Le Reve Gauche

Gambling tycoon Steve Wynn’s latest IPO shows what Wall Street has learned from the scandals and what it hasn’t.

In a move that seemed equal parts desperation and sheer will, Las Vegas pioneer Steve Wynn last week pulled off a stock and bond offering that together raised $790 million.

The offering by Wynn Resorts, Wynn’s investing vehicle, is a little heartening and a lot troubling—an interesting progress report on what Wall Street has learned from scandal and what it hasn’t. The Wynn deal was encouraging, because the institutional investors who a few years ago willingly swallowed whatever hash Wall Street was shoveling asked tough questions and demanded better prices. The bonds yield 13.5 percent and the stock price was cut repeatedly.

But the transaction also showed how blue-chip Wall Street underwriters continue to let fees get in the way of better judgment, and how they simply can’t be relied upon to enforce better standards for corporate governance.

The offerings were intended to produce a comeback for Wynn, who led the transformation of Las Vegas from cheesy American red-light district into a glitzy (if still highly cheesy), family-friendly leisure world. Until 2000, Wynn headed Mirage Resorts and had developed such signature properties as the Bellagio, the Mirage, and Treasure Island.  Along the way, he became a prodigious collector of art—and of people. He entertained politicians of all varieties on his private golf course. But in 2000, with Mirage’s stock beaten down, octogenarian raider Kirk Kerkorian swooped in with an unsolicited bid and bought him out.

No sooner had Wynn reluctantly sold than he began to plot his grand return. His latest venture, Le Reve, will be something to behold when it opens in 2005. Spread across 192 acres where the Desert Inn Resort & Casino once stood, this “intimate environment” will include an “approximately eight-story, manmade ‘mountain’ enclosing an approximately three-acre lake in front of the hotel.” The complex will also include 18 dining outlets, 2,700 rooms, 2,000 slots, a Ferrari and Maserati dealership, and a golf course. (Très intime.)

At the outset, raising the $2.4 billion to realize the dream didn’t seem like a problem for Wynn, who possesses a vast fortune, international connections, and enormous charisma. He contributed $174 million and rounded up $380 million from Japanese gambling giant Aruze and another $41 million from mutual-fund company Baron Asset Management. The rest was to come from loans and the simultaneous bond and stock offering. Originally, he hoped to raise about $450 million from public investors, selling shares at between $21 and $23 apiece.

But a funny thing happened on the way to the IPO. After the registration forms were filed in August, both bond and stock investors balked. After all, investing in a company run by Steve Wynn is a little like gambling in one of his casinos. You get drawn in by the glitz, but the odds always favor the house. And despite a climate in which everybody pays lip service to the need for improved corporate governance, director independence, and reasonable executive compensation, Wynn and his underwriters seemed oblivious to appearances.

The company’s structure grants Wynn ironclad control of the board, with virtually no opportunity for dissent. Aside from Wynn and a representative of Aruze, the eight-person board includes Wynn’s wife, Elaine, and Wynn Resorts’ president.

The deal also contains a bunch of now out-of-fashion related-party transactions. The prospectus informs us that a Wynn-controlled entity—Wynn Design & Development—is “responsible for the design and architecture of Le Reve (except for the showroom) and for managing construction costs and risks associated with the Le Reve project.” The company also has a deal with Wynn to show his art collection at a museum it will run at the future site of Le Reve. Wynn Resorts leases the art from the Wynn family and reimburses the Wynns for insurance costs—$275,000 for the 12 months ending June 30, 2003. Wynn also gets to keep half of any profits generated by the museum. Wynn Resorts and its predecessor companies had also leased aircraft from entities owned by Wynn, including a $38.2 million Bombardier Global Express.

The financials aren’t pretty, either. The company essentially has no revenues, and it’s on the hook for high-interest bonds. The hotel is not slated to open for three years, and a great deal could go wrong between now and then.

As the deal encountered flak, Wynn did make a few concessions. In October, he paid a Wynn Resorts entity $133,400 to purchase a country-club membership that it had bought for Wynn in 2000. But the biggest concession was the stock price. After much hemming and hawing, the deal was finally set last Friday.

The company ultimately sold 34.62 million shares for only $13 each. The same day, the $343.3 million junk bond deal also became effective. So tepid was investor demand for the stock that Wynn and Aruze bought 11.15 million shares—or 32 percent of the offering—spending $145 million of their own money.

How things have changed. In the late 1990s, executives viewed IPOs as an opportunity to cash out. Here, Wynn was compelled to ante up. In the end, only $305 million of the IPO revenues actually came from the public. Ironically, the pre-offering investments that Wynn and others made in the company are now valued at a higher price than the IPO—in other words, it’s one of those rare instances in which the founders paid more for their shares than the public investors.

What was going through the minds of the underwriters, whose ranks included Deutsche Banc Securities, Bear Stearns, and Bank of America? They certainly misjudged the public’s appetite for shares of a company with no revenues and a CEO with a tendency toward self-dealing. More likely, the underwriters were simply desperate for the fees. For the bankers, 2002 has been a long, dry season. And with the books about to close, the bonus pools, which provide the bulk of their compensation, are looking mighty shallow. The IPO alone probably generated about $23 million in fees.

Judging by the action in Wynn Resorts since its opening last Friday, the underwriters are working hard for that paycheck. Minutes after opening, the stock fell below the offering price. Look at a chart, and you’ll notice how the stock has miraculously managed to find support at exactly the $13 offering price. Since it doesn’t look good if a stock sinks below its offering price during its maiden sessions, it’s reasonable to assume that the underwriters are supporting the stock in the marketplace. That’s usually not a good sign.

Recently, investors have been complaining thatwhen it came to IPOs, only the rich and well-connected were able to buy in at the offering price. In the case of Wynn Resorts, it appears that rank-and-file investors will have plenty of opportunity to buy this stock for far, far less than its original price.