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The private equity owners of The Venetian Las Vegas are seeking regulatory approval to distribute $620m to investors and hand out bonuses to employees, but gaming regulators have questioned the soundness of returning such a large dividend less than eight months since the acquisition closed.
Apollo Global Management received approval from Nevada gaming regulators in February for its portion of the $6.25bn acquisition of the Strip properties owned by Las Vegas Sands Corp. The deal was first announced in March 2021.
Apollo, through its operating subsidiary Pioneer Topco L.P., acquired the operations of The Venetian, Palazzo and Venetian Expo Center for $2.25bn. Las Vegas Sands provided $1.2bn of seller financing with the private equity firms putting up $1.05bn.
Real estate investment trust VICI Properties paid $4bn for a total of 82 acres of Strip real estate and land housing the $1.8bn MSG Sphere development. VICI also received $250m in annual lease payments from Apollo.
Daniel Cohen, a partner with Apollo, told regulators that it bought The Venetian at a time when it was losing a million dollars a day, so in a normal environment that figure would have been between $500m and $600m.
“That is roughly where we are going to after this transaction,” Cohen said. “We don’t look at it as we are taking a dividend ... we are right-sizing.
“Of the $620m, $400m is coming from debt and the rest is coming from cash generated by the business.” Cohen said.
The Nevada Gaming Control Board (NGCB) on Wednesday (November 2) recommended approval of the distribution, which is required by state gaming regulations because Apollo’s operating subsidiary is a private equity investment company.
The Nevada Gaming Commission (NGC) is expected to consider the request on November 17.
Gaming regulators are also required to review the proposed distribution to make sure the company maintains an appropriate debt balance and financial ability to fund its operations.
Sonia Vermeys, a partner with Brownstein Hyatt Farber Schreck in Las Vegas, reminded the control board the acquisition was funded through equity capital from Apollo fund investors and the “investment included approximately $50m … to ensure that the business was well capitalized from day one after the transaction.”
Affiliates of Apollo also provided a first-lien revolving credit facility to fund the ongoing capital needs of the business. Vermeys said Apollo now plans to recapitalize The Venetian and distribute cash to equity holders and company employees.
“This recapitalization plan is supported by The Venetian’s very strong financial position and the pending favorable transaction with J.P. Morgan Chase bank,” she said.
Robert Brimmer, chief financial officer of The Venetian, said the casino was able to propose this distribution because the resort has substantially outperformed expectations since the deal closed.
“We are currently run-rating north of $600m EBITDA for the business relative to the 2019 pre-COVID period,” Brimmer said. “We are up nearly 27 percent. This is a very broad-based recovery across our business.”
Brimmer told the NGCB that The Venetian has just over $300m in excess cash on the balance sheet that is not needed to run the business, nor does the casino have immediate investments that need funding. He said the $300m is earning a 2 percent interest rate, which is below investors’ cost of capital.
“This investment was always based on the assumption that we would see a recovering from COVID,” he added. “That has happened faster than we expected.”
Commissioner Philip Katsaros expressed concern that the initial application for a distribution was filed in June just about three and a half months after closing. He noted that the initial amount of the distribution was 15 percent to 20 percent lower than what was being asked for now.
Brimmer said the increase in the distribution reflects a financial performance where earnings in the business have improved materially. Cohen confirmed that the initial ask in June was $520m.
“Earnings and cash we generate were both factors that went into our [decision] that the full $620m should be distributed,” Brimmer added.
Both Katsaros and chairman J. Brin Gibson admitted the control board does not have a long track record in considering dividend requests from private equity firms and expressed concern that this transaction is largely funded by debt rather than cash.
Gibson noted the control board had approved two similar requests in 2015 and 2017 but both of those distributions were for around $70m each.
“We have to sit here and decide at which point is too much,” Katsaros said. “I don’t want to tell you how to run your business, but at what point do you put the financial stability of the operation at risk?”
Katsaros then asked Apollo’s Cohen if the private equity group would look at another distribution in a couple of months.
“No, we are not,” Cohen assured the three-member control board. “When we closed the transaction in February, we never even contemplated this.
“What is important to know is that when we closed the transaction, we thought we should be operating the business with $50m in cash. Even with how much the performance has improved … when we close this transaction, we will have about $150m in cash.”
