LEISURE

Kerzners Atlantis resort in the

Bahamas is a destination in itself.
Paradise hideaway:
Le Touessrok in Mauritius.

The UKs gambling industry is

set for deregulation in 2004,
with an influx of Las Vegas-style
casino resorts expected to
follow. But nothing can prepare
London for the plans that South
Africas colourful hotel mogul
Sol Kerzner has up his sleeve.

Kerzner bets
on London
Clubs
By Christian Sylt
SOL KERZNER is the mastermind behind
the grandest gaming resorts in the world.
Kerzner cut his teeth in hospitality working at
his parents hotel in Durban and later created
South Africas first five-star hotel. He found
fame in 1979 by setting up South Africas
illustrious Sun City, a casino complex built
around an artificial rainforest replete with
waterfalls and real crocodiles. Today he runs
Kerzner International, valued at #630 million on the New York Stock Exchange. His
flagship is Atlantis, a 2,300-room resort on
Paradise Island in the Caribbean featuring
the worlds largest open-air marine habitat.
In anticipation of the UKs gaming law
deregulation in 2004, Kerzner bought #15
million of loan notes in beleaguered casino
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EUROBUSINESS MARCH 2003

group London Clubs International (LCI) late

last year, acquiring 30 per cent of its bonds
(long-term debts). Hes keen to make a bid for
the business, and since LCI is such a vulnerable target its only a matter of time before
Kerzners sprawling entertainment centres
start springing up in the British capital.
LCI operates some of the most prestigious casinos in London as well as
several in South Africa, Lebanon
and Egypt, but in 1997 the company found itself in financial trouble
and its market value plunged from
#808 million to just #52 million.
Its now bondholders like Kerzner,
not shareholders, who control the
destiny of the company.
LCI is geared to the gills, making
it a sitting duck for poachers.
At the end of 2002 its liabilities were #389 million
against total assets of only
#34 million. Kerzner says he
would certainly be one of
the players for LCI if
the price was
right. If Kerzner takes
control it
will be a
fitting
finale for
LCI its

woes began after a disastrous investment in a

Las Vegas casino had to be written off.
In 1997 LCI paid #50 million for a 25 per
cent stake in the new Aladdin gaming complex in Las Vegas. Rising development costs
led to the group being dragged further into the
venture than anticipated and more money was
invested. LCI ended up with a 40 per cent
share in the resort: it eventually opened
late, over budget, and footfall was disappointing. LCI was forced to
renegotiate its banking covenants
and its shares went into freefall.
The final blow came after 11th
September 2001 when US travel
and tourism tumbled: the
Aladdin, already performing well below
expectations, was
placed in Chapter
11
bankruptcy
protection. LCI
finally severed its
ties with the complex in October
2001, giving the
Aladdin bank syndicate a five per cent
stake in LCI in
exchange for paring down the
debts it faced
from #150
million to
#15 million. The
adventure had
been a
bet on
black,
a n d
t h e

LEISURE

THE WORLDS MOST

EXPENSIVE HOTEL ROOM
ATLANTIS on Paradise Island in the Bahamas is
more than just Kerzners flagship; it typifies the
lavish luxury of his hotels. Awash with turrets
and towers, the pastel-coloured resort looks as
though its been dug up straight from the lost
city itself. Of course, theres an underground
mock-up of Atlantis, as well as 24 hectares of
pools, waterfalls and marine habitats. But for
extreme extravagance, staying in the Bridge
Suite perched between two of the
accommodation towers cannot be beaten.
And at #25,000 per night, it is the most
expensive hotel room in the world.
The suite capitalises on its location, with
guests able to enjoy the Bahamas best views of
the Atlantic Ocean from its floor-to-ceiling
windows. The suites butler service is both de
rigeur and necessary if you plan to fill the 75square-metre balcony with people; while a 230square-metre entertainment centre caters for
the more couch potato-type visitors who prefer
to remain in the suite as much as possible.
Imperiously opulent, the suite has 3.6 metrehigh ceilings, hand-painted stencilling, a
profusion of gold gilt and glass and a foyer
featuring an elaborate marble floor. Luxury
touches in the living room including a baby
grand piano and custom hand-tufted rugs are
hardly subtle. The dining room is highlighted by
an iron and 22-carat gold chandelier, a customdesigned table for 10 and gilt armchairs.
Little wonder that Michael Jordan is a past
guest here the dramatic four-poster bed in
the master bedroom measures more than three
metres in height and even the bedsheets are
custom made and hand painted. So if you can
afford the cost, the Bridge Suite is definitely
one worth crossing.

roulette ball had landed on red. LCIs perfor- million, although the midmarket Palm Beach
mance didnt fully recover and at the end of is expected to fetch a fraction of this.
However, LCI has little chance of selling all
2002 posted a #31 million loss.
LCIs massive debts initially scared off sev- these casinos for book value, according to one
eral suitors; Kerzner admits to having made banker: The problem is, the ones they want
an informal approach for the company in to sell are not the ones people want to buy.
summer 2002 which came to nothing. Howev- Everyone has had a look and most have
er, LCI became more attractive after reaching walked away. Surprisingly, LCIs London
an agreement with its lenders in September casinos arent the most desirable.
LCIs casino portfolio includes several
2002 to extend existing debt facilities and
reduce interest rates on some of its borrow- situated in regional UK towns. These generalings for a further two years. In return, LCI ly trade more steadily than premises
pledged to pay back #150 million and show frequented by high rollers, where large wins
by successful punters can
that it had made inroads
into reducing its debt by
Kerzner stresses that dent profits and prevent
management from giving
September 2003.
he would like to
accurate forecasts to
The carrot for potential
make an acquisition shareholders
and
purchasers was the #23
investors. But crucially,
million working capital on our own or jointly with
these casinos will also be
given to LCI as part of the
renegotiated terms. LCI others prior to deregulation the most likely beneficiaries of changes to UK
shares have risen more in the UK gaming industry.
gaming legislation.
than 20 per cent since the
Following a government
agreement was made, as
investors clearly anticipate an injection of review in 2002, a raft of new measures was
fresh funding. And LCI has little choice over suggested to modernise the UKs archaic
gaming legislation. Analysts expect that withhow to raise all the capital.
A debt-for-equity swap is a possibility. A in two years the proposed liberalisation will
joint venture is another, with a new investor have been passed by parliament, and that it
putting fresh capital into the business. But it is will turn around the trifling casino market,
likely that LCI would be very wary of a joint currently worth about #935 million of the
venture after the disastrous repercussions of #10.5 billion British gambling industry; they
believe UK casino revenues could quickly
its ill-advised gamble in Vegas.
A sale of some of its assets is already under- double to more than #1.8 billion.
Out will go the 24-hour notice currently
way and could provide the bulk of LCIs
payment. Its Emerald Safari and Resort casino required for membership of gaming clubs,
in South Africa is being sold, which one and the ban on casino advertising. In will
industry insider said could go for about #53 come betting shops serving food, along with
million, including a #23 million debt. Two of entertainment licences and sports betting for
the companys London casinos 50 St James casinos. Most significant of all will be a relaxand the Palm Beach, are also up for grabs. The ation in the laws governing slot machines. For
more upmarket 50 St James is worth #83 mil- decades, casino managers who are currently
lion, including a freehold value of #30 permitted to run only 10 machines per

EUROBUSINESS MARCH 2003

73

LEISURE

venue have looked with envy at the freedoms enjoyed by competitors overseas.
The UK is believed to lose about 400,000
home-grown gamblers a year to the lure of
colossal jackpots in Las Vegas more than
any other country in Europe. Yet one survey
shows that 14 per cent of the adult population
in the UK play fruit machines at least once a
year making it a more widespread pastime
than betting on horses, and second only to the
Lottery and scratch cards. In contrast, fewer
than four per cent of adults have ever been
through the doors of a British casino. So,
because slot machines are not normally associated with high roller casinos, it is LCIs
regional operations that will benefit from the
incoming legislation. But these are not the
casinos the company has put up for sale.
Because selling separate assets isnt guaranteed to raise the required funds for LCI, it
remains at risk of being bought outright.
Hence Kerzners finger in the pie, with him
taking a share of the companys debt and
admitting he is interested and serious about
trying to enter the UK gaming market. As a
bondholder he is entitled to more detailed
information than shareholders receive: We
can sit at the table of London Clubs, and start
being involved in the dynamics, he adds.
Kerzners son Butch is keen to emphasise
that because Britain is a new market for his
company, it is proceeding with caution.
Indeed, the closest Kerzners unique brand of
entertainment has come to the UK so far has
Sol Kerzner has his eye on casinos in
been the Atlantis online casino based in the
London and hotels in Europe.
Isle of Man.
Kerzner is also careful not to put all his
chips on the gaming market alone, and is talkKerzner could face stiff competition. Haring to two quoted property companies about a
joint venture. Real estate is important here rahs, one of the worlds largest casino
and we would hope to do something in part- companies, has said that UK market entry
nership with local real estate operators in would be very attractive; and even Kerzners
terms of gaming, to ensure we have the right old company, Sun International, has been
property in the right place, he says. So looking for more than a year to break into the
whether Kerzner takes control of LCI alone or UK market. Park Place Entertainment Corporation, another prime
with others remains to be
seen. But he stresses that
Kerzner Internationals player, whose assets
include casino meccas like
he would like to make
development is driven Caesars Palace in Las
an acquisition on our own
Vegas, is also looking to
or jointly with others
by its #100 million
establish links with leading
prior to deregulation.
This wont be Kerzn- annual cashflow and Kerzner British leisure operators
and property companies.
ers first foray into a adds that its bank debt of
But entering the British
deregulated
European
market remains a big gamgambling market. In the #300 million is undrawn. It
ble. The overseas players
mid-1990s his business at also helps that the company
biggest fear is the tax
the time, Sun Internationis
sitting
on
a
cash
pile
of
regime. How much they
al, owned 30 per cent of a
will invest will depend on
French company called more than #30 million.
the total cost of doing
Spic, which controlled
business in the UK, says
four French casinos. We
were in France before they relaxed the laws, Professor Peter Collins, director for the study
he says, but he then sold this interest to focus of gambling and commercial gaming at
on the much bigger, Atlantis resort-hotel pro- Salford University. The tax situation will
ject. Kerzner adds t hat he isnt looking at vitally affect the position of potential investors
entering continental European cities again in the market.
British casino companies, meanwhile, are
because not only are many ridden with gaming regulation but the taxes can also stymie awaiting deregulation with baited breath.
development. Now, all eyes are on the UK and Even Hilton Group, the hotels-to-betting comwhat riches may be reaped from deregulation. bine, is set to join the fray despite having sold
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EUROBUSINESS MARCH 2003

its gaming division to rival Gala Group more

than two years ago. Hilton operates some of
the UKs biggest seaside hotels, which are
poised to cash in on deregulation; its chief
executive, David Michels, admits that tying
up with a casino operator would be the likely
route for the company to take advantage of the
change in law.
However, a question mark still hangs over
how much of the proposed legislation will be
become law. Before committing any funds,
gaming companies will want to see exactly
how many casinos will be allowed and how
many slot machines will be allowed in each
casino. And, as Kerzner comments, when
lots of people compete for a licence, you are
lucky if you hit the big one. This is why he is
bolstering his companys other arm, its luxury
resorts business.
Kerzner isnt just king of casino-hotels. His
assets have a total worth of #1.36 billion with
several smaller, more exclusive five-star
hotels being the jewels in the companys
crown. This prestigious portfolio comprises
celebrity hideaways such as Le Touessrok and
Le Saint Gran in Mauritius and Paradise
Islands petite Ocean Club, which has only 89
rooms. Five of Kerzners hotels were recently
rebranded under a new title, One & Only,
which he wants to establish as a luxury brand
and roll out across the world.
Having a collection of great hotels, it

LEISURE

makes sense for us to look to have a brand,

but our hotels are not cookie cutters, says
Kerzner. They are each so distinctly different
in architecture and style. And Kerzner has a
#23 million marketing spend with which to
convince the public.
The companys success speaks for itself. In
the last fiscal year it reported a #76 million
profit, which Kerzner puts down to the
better-blended return it receives from the
range of equity stakes that it holds in the
hotels. Although the company owns nearly 70
per cent of Paradise Island, it has no financial
interest in its Royal Mirage resort in Dubai,
while it fully owns the Ocean Club. This gives
the company revenue from management fees
for operating some of the properties, but
allows it to cream all the profits from others.
And the rewards are remarkable.
Kerzner acquired Paradise Island in 1994.
Since then, gross revenues on the island have
more than doubled, from #198 million in 1995
to #473 million in 2000. The average room
rate has nearly tripled, from #90 in 1993 to
#252 in 2001, and occupancy levels have
increased from 62 per cent in 1993 to above
80 per cent, despite Kerzner more than
doubling the number of rooms at the resort
over this period.
Kerzner even bucked the worldwide
tourism downturn to achieve record revenue
and operating profits on the island in 2002,

and hints that he could as much as double the

number of rooms at Atlantis should such
growth continue.
The companys development is driven by its

#100 million annual cashflow; Kerzner adds

that its #300 million loan facility is unused.
The fact that we are one of the lowest-geared
hospitality companies helps us to continue to
expand, he says.
In the last two years Kerzner says he has
invested around #500 million in renovations
and groundwork for new hotels. The company
has another hotel under construction in the
Maldives as well as establishments in Mexico
and Cuba. And Kerzners core value of wowing the customer is not just for show. He is
renowned for attention to detail as much as
grandiose design.
When we were selecting sites for the Saint
Gran, my partners in Mauritius were going
crazy because theyd show me a site once
every six weeks and Id knock it back. It took
about 18 months to find the right site, says
Kerzner. A business associate adds that he
once watched Kerzner make an employee
paint a wall seven times until he got it exactly
the right shade of green. He wants things just
right. And he never fails, he says.
All Kerzners future luxury resort hotels
will be branded One & Only, and in five years
he hopes to take the division to market with
around 20 resorts more than the mighty Four
Seasons, which is valued at #800 million.
One & Only could also spread to cities
heavily dependent on tourism, says Kerzner,
with New York, Paris and London top of his
list. As its simply a matter of time before
Kerzner pounces on LCI, a Caribbean-themed
casino combined with a One & Only megaresort in London could come to London
within five years.
After all, what better way would there be
for the UK government to celebrate deregulation than by letting Kerzner rule the capitals
gaming clubs?
LCI had better start buying paintbrushes. EB

Luxury
Kerzner style.

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