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ALADDIN AT 2: What went wrong?

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The Aladdin tale, on the surface, seems like a million other Sin City stories: Outsiders arrive, flush; outsiders leave, broke.

 

And that plot is a big part of the Aladdin story, but two years to the day after the property opened, and nine months after it filed for bankruptcy protection from its creditors, casino industry insiders still talk about what went wrong with the $1.3 billion megaresort.

 

The owners? Inexperienced, the insiders say. The money? Highly leveraged, with no margin for error. The design? Countless problems.

 

Many casino executives and Wall Street-types were happy to riff on the property’s shortcomings as long as they were not identified by name, but Deutsche Banc Securities analyst Andrew Zarnett made his analysis on the record.

 

“The Aladdin is poorly designed and poorly executed,” Zarnett said Wednesday. “There were too many cooks in the kitchen, and they weren’t good cooks. The design is flawed, operations were flawed and its financial structure was too leveraged.”

 

Not surprisingly, veteran casino executives blamed the inexperience of the UFABet Aladdin owners.

 

“People that begin this kind of a project with no experience are asking for trouble, and that’s what they got,” said one Las Vegas casino executive, who like most of his peers, was willing to critique the project on condition of anonymity. “When people with no experience begin a project of this size, they make mistakes on everything they try to do. They make a 15 percent mistake on every decision, and if they have to make 1 million decisions a year for four years, and make a mistake on all 4 million decisions, they end up with the Aladdin.”

 

One casino company’s top boss noted the Aladdin’s total cost, including Desert Passage, was about as expensive as the $1.6 billion Bellagio.

 

“Yet the Bellagio throws off more than five times as much (cash flow),” the executive said. “The Aladdin’s a colossal black hole.”

 

At the center of the web of the Aladdin’s ownership interests is Jack Sommer, trustee of the Sommer Family Trust.

 

Sommer did not return several phone messages.

 

When the family trust sold a major New York property in 1994, Sommer needed to find a real estate investment to park the proceeds to avoid capital-gains taxes.

 

The Aladdin was on the market at the same time, and Sommer’s reported $80 million sealed bid on the property was accepted, and he purchased the casino and its 34 acres on behalf of the trust in 1994. The casino was closed in 1997 and imploded in 1998 to make way for Sommer’s vision of a mixed-use retail and gambling megaresort.

 

The Sommer trust contributed the project’s land and partner TrizecHahn kicked in $250 million to build the Desert Passage retail component. The trust owns one-third of Desert Passage; TrizecHahn has a two-thirds stake.

 

Another significant investor in the project was British casino owner London Clubs International. The Aladdin project was its first U.S. venture. The company initially invested $50 million for an ownership stake in Aladdin Gaming Holdings LLC, the company that owns the Aladdin, and the right to create a London Clubs-branded high-limit area.

 

When the Sommer Family Trust couldn’t fund its share of project cost overruns, London Clubs contributed about $150 million more, upping its ownership share of the casino to 40 percent.

 

Before the property-owners’ licenses were approved by Nevada gaming regulators, the owners’ shaky financial status received tough questioning from Gaming Control Board member Bobby Siller.

 

“Most people coming before us, in your position, have used sound business judgment,” Siller told Sommer. “I’m questioning your judgment. Do you understand that?”

 

Most insulting was Siller’s final comment: “Your personal affairs are in the red, your development is in the red, and your only substantial source of income is loans from your mother.”

 

Siller’s concern was well-founded. The property struggled during its first year, and Aladdin bosses mentioned the possibility of bankruptcy in a Security and Exchange Commission filing last August after poor slot and hotel room results forced them to cut its work force from 4,500 workers to 3,000.

 

After the Sept. 11 terrorist attacks depressed air travel worldwide, Aladdin’s business nosedived, and the property’s executives filed for bankruptcy protection.

 

The property’s performance and a potential obligation to fund more shortfalls reportedly forced London Clubs Chairman Alan Goodenough from his job. The company’s Las Vegas investment, along with the Sommer Trust’s investment, will probably be a total loss, insiders say.

 

“Welcome to Las Vegas,” one casino boss said with a laugh. “Now go home.”

 

Casino executives, most of whom spoke on condition of anonymity, said the property management’s inexperience led to one especially fatal design flaw.

 

“Saving the giant monolith (the Theatre of the Performing Arts) was a huge mistake,” said one boss.

 

Bob Boughner, president and chief executive officer of the Borgata, the now-under-construction Atlantic City megaresort co-owned by Boyd Gaming Corp. and MGM Mirage, said Borgata executives paid close attention to the Aladdin’s development and execution.

 

Boughner toured the Aladdin a few months before it opened and has returned several times since, and he agreed that keeping the theater was a mistake.

 

“They would have been better off working with a clear site,” he said. “The owners’ limited experience probably led them to overlook access, visibility and convenience.”

 

The London Clubs salon has a charming design, but is “clearly in the wrong area, off the casino floor,” Boughner said. “It does not have a feeling of exclusivity.”

 

Opening without a database of potential customers was another major problem, the New Jersey executive said, as was the decision to keep the Aladdin name.

 

“It didn’t make sense to spend over a billion on a tired concept,” he said.

 

As for where the property goes in its third year and beyond, Aladdin continues to work with limited financial resources as KPMG Corporate Recovery Services partner Jeff Truitt tries to peddle the megaresort.

 

Several parties have bid on the property, sources said, but Truitt did not return phone messages.

 

Unsecured creditors’ lawyer Frank Merola said recently that Truitt was allowing financial markets to decide if and when the bankrupt megaresort should be sold.

 

“The property is making money, so the debtor can afford to let the market decide the timeline,” Merola said.

 

Aladdin Chief Financial Officer Tom Lettero’s most recent monthly financial status summary filed with the bankruptcy court reported $16.3 million in June revenue, down from $19.9 million in May, $21.8 million in April and $25.5 million in March.

 

June expenses were $19 million, compared with $19.5 million in May, $14.7 million in April and $22.1 million in March.

 

The property reported a net loss of $3.5 million in June, compared with a $423,369 loss in May, a net profit of $2.7 million in April and a $1.1 million net loss in March.

 

The Aladdin owes its secured creditors $542.5 million, including about $435 million to bankers holding a deed of trust on the property and $70 million to companies leasing equipment and providing slot machine loans. Unsecured creditors are owed another $85.7 million.

 

Property executives hope some small capital expenditures can add allure to the 2-year-old megaresort.

 

First, the property is now called “The all-new Aladdin” in marketing pitches, property spokesman Fred Lewis said.

 

A ‘hugely successful” nightclub, Curve, recently opened in the London Club, and plans are under way to open a wedding chapel, Lewis said.

 

A 400-seat showroom run by the Aladdin will also open soon, he said.

 

The work force is down to 2,800 workers, but some laid-off workers are being recalled as business improves, Lewis said.

 

 

 

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