A decade following their catastrophic swing-and-miss on the Las Vegas CityCenter deal, MGM and the government of Dubai are back and ready for another bite at the apple.Dubai made a gargantuan bet on the Las Vegas Strip and lost bigly in 2007 when it agreed to acquire a 9.5 percent stake in MGM and a 50 percent stake in the CityCenter development, which consists of the Aria, Mandarin Oriental, and other commercial and residential towers.This time, MGM is betting big on continued growth in the luxury market of Dubai and the broader Persian Gulf.With Monday’s announcement that Dubai had granted MGM the concession to develop and operate a 26-acre, two million square foot luxury destination resort along the city-state’s high-end Jumeirah Beach district, the two parties have effectively switched sides from a decade ago.Hopefully the results this time around will be better.Signed with possibily the worst timing of any investment deal you can think of, the 2007 agreement saw Dubai World – the Dubai government’s investment arm – embark to become a power player on the Las Vegas Strip, spending $4.68 billion for its bet on continued growth in the Las Vegas economy.We all know what happened next. The financial crisis hit, the Las Vegas economy tanked, and the $8.5 billion CityCenter project – reported to be the largest privately funded real estate development in U.S history – went with it, capped by the $400 million Harmon hotel tower being demolished because of structural flaws before it could ever open.Dubai World sued in 2009 to protect its interests in the project – citing MGM’s management of the development and questioning its overall long-term health. After nearly landing in bankruptcy, the project struck an agreement with lenders to provide emergency financing; ultimately the project was completed.Over the ensuing years, CityCenter has recovered in tandem with the local economy, but not before the Dubai government incurred staggering losses.At the time of the deal, Dubai World acquired 21 million shares of MGM stock for $1.74 billion, at a cost of between $80 and $84 per share. As of Monday afternoon, MGM’s share price is $27.12 – meaning that Dubai World’s stake is around $571 million.Some back-op-napkin calculations can help us estimate Dubai’s loss on the $2.96 billion CityCenter portion of its investment:
- The complex generated a record $353 million in EBITDA for 2016.
- MGM shares are currently trading at an enterprise value to EBITDA multiple of 11 – giving CityCenter a rough valuation of $3.9 billion.
- As of March 2016 CityCenter had $1.24 billion in total outstanding debt – we’ll assume that a year later it’s at $1 billion, for the sake of argument, making the property’s net worth to be $2.9 billion.
- Dubai World’s 50 percent ownership stake makes its investment worth roughly $1.45 billion.
Piecing it all together, Dubai World’s investment is worth about $2 billion, which would mean a $2.7 billion loss. Some of this was recouped, however, last March when MGM and Infinity World – the Dubai World subsidiary through which it pursued these transactions – were able to sell off The Shops at Crystals to Simon Property Group for $1.1 billion.On the surface, the new Dubai project has all the makings of a net positive for both parties. It is the first time that the MGM and Bellagio brands will be on display in the Middle East region and – should it prove successful – will allow the company to create a footprint in the Middle East even without gambling offerings.In fact, there’s a strong case to be made that for any company to be truly considered a global luxury brand, it needs to have a presence in Dubai. Over the past two decades, Dubai has become a city synonymous with shark-jumping lavishness – complete with man-made islands, seven-star hotels, the world’s tallest building, and the world’s largest indoor theme park.For Dubai, the value proposition is also clear. Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s ruler, and his team must be convinced that an operator such as MGM with a successful Las Vegas track record – where competition is tight for VIP guests – will be a boost to the city’s current slate of luxury offerings.But just as the Dubai World’s timing of its Las Vegas investment was a colossal failure, there are lingering questions surrounding the strength and durability of Dubai’s boomtown economy, which is largely built on oil wealth.There has been talk of a Dubai real estate bubble for several years as values in certain parts of the city have fallen off. While the emirate has made efforts to diversify its economic base – much like Las Vegas has tried to diversify away from being a one-industry city, the drop in global oil prices means that the spending power of Middle Eastern sheiks and royals has dropped as well.As we learned in 2007, recognizing and timing property bubbles is ultimately a guessing game. It will be in the best interests of the gaming industry for MGM to prove that it has learned from its counterpart’s mistakes a decade earlier.
