Gamal Aziz Bets On MGM Mirage's Future - Investment Outlook - December 2007
If Gamal Aziz isn't burning midnight oil as the president and CEO of MGM MIRAGE's newly launched non-gaming luxury/lifestyle hotel management company or mapping out a new way to push the envelope as COO of MGM Grand, he is probably at Barnes & Noble.
By Mary Scoviak -- Hotels, 11/30/2007 11:00:00 PM
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If Gamal Aziz isn't burning midnight oil as the president and CEO of MGM MIRAGE's newly launched non-gaming luxury/lifestyle hotel management company or mapping out a new way to push the envelope as COO of MGM Grand, he is probably at Barnes & Noble.
Look for him in the "Business & Money" aisle, scoping out the latest titles by his favorite authors: Jack Welch (Winning); Malcolm Gladwell (especially Blink: The Power of Thinking Without Thinking); the Fast Company's Bill Taylor (Mavericks at Work); The New York Times' "The Boss" columnist Thomas Friedman; Warren Bennis (On Becoming a Leader); Larry Bossidy (Execution: Getting Things Done); and Alan Deutschman (particularly for Change or Die, which contends change has to be rapid and radical to be effective.)
The latter is a book Aziz could have written. "Rapid, radical, effective change" defines his life, his business strategy and his success. It informed his decision to cash in his savings at 16 and leave his native Egypt to work in Paris (bussing tables, initially) before earning a degree in business administration from the University of Cairo. It also convinced him that a seasoned hotelier who had polished the performance of some of the industry's most revered icons, including The Plaza in New York City and the St. Francis in San Francisco, could teach Las Vegas a thing or two about revenue models.
WHAT'S NEW
In the 11 years since arriving in this neon world to take over food and beverage operations at Caesars Palace, Aziz has become one of recognized the architects of the "New Vegas." With Bellagio and MGM Grand, he shook up expectations and profit margins by luring star chefs (Joël Robuchon made his U.S. debut not in New York or Los Angeles but at MGM Grand), A-list interior designers (Tony Chi and others) and headliners (such as in Cirque du Soleil, Madonna, U2 and the Rolling Stones) to the land of cheap buffets, ho-hum steakhouses, crooners and red and black brocade.
He showed shareholders and Wall Street that Las Vegas hotels that were giving away rooms and food were leaving hundreds of millions of dollars on the table. He upped the offer with the development of successful sub-brands such as SKYLOFTS, an all-suite commanding rates over US$1,000 a night; West Wing, a chic reworking of 700 characterless rooms; THEhotel, Mandalay Bay's haunt for the ultracool; and The Signature, a condo hotelsuite concept. Aziz's "radical, rapid changes" earned MGM Grand more AAA Diamond designations than any other resort in the world and a TIME magazine cover. More importantly, they proved that the future of Las Vegas was in the hotel entertainment business, not just on the casino floor. In fact, nongaming now delivers 60% of revenues for most of Las Vegas's leading properties. Now, he is out to do the same for the top end of the non-gaming market.
| MGM MIRAGE Hospitality At a Glance |
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Headquarters: Las Vegas Corporate profile: Subsidiary of MGM MIRAGE launched in May 2007 Capital structure: 75% debt; 25% equity Targets: Luxury and lifestyle hotels ranging from 200 rooms to more than 1,000 rooms in U.S. destinations such as New York, Los Angeles, Orlando, Chicago, Washington, D.C., San Francisco and Hawaii, as well as international sites in Asia, Middle Eastern countries such as the U.A.E. and Qatar, and North Africa’s Egypt and Morocco. Europe should see “joint ventures and strategic acquisitions.” Projected weighting: 60% lifestyle; 10% to 15% ultra-luxury; the remainder would be a mix of projects that include 1,000-room convention hotels; 70% urban; 30% resort. Pipeline: Joint ventures with Mubadala Development Co. of Abu Dhabi to develop non-gaming hotels and resorts globally, initially targeting opportunities in Abu Dhabi. The United Kingdom and Las Vegas, and with Diaoyutai State Guesthouse of Beijing to expand the brand globally, beginning in the People’s Republic of China. MGM MIRAGE’s joint venture with the Mashantucket Pequot Tribal Nation also will fall under the auspices of this newly formed subsidiary. Dubai World’s recent acquisition of a non-gaming site in Singapore offers further potential. Brands: MGM MIRAGE, certainly, as well as brand extensions such as SKYLOFTS, The Mansion, West Wing and The Signature. |
 Gamal Aziz can use his SKYLOFT and Signature concepts as he rolls out options to potential investors around the world. |
LUXURY'S NEW HIGH ROLLER
This kind of visionary thinking is why MGM MIRAGE Chairman and CEO Terry Lanni is banking on Nevada's "Hotelier of the Year" in 2005 and one of the "Top 10 Most Influential People in Las Vegas" to put the company's non-gaming subsidiary, MGM MIRAGE Hospitality, on the world map. He calls Aziz "uniquely qualified to lead our growth and brand expansion." He likes Aziz's combination of worldwide luxury hotel operations and development expertise alongside his record in delivering quality resort products and guest services, brand-building skills and people skills that keep MGM Grand's turnover at 16%, about half Las Vegas's average. It doesn't hurt that he is fluent in several languages, including Arabic.
Lanni and MGM MIRAGE can open all the right doors. A joint venture with Mubadala Development Co. of Abu Dhabi gave the young company just what it needed to satisfy analysts: its first "real" project. The US$3 billion MGM Grand Abu Dhabi, announced early in November, will include an MGM Grand Hotel and two other branded luxury hotels totaling more than 1,200 rooms.
Borrowing substantively from the Las Vegas business model, the 50-acre (20-ha) site will have destination appeal, thanks to entertainment facilities, retail shops, residential offerings, convention facilities and, of course, fine dining. One thing it does not have: gaming. Still, it should be triple play for MGM MIRAGE. David Katz, CIBC's senior lodging and leisure analyst, says the "scale and scope" of fee structures were not disclosed, but that it is likely MGM will earn development, management and royalty fees from the project. Scheduled for completion in 2012, this could be a template of more to come from Mubadala.
Another joint venture with Diaoyutai State Guesthouse of Beijing provides MGM MIRAGE Hospitality access to China in a way its more mature competitors still dream about-think about the prospect of luxury hotels and lifestyle suites in nearly every major market in China. The development pace could ramp up far faster than expected if rumors that Dubai World may invest prove true.
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Even if they don't, Dubai World's strategic relationship with parent company MGM MIRAGE (a 4.5% stake in the company and a US$27 billion investment in its CityCenter Las Vegas complex) is having ripple benefits for the non-gaming subsidiary. The MGM MIRAGE stakeholder's successful bid for a muchcoveted development site in Singapore would give the luxury management company a key anchor in this Southeast Asian financial/airline hub. Like any other management company, MGM MIRAGE Hospitality's aim is to be asset light. But, it can count on a supportive bankroll for key projects.
Then, there is the strength of the MGM MIRAGE name. "MGM MIRAGE is a recognized name with an image of quality," says Lawrence Klatzkin, managing director, Jeffries & Co., New York. "The brand has real meaning, a definite cache. MGM MIRAGE has demonstrated that it can run not only casinos but hotel projects. For example, Bellagio is one of the most profitable casinos in the world, with a high level of non-gaming income." Klatzkin is forecasting US$504 million EBITDA for Bellagio in 2008. MGM MIRAGE Hospitality is leveraging all of that to muscle into the burgeoning luxury/ lifestyle sector. "We already see a windfall of opportunities," Aziz says. Some have come directly through the company's parent and Lanni's patiently built investor network; others are the logical outgrowth of a backlog of calls from investors asking MGM MIRAGE for a nongaming option. Multiple-deal announcements are expected in early 2008.
Why would a developer pass up established names from Four Seasons to Mandarin Oriental to have an MGM flag? "The joint venture partners know that, within their development regions, they won't have to compete with pre-existing MGM flags. MGM will be working solely for them," Klatzkin says.
 Portfolio acquisition is part of the MGM MIRAGE Hospitality plan, but executing may not be an easy task. "There are opportunities, but the portfolios we have seen thus far are very pricey." - Terry Lanni, MGM MIRAGE Chairman and CEO |
The company's joint venture partners also have agendas well-suited to a brand that pairs start-up excitement with a legacy that opens up a worldwide customer base of 32 million, 50% of which comes with a non-gaming profile. Abu Dhabi has few hotels. China is so vast that even aggressive flags do not have countrywide visibility, let alone anything approximating critical mass. Both would benefit from a name strong enough to be a destination unto itself.
Abu Dhabi wants to compete with Dubai, says Klatzkin. MGM MIRAGE's brand strength and posh profile would provide the necessary jumpstart. In China, the goal is to create a more hospitable environment for business people going to China. "More hotel product throughout China means more profit centers throughout China. Diaoyutai can leverage off MGM MIRAGE's reputation with people all over the world," Klatzin says.
MGM MIRAGE Hospitality has something else many of its luxury competitors don't: tiers of brands. Developers can choose from luxury, lifestyle or resort brands and match the flag to their project and market. "We will make use of several of the brands in our collection. But, given the opportunity, we look to create new brands with the right partners," Aziz says. A residential component will be a critical part of the new company's strategy, as well.
Portfolio acquisition is part of the plan, but executing may not be so easy. "There are opportunities, but the portfolios we have seen thus far are very pricey," Lanni says. There is also the problem of alignment. Few portfolios currently available have the capacity to deliver the kind of unique experiences MGM MIRAGE Hospitality hopes to make its hallmark. However, with an eye toward building critical mass faster, Lanni and Aziz will keep shopping.
| The Upside |
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The MGM name. "MGM Hospitality possesses an asset that uniquely helps it realize value in terms of worldwide business recognition," says Jeffries & Company's Lawrence Klatzkin. Minimal expenditures (mostly corporate) and, when the company matures, what Klatzkin sees as "very strong and predictable cash flow." Income could flow from development fees, design fees, operating/management fees and fees for the use of MGM's brand name. More joint ventures like those with Mubadala Development and Diaoyutai that would speed up growth. Cross-over value. MGM MIRAGE has 1,087 acres (439 ha) of undeveloped or underdeveloped land in the United States alone (excluding the CityCenter land, land in Jean, Nevada, and land for Atlantic City's City Center East). Add to that the potential of a sister real estate development company. THE CHALLENGES Proposals, not properties."Because MGM MIRAGE Hospitality is a management company and doesn't own the land, it can't make the announcements on when the projects with Mubadala or Diaoyutai will get done. It's up to the owner to do that. We don't know how long that will take," Klatzkin says. If Dubai World pursues an investment deal alongside Diaoyutai, it will be sooner, not later. Lead time. Luxury and lifestyle projects don't go up over night. Barring a portfolio acquisition, it will take several years for the company to become "significant," Klatzkin says. |
 The Mansion at the MGM Grand is a haven for Las Vegas high-rollers and another luxury concept that could be replicated around the world. |
RAISING THE ANTE
MGM MIRAGE Hospitality is selling innovation as much as reputation. Revolutionizing expectations in the lifestyle/luxury sectors— both owners’ and guests—is integral to what Aziz sees as the company’s competitive edge. “The advantage MGM MIRAGE Hospitality has over traditional hotel operators is that we have learned to maximize the profit potential of a property’s complete landscape. By introducing destination amenities that don’t just appeal to guests within the property, we can import business into our restaurants, spa facilities and entertainment venues,” he says. Business as usual at some 5-stars has left the door open, in his view. Too many luxury hotels “excel in one area and leave the guest wanting in others,” Aziz contends. “They may have a signature chef, but they bury their gym in the basement with old equipment and no access to a personal trainer.”
MGM MIRAGE Hospitality plans to redefine the luxury model to deliver everything the guest wants under one roof. Aziz predicts a next generation of ever more personalized service and experiential, interactive amenities provided at every customer touchpoint. “Hotels miss the mark when they think of themselves as dormitories,” he says. “If the footprint of your hotel is to have restaurants, bars and a health spa, then design them with excellence. Don’t design a boring hotel lobby bar or a spa that is an afterthought. Every element should help keep the guest in the building and attract customers from the outside. That’s how you maximize the entire property’s potential revenue.”
Aziz also has an answer for skeptics who question MGM MIRAGE Hospitality’s draw outside of its home market. Travelers who don’t know the ‘brand’ from gaming, conventions or leisure travel would find it hard to avoid if they watch worldwide televised boxing events, award shows, premium concerts—all of which are broadcast to dozens of countries in a variety of languages, he says.
 "The advantage MGM MIRAGE Hospitality has over traditional hotel operators is that we have learned to maximize the profit potential of a property's landscape." - Gamal Aziz |
BEATING THE ODDS
For MGM MIRAGE Hospitality’s president and CEO, the biggest challenges in brand building will be in the details—where to build, which amenities to include, when to says “no.” Achieving critical mass is a goal, but it won’t come at the expense of growing too quickly and undercutting the brand’s integrity—a lesson Aziz has learned from watching weakened chains. “Our strategy isn’t based on obtaining a specific number of properties in three to five years,” he says. “It is to use the competencies we’ve learned in Las Vegas to evaluate proposals and to select those few that present the most attractive options in different parts of the world.”
If Aziz borrows a page from any industry figure outside of the company, it would be Four Seasons’ Founder, Chairman and CEO Isadore Sharp. “He created a product that has stood the test of time and is synonymous with consistent quality throughout the world,” Aziz says. “My goal is to create destinations that have the capacity to evolve and continue to impress customers year after year.” Matching the value Sharp delivered to shareholders may be another aim, especially if the company takes the likely path of being spun off.
It is an admirable goal, but Aziz still has to prove it can be reached. Amir Kapoor, research analyst with Gabelli & Co., is among those who are “bullish” on the new non-gaming venture. He likes both the prospects of MGM MIRAGE’s new organization structure and the growth prospects afforded at a time when gaming sites worldwide are far more limited than non-gaming sites.
Klatzkin also sees possibilities. The problem is that, without a timetable or a firm figure for hotel and room counts, “there is limited ability to calculate its full value,” he says. “I’d put the value at US$20 a share for now, but I expect it will be a lot more if MGM MIRAGE Hospitality can execute. It will take three to five years before the value is fully realized.”
| MGM MIRAGE’s Big Picture |
| Catalyzed by parent company Tracinda's filing and potential sale of Bellagio and CityCenter, MGM MIRAGE could be taking its first steps toward transforming itself into a property and operating company, says Gabelli & Co.'s Amit Kapoor. Like most analysts, Kapoor predicts a new structure with MGM MIRAGE acting as a holding company consisting of MGM MIRAGE casinos, MGM MIRAGE Hospitality and MGM Real Estate Development. Terry Lanni, MGM MIRAGE's chairman and CEO, doesn't like the term "holding company." "A holding company isn't actively involved in managing each of its ventures. We would be," he says. However, Lanni does acknowledge that the possibility of an organization with three distinct divisions may not be off the mark. Although it is "too early to project," the potential to spin off these companies as public entities has to have appeal. "Four Seasons went private at a staggering multiple (44.4 times expected fiscal 2007 earnings per share and 31.9 times expected 2007 EV/EBITDA). If we could accomplish that, I'd be very pleased," Lanni says |
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