by Richard Coulson
(The author is principal of R C Capital and a frequent contributor to the Tribune's business section. In this interview with Joe Rackrate, a (fictional) hotel-casino consultant, he explores the recent unravelling of the $2 billion Baha Mar development.)
RC: Wow – our country sure took a hit when Harrah’s pulled out and left Baha Mar holding the bag: GDP down couple of percentage points, maybe 5,000 construction jobs lost, Cable Beach stuck with its same old tired face. What went wrong?
Joe: Oh, lots of things. You could pin it on Perry, who dilly-dallied too long. Or on Hubert, who shot his mouth off. Or the U.S. recession – tight money and fewer tourists everywhere. Or the private buy-out of Harrah’s, when the new owners loaded the company with a mountain of debt. Or the usual fate of a minnow like Baha Mar swimming with a shark like Harrah’s.
RC: Tell me more.
Joe: Well, look. What is Baha Mar? Three hotels on Cable Beach, one so run-down they had to close it. No operations outside Nassau. Lyford Cay’s Dikran Izmirlian picked them up with a few hundred million of spare pocket money, re-named them Baha Mar, and put son Sarkis Izmirlian in charge, a young fellow unknown in the hotel business. And who is Harrah’s? Simply the world’s biggest and best known gaming/hotel outfit separating suckers from their cash through years of operating as Harrah’s, Caesar’s, and Bally’s in Vegas and a dozen other American cities, with a buy-out value of $17.7 billion, led by CEO Gary Loveman, a former Harvard Business School prof who’s been building Harrah’s since he joined them in 1998.
RC: But didn’t they have a joint venture agreement all signed up with everything looking rosy?
Joe: Sure, it was all rosy until the shark didn’t like the way the water smelled and wanted out of that tank. Their termination letter of March 6 said they thought the deal was taking too long and doubted that “land will be delivered (by Government) to the joint venture as planned”. I bet that was a red herring. The real issue was simmering ever since the Harrah’s privatization closed just five weeks earlier on January 28. Right away, the two buy-out companies, Texas Pacific Group and Apollo Management, learned that their banks were having a hard time selling all the bonds financing the highly leveraged deal and that the Harrah’s credit rating was not too strong, Those hard-nosed guys started to look for any risky deal they could unload in the shaky debt environment – and Baha Mar was the first, soon followed by a venture in Slovenia. Loveman, who had spent years negotiating Baha Mar, probably wanted to continue, but now he was only one of nine directors, and was told to wield the axe.
RC: So did Harrah’s have a legal right to pull the plug?
Joe: Baha Mar sure doesn’t think so. That’s why they filed a 51-page complaint in New York Supreme Court. Maybe in the hundreds of pages of joint venture agreements a smart lawyer can find some fine print that okays Harrah’s move. But to a normal businessman, it’s pretty dicey. Look at the timing: on January 31, Harrah’s signs the Supplemental Heads of Agreement with Baha Mar and the Government, and Loveman e-mails Sarkis: “Well done. We look forward to working with you to bring Bahamar to reality.’’ Both parties schedule the closing for March 15 and a big-wheel ground-breaking ceremony in Nassau March 17-18. Vern Jennings, Harrah’s man-on-the-spot in Nassau, works on these arrangement right up to March 6, the very date when the famous termination letter arrives by fax, signed by Harrah’s Vice Chairman Charles Atwood. Was Jennings himself blind-sided by this abrupt decision at Harrah’s head office in Vegas? Cold feet at the last minute? – knowing they have to put up some of the $212 million agreed equity at the closing.
RC: This means Baha Mar wins its case? What are they asking for?
Joe: First, specific performance, that is, an order for Harrah’s to take up its agreed 43% stake. Unlikely they’ll get that, so they’re also claiming damages, close to $300 million to cover what they’ve already spent. I didn’t say they would win. To me, it’s a pretty clear case of bad-faith dealing by Harrah’s; but whether bad faith counts in a New York court, you’ll have to ask the lawyers. Or better still, the judge. And I’m sure Harrah’s will drag up every reason to fight back.
RC: But let’s assume Baha Mar wins. Can they all be happy campers then?
Joe: Far from it, my friend. So they collect a big pile of cash, but a lot more than money is at stake. Reputation! Pride! They’ve lost the key partner, that was going to help them create Las Vegas in Nassau. Even Starwoods may now drop its management agreements. All those beautiful advertising brochures and glowing web-sites must be junked. Talented, expensive staff are already being sacked. Bahamian contractors are bitter. What happens to all the road-moving schemes, the Jack Nicklaus golf course?. Baha Mar never dug a shovel of dirt on Cable Beach, so all Bahamians saw was the forced closing of popular Café Johnny Canoe – not the smartest PR move. The A-word is never mentioned, but Atlantis remains unchallenged as the dominant tourist draw in the Bahamas.
RC: Pretty tough on Sarkis , since the original November 2005 web-site said Baha Mar was “Created by Sarkis Izmirlian”, then aged 33.
Joe: Yeah, and by all accounts he’s a real good guy, got a top Georgetown degree in finance, energetic, ambitious, lovely wife. A certified gentleman now that he’s elected a Governor of Lyford Cay Club. And an amazing family: grandfather left home without a penny and made a fortune shlepping camel trains across the Sudan, dad they say cornered the African peanut market. All that takes guts and brains! And they support a charitable foundation back in struggling Armenia.
RC: So Sarkis gets the sympathy vote.
Joe: Sure, but sympathy doesn’t cut any ice in the hotel business. The fact is he lost the deal. Look at Sol Kerzner, the tough old pro, compared to young Sarkis, the nice young amateur. Everything Sol does on Paradise Island turns to gold, maybe now in Dubai too. He wrangles non-stop with governments, bankers, partners, staff, environmentalists, loses his beloved son on a business trip, but still the buildings go up and the guests keep coming back. And he’s always up-front. Why didn’t Sarkis show his face at the public meeting extravaganza here in February? Sure Sandy Sands is a good executive who does all the right things and carries the Bahamian flag, but he’s only a paid hand, not the skipper. They say the Izmirlians like to keep a low profile, but that’s a strange policy when you’re creating “the Caribbean’s largest single-phase destination resort”.
RC: So what’s next for Baha Mar? Can they get Harrah’s to come back? There was a hint of that in the termination letter.
Joe: Could be, but once litigation starts, it’s hard to sit down like pals again.
RC: Maybe they can find another partner?
Joe: Well, that ain’t so easy. Who do they turn to that’s got the same clout and the know-how? MGM-Mirage or Wynn Resorts out in Vegas, both already trying out Macao? Donald Trump in Atlantic City? Genting Hotels from Malaysia? Any of those boys are gonna look fish-eyed where Harrah’s couldn’t cut a deal. Who wants to be second choice? The chief hotel executive here, Don Robinson, is a savvy guy who spent his career running hotels and theme parks for Disney, so maybe he can rope them into the corral. That would be a terrific name to attract tourism; trouble is, the Mouse people don’t like gambling, and a big project can’t survive without a fancy casino.
RC: So maybe they go it alone?
Joe: Might be best. Maybe they’ll build something new and classy to replace Nassau Beach, one of those sexy little W hotels that all the young trendies like. Sit back a few years and fiddle with that, then look at the market and try something bigger again. Anyway, the Izmirlians won’t walk away; they’re tough people, committed to Nassau, and can survive one set-back.
RC: Maybe they do a deal with Sol, become part of his empire under another name.
Joe: Hey, That’s really thinking outside the box! I can see it now – Sol created one myth , the Lost World of Atlantis, so now he creates a new one, and calls it . . .what? . . . Camelot! Another place that never was. Knights in armor riding round, jousting tournaments on the beach! Crazy! But let’s calm down. That will never fly. No matter how much the Bahamas Government loves Sol, they’ll never let him buy out his main competitor.
RC: Thanks very much for your views, Joe. Where do you stay in Nassau?
Joe: Well, I alternate. They know I put some bucks on the table, so they both comp me pretty good.
The contractors for Baha Mar never paid National Insurance for the Bahamian workers who worked on the Wyndham Hotel refurbishing project. Some of them were not paid the correct wages for the hours worked. Why isn't the Labor Board going to the Lyford Cay investors and demanding restitution for the citizens involved?
Posted by: Pat Winters | May 23, 2008 at 06:07 PM