Las Vegas Sands: Massive Offering, But Is It Enough?

In one of most dilutive offerings we’ve seen in some time, on Tuesday, casino & resort operator Las Vegas Sands announced a major restructuring effort aimed at staving off the breaching of key loan covenants in the fourth quarter.

The massive offering includes the issuance of 181.8 million shares of common stock, and a package including 5.2 million shares of 10% preferred and warrants to purchase 86.6 million common shares at $6 apiece. There were only 355 million shares of LVS in existence on Monday, so the common stock offering alone represents a full 33% dilution to current shareholders.

The selling price of $5.50 is an astonishing 31% below Monday’s close of $8.00; the only salve for investors who have been around this stock the past few weeks is that they have become accustomed to daily moves of 30% or more.

More Dilution to Come

In addition to the immediate, known dilution, we will see further implied dilution through the warrants package, which allows investors to purchase roughly 87 million shares at $6.00, a price that can be assumed to hold in any situation outside of future bankruptcy.

Adelson Ponies Up Again

For those who haven’t been following this Vegas-worthy storyline over the past few months, CEO and 70% owner Sheldon Adelson already had to pony up $450 million on the last day of the company’s third quarter to prevent breaking loan covenants then.

On Tuesday, in conjunction with the deal announcement is a separate agreement between LVS and Adelson, whereby Adelson will exchange his 6.5% convertible notes due 2013 into common shares at the investor-equivalent price of $5.50/share. Adelson will also purchase warrant/preferred packages on similar terms to those listed above, which represents another $525 million personal investment from the Adelson family.

Parting Thoughts

There’s a lot of moving parts here, and not as much in the way of precedent. Is this deal good for shareholders? On the surface it would appear “no,” but Las Vegas Sands was running very low on options. In a world where high-risk lending is in hibernation at best, casino operators with massive debt loads in the middle of a spending binge aren’t even going to get through the door.

LVS stock has been doing battle with the prospect of $0 equity value for some time. Removing part of that fear itself, could be enough to drive the stock higher, as the property values alone are well above the enterprise value of the company. Earnings were reported on Monday night, and I have yet to pore over the numbers the way I’d like to. I will certainly keep you updated as I continue to assess the cost of capital and “survivability” metrics for Adelson & Co. But you have to give Adelson credit; he’s keeping his skin in the game right along with shareholders.

Disclosure: Author does not hold positions in the securities mentioned.

Comments

[investor88:]

Impressive display of faith by Adelson in Sands as he has put usd1 bn of personal wealth into the company in the last 2 months. At this stage a high risk-high return stock.

2008 Nov 12 08:39 AM

[Planting $ ...:]

This is now a binary decission. This stock either goes to zero or $50. I would say $100 but they just doubled the outstanding shares. This company has strong cash flow. It does not look like it because so much has been eaten up in capital expenditures, but now that they are slowing the pace they "should" have enough free cash flow to pay the bills. Casinos create a lot of cash.

Adelson will want to keep plowing ahead, but it could cost him his fortune. Strategically the faster the casinos get open the better, but if they can't get project financing then they need to use the now decreased cash from the casinos just to pay the debts. They still have letters of intent from world class hotel brands, the Macau government wants to see a Cotai strip, and they have much of the construction finished. As long as they survive the earnings and EBITDAR will shoot through the roof.

In the beginning of 2007 they had two casino resorts. In the beginning of 2008 they had four casino resorts. Venetian Macao was much more substantiall then the first two. In the beginning of 2009 they will have five casinos and the ferry service in place. By 2010 they should have the most magnificent casino yet in Singapore. 2011 they add Bethworks Pensylvania. 2011 on they add another 10 to 12 hotel brands on eight plots of land in Macao.

So they are going from two to say 15 of equivalent size to the first two. Adelson wanted to get it done by the end of 2010. Saying they survive then they should still get it done by the end of 2013. That would be a 39.9% compound annual growth rate from 2007 through 2013. If instead they get it done by the end of 2012 then it a 49.6% compound annual growth rate. Then again tey could spend all their cash today, default on the the debts, and then go banckrupt.

Like the last person said this is high risk high return. Adelson would be the only reason they spend so much that they default, and he has now bet practically all of his life fortune on this play. I am going to bet with the house.

2008 Nov 12 09:12 PM

[Ryan Barnes:]

You're right Planting, it is a bit of a binary scenario. Adelson's ego got shareholders into the current predicament, because LVS literally can't stop the building process...too much at stake to lose. I'm still hoping to see a deal for the apartments & canal shoppes in Cotai; this could bring in another $1B

2008 Nov 13 12:23 AM

[Richard Col...:]

Planting $ for tomorrow:

Excellent report, you said it all. I am betting with the house and have been for a long time. This company one day will go through the roof. MGM,Wynn and Boyd will also show nice profits. These 4 gaming companies have the smartest business men in the corporate world.
This is the most profitable gamble you will ever make.

Dan Kowkabany

2008 Nov 13 10:10 AM