn Resorts and MGM Mirage. Thanks to its accessibility to mainland China, the former Portuguese colony’s gaming revenue rose 58 percent in 2010, as Las Vegas and Atlantic City languished in recessionary doldrums.

But there is a seedy side. Sands is now being investigated under the U.S. Foreign Corrupt Practices Act. Its former Macau head, suing for wrongful dismissal, has accused Sands of trying to exert influence on local officials, and pushing for more “junkets” — gambling groups brought in by promoters who often lend money to gamblers. Some junket operators are linked to organized crime.

If found in violation of the FCPA, even taking the highest penalty ever paid under the act of 3.2 percent of revenue, Sands would have to pay $225 million. And sleaziness doesn’t usually faze investors much. Macau gambling magnate Stanley Ho has been linked by U.S. prosecutors to Chinese organized crime — yet shares in his SJM Holdings still outperformed Sands China  and Wynn Macau in 2010.

The fact that Sands’ shares shed so much suggests investors feel it has more to lose. Any black mark would affect the company’s ability to do business with more genteel regimes. In Singapore, it is petitioning the highly conservative government to expand its new resort. Meanwhile, Sands also hopes to convince Spanish authorities to permit a 15 billion euro mega-casino.

The foray into Macau has been good for Sands — the enclave accounts for roughly 50 percent of its earnings and helps the company command a dear enterprise valuation of more than 19 times EBITDA. But Sands needs an extra measure of caution in Macau, lest the enclave’s dodgy reputation rubs off in other places. That goes for Wynn Resorts and MGM Mirage too.

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