Monday, December 3, 2012

For Las Vegas Sands, Splitting "Aces" Might Be the Smart Bet

The Sands Casino was one of the great pillars of old Las Vegas.  But in the mid-nineties it found itself unable to compete on the literal sands for which it was named.  Since that time, Las Vegas Sands (LVS) has become an amazing example of an organization employing the types of strategy shifts that Chan and Mauborgne talk about in  Blue Ocean Strategy.

In the face of increasing competition from the other casinos on the Vegas strip, the Sands decided it couldn't continue its decades-old gaming and hotel strategy on the red sands of new Las Vegas, and instead reinvented itself with the blue waters of Venice. In 1996, the Sands imploded and the Venetian Hotel and Casino was raised in its place.  While the corporation remained the same, it shifted its focus from the traditional gambling that had been its bread and butter toward services for the convention and trade show industry.

Less than a decade later, aware the Las Vegas market that the Sands still primarily operated in was well-established over the previous half century, the Sands took another page out of the Blue Ocean Strategy playbook, and opened a new casino/resort in the largely untapped markets of Asia.  Specifically the Sands Macao, located in the only place on mainland China where casino gambling is legal and an area with one billion people within a three-hour flight.  The company considered its strategy in this new market, and concluded that it shouldn't just be a casino/hotel as it had been, but rather offer a variety of structures and services catering to a number of different price points, like a Vegas strip in its own right.

But despite these successes, the Sands was hit just as hard as the rest of the economy (and particularly the gaming industry) in 2008 during the global financial crisis. Sources say that at one point, the company was losing $1,000 per second. While things have improved since that point, the company is still looking for innovative ways to make money.  In the further spirit of the Blue Ocean Strategy, the Sands is currently considering the radical idea of splitting itself into two separate companies.

This follows in the footsteps of Penn National Gaming, who announced last month that it will be separating its real estate holdings from its casino gaming interests through the formation of a Real Estate Investment Trust.  The Wall Street Journal reports: "Under the terms of the Penn arrangement, one company, known for now as PropCo, will own the physical buildings that house casinos operated by the other, known as Penn National Gaming. Penn is to pay a substantial share of its pretax earnings in rent to PropCo, which will own 17 casino properties. As a real-estate investment trust, or REIT, PropCo won't have to pay taxes on that rent, as long as it distributes nearly all of its income to shareholders."

It is unclear whether Las Vegas Sands will follow suit, but some financial analysis shows that the individual pieces of the Sands' business are worth more than it is as a whole.  Splitting off its real estate holdings is a move into a market that was formerly a necessary part of the business, but certainly not a core part of its strategy. I think this is perhaps the most illustrative example of the Blue Ocean Strategy: re-imagining a part of one's organization as something completely different.  In this case, REITs are largely untried in the casino industry, and investors generally want a diversified portfolio in their REITs. 

Questions: In this case, does it really matter if the real estate portfolio is diversified if the company is separate, but largely "in-house"?  Is it always possible to create a Blue Ocean strategy, or is it  limited only to certain types of organizations?  While themed casinos look like they're largely a thing of the past, what type of theme would you use if you were opening a themed casino?

Links:
Seeking Alpha - Las Vegas Sands: A REIT Spin-Out Strategy That Could Turn Into Three-Of-A-Kind
WSJ - Gambling Firm Penn to Split Itself in Two
Wikipedia - Blue Ocean Strategy

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