Innovation

Onex rolls the dice in Las Vegas

Written by Thomas Watson, Canadian Business Magazine

Welcome to the Las Vegas Tropicana. Kimberlee Ward, a 22-year front-desk veteran at the legendary casino resort, has been smiling at customers while issuing that message for longer than she cares to remember—sometimes disingenuously. After all, Ward’s friendly greeting is pretty much the nicest thing the hotel has to offer, at least it was until the Tropicana was acquired last year by Toronto’s Onex, the private-equity firm run by billionaire Gerry Schwartz, and Alex Yemenidjian, the former head of Metro-Goldwyn-Mayer.

Unlike other early Sin City ventures, the Tropicana was designed to be much more than a Mafia cash cow with basic sleeping quarters. When the hotel’s famous 60-foot tulip-shaped fountain lit up in 1957, it signalled the arrival of a luxury segment to the local tourism market. The original Y-shaped complex had the best pool in town. It was surrounded by acres of manicured gardens. And more than one employee per guest was on hand to ensure patrons were pampered. Inaugural entertainment featured a US$250,000 musical revue starring Eddie Fisher, who performed in the most lavish showroom in town. All the big names of yesteryear followed, ranging from Jack Benny to Sammy Davis Jr. The Trop also set itself apart in 1959, when entertainment director Lou Walters (Barbara Walters’s father) titillated customers by importing Les Folies Bergère, a long-running topless showgirl revue.

But it’s been a long time since the hotel was up to James Bond’s standards in Diamonds Are Forever, or featured as a hot spot in Elvis Presley’s Viva Las Vegas. Thanks to a mishmash of inconsistent structural additions, Father Time and off-site management, the Tropicana is no longer considered “the Tiffany of the Strip.”

Indeed, it developed a reputation for coming across as a budget motel staffed by cranky senior citizens. For obvious reasons, the Hooters Hotel Casino next door currently offers more sex appeal. “Staying at the Tropicana was like sleeping in a smelly ash tray filled with beer,” says an image-conscious Canadian IT executive, who wants knowledge of where he foolishly slept during a 2008 vacation to stay in Vegas. “The service stunk, too. Everyone and everything was so old.”

For the record, the Tropicana no longer smells like a frat-house after a keg party. Bedbug complaints also appear to be a thing of the past. Until recently, the 34-acre property was part of Tropicana Entertainment, a former division of U.S. billionaire Bill Yung’s hospitality empire, which filed to restructure under Chapter 11 provisions of the U.S. Bankruptcy Code in 2008. Activist investor Carl Icahn now controls the parent company, which still operates two Tropicana-branded resorts in the States. But the Vegas hotel fell into the hands of Onex, which separated the Strip property from its parent last year after strategically acquiring more than US$200 million of its debt—at discount prices.

When Onex gained control, the Trop’s books were as ugly as the infamous mirrors, as revenue declined to US$77 million, down 26% from 2008 and off 50% from 2007. Occupancy slipped to 67% last year, off 80% and 95% from 2008 and 2007, respectively. Average room rates plummeted to US$55 in 2009, compared to US$71 in 2008 and US$89 in 2007. But thanks to a US$200-million renovation program, not to mention a little help from the Mob (more on that later), the storied Vegas operation has a shot at being reborn.

Ward no longer forces a smile when greeting customers. “We’ve been neglected by previous owners,” she says, “so its really nice to welcome new ones interested in restoring our lost shine.” Out by the pool, however, dissatisfied customers send a different message to Onex. “We’ve been coming to Vegas for years,” says the female half of a middle-aged American couple during a Tropicana stay in June. “But we lost money in the recession, so we now travel on a budget. Last time, we tried the Excalibur. And we thought that was bad—until we came here. Our suite is so old that it has a steamer. I found a comb I think was left behind by Sammy Davis.”

The woman in question is screaming, trying, with limited success, to be heard over hip-hop music blasting around the historic Tropicana pool. Nearby, a well-packaged 20-something female, sporting a Polly Pocket€“sized bikini, is gyrating to the music, skillfully teasing a tattooed gang of man-boys. The dance is suggestive enough to generate hoots and howls loud enough to be heard over the deafening urban tunes. “That’s nothing,” the male member of the couple shouts. “You should have been here Saturday, when the pool party was really inappropriate.”

These customers know the Tropicana is a work in progress. But they can’t understand the endgame. “I really hope the new investors have a plan,” the husband says, “because they seem to be targeting kids with an atmosphere that will keep older people with money away.”

Onex, of course, never does anything without a plan. Schwartz’s private-equity firm is out to build a gaming empire by cherry-picking distressed industry assets. And as Onex managing director Tim Duncanson points out, the company has started off with pretty decent cards. “We didn’t expect our first acquisition to be an historic Las Vegas property. But the Tropicana opportunity came up, and it’s location on the Strip made it something of a diamond in the rough.”

At its worst, the 1,850-room hotel and its 60,000-square-foot casino was estimated by creditors to be worth at least US$360 million, thanks to its historic brand and high-profile location next to the MGM Grand (which was built on the Trop’s former golf course). Nevertheless, investing in a run-down Vegas property is still a gamble in the current economic environment. Last year, visitor volume was still down 7% from pre-credit-crisis levels—despite a 30% cut in room rates. Total nights occupied was off 5%, while convention traffic was down 28%. Gaming revenues slipped to US$8.8 billion in 2009, a 20% drop from 2007. Vegas has also taken a hit from the recent opening of CityCenter, a massive resort and condo complex partly owned by U.S. billionaire Kirk Kerkorian’s MGM Resorts. The US$8.5-billion development was supposed to attract enough new customers to help lift all boats. But to date this year, Vegas visitor volume is up only 1.3% over last year, while room inventory has jumped 5.9%, thanks to CityCenter’s 6,000 rooms and other hotel expansions.

That said, anyone who bets against a Tropicana comeback is missing a key part of this story. After all, Onex’s chosen partner is Yemenidjian. And before running MGM, he made a name for himself as the consigliere in Kerkorian’s casino empire. “Working with Alex is like having an ace in the hole,” Duncanson explains, because “he has that extraordinary ability to think as an investor, developer, designer and operator all at the same time. And he has a history of success in the toughest gaming market in the world.”

If anything can tip the odds in the Trop’s favour, Yemenidjian’s operational genius is it—which explains why losing him as a strategic partner and project leader is listed as a risk in the Onex business plan next to market conditions and a fight with Icahn over rights to the Tropicana name.

Born and raised in Buenos Aires, Yemenidjian moved to the States with his Armenian family when he was still a teenager. With a passion for fashion and design, he thought about being an architect, but ended up studying business administration and accounting. He did a stint at KPMG, then started his own firm, which he left in 1990 to pursue what was supposed to be a short-term assignment crunching numbers for a Kerkorian project. Instead, the two men developed what has been described as a father-son relationship.

As a director and executive of the tycoon’s gaming operations, Yemenidjian helped design and operate hotels and casinos, including the MGM Grand and New York New York. In 1999, as Kerkorian’s trusted right hand, he was named chairman and CEO of the MGM studio, where he acquired the “Wizard of MGM” moniker for ending an ugly 11-year streak of losses. In 2005, MGM was sold by Kerkorian for the umpteenth time, and Yemenidjian decided to go head-to-head with his friend and mentor by re-entering the gaming business as a casino owner. “I did not want to get back into the entertainment business,” he says. “I think the economic model of the movie industry is much more challenging than the economic model of the hotel casino business. And it is easier to deal with slot machines than temperamental entertainers.”

The partnership with Onex was serendipitous. A few years ago, Schwartz was a guest at the annual meeting of Baron Capital, where he was introduced to Yemenidjian, who sits on the mutual fund’s board. “Gerry mentioned that he was very interested in looking at the gaming industry,” says the Tropicana CEO. “I was doing the same thing on my own. We had lunch and hit it off.”

With slicked-back black hair and immaculate business attire, Yemenidjian perfectly fits the casino boss stereotype. Sitting in his office, surrounded by staff reports and renovation plans, he comes across as an older version of Andy Garcia’s character in the 2001 remake of Ocean’s Eleven—but without the violent streak. Tell him that his people failed to organize a promised site tour and you will ignite a fuse attached to a bomb set to explode at the earliest opportunity on whoever dropped the ball. Note that you saw a glass full of cigarette butts ignored by hotel staff for hours on end, or that the air conditioner in your renovated room wasn’t installed properly, and you see murderous thoughts in his eyes. But the man remains determined to change the Tropicana culture by peaceful means, which is why employees are now required to read Ken Blanchard’s Raving Fans: A Revolutionary Approach To Customer Service. The book is Yemenidjian’s bible. The basic thesis, he says, “is that in order to impress a customer, you must provide everything the customer expects plus one element of surprise that exceeds expectations.”

Serious thought was given to tearing the existing building down. But that made little economic sense and wasn’t deemed necessary because the property “has great bones.” Nevertheless, while it can strive to offer quality service, the Tropicana can’t be a five-star operation thanks to its infrastructure. Yemenidjian, of course, isn’t targeting Steve Wynn’s customer base or the low-end Circus Circus crowd. The plan is to aggressively attack the vast market that sits between Vegas extremes by offering “best-in-class” accommodations in the mid-tier price range and the best party in town.

The Tropicana logo, conference centre, some common areas and one of the resort’s two towers have already undergone a complete makeover. Redone rooms feature little extras, ranging from flat-panel TVs and iHome clock radios to canvas artwork by famed artist Aldo Luongo and white plantation shutters that add abundant natural light.

But industry watchers say the Trop will have to do a lot more to become profitable. “Even after investing a ton of money,” says David Schwartz (no relation to Gerry), director of the University of Nevada’s Center for Gaming Research, “the Tropicana’s remodelled rooms are not going for much more per night. The premium over old rooms is currently 13 bucks. This market is really tough, especially mid-week. There are City-Center rooms going for less than US$100, and they were supposed to command over US$250.”

Yemenidjian thinks Vegas will come back and come back strong. But he’s not counting on it happening soon. He knows he must gain market share by differentiating the Tropicana from the competition. And to do that, he plans to do much more than clean up the hotel’s rooms and common areas. “People call it a renovation,” he says, “but it’s not. It is a major transformation, and I think it is the first time that’s been done on the Strip. We are certainly the first to do a major physical transformation while a property remains operational. That’s why it’s like trying to build a house during an earthquake.”

Nothing will be left untouched. And when it is done, the new Tropicana will not sport anything like its former landmark fountain. The famous Tiffany glass will follow bedroom-ceiling mirrors out the door. There will be no parrots, cockatoos, finches and lovebirds living in the walkway between towers. And the entranceway won’t be guarded by giant Aku Aku gods like in the past. Yemenidjian wants a new consistent tropical image. He chose a South Beach Miami tropical theme because it is hip and fun. And certain aspects of the Tropicana infrastructure fit “with the retro architecture that gives South Beach some of its charm.”

Simply put, as one executive frankly admits, the Tropicana plans to create an “Entourage vibe. But right now, the party is still more Turtle than Vinnie Chase.” That will possibly change with the arrival of Nikki Beach, which has signed on to bring its “Sexiest Place on Earth” concept to the Las Vegas strip. The world-famous posh-party company will transform the historic Tropicana pool into a trendy beach club that can host 10,000. It will also operate Club Nikki, a new 15,000-square-foot nightclub.

Furthermore, Yemenidjian recently hired Brad Garrett, best known as the unloved giant on Everybody Loves Raymond, to host a new comedy club. He has plans to open a new jaw-dropping Tropicana show, which rumours say will feature Gloria Estefan. An interactive history lesson called the Mob Experience is also in the works. It will house the world’s largest collection of Mafia artifacts and memorabilia, but don’t think museum. “I don’t want any museums on our property,” Yemenidjian says. “People come to Las Vegas to do things and to see things they can’t do or see back home.” The multimillion-dollar attraction will feature holographic gangsters and surviving Mafia family members such as Meyer Lansky II and Millicent Rosen, daughter of Bugsy Siegel.

According to Schwartz (the gaming analyst), the Tropicana will do well if it can pull off a jump in mid-week convention business. He likes the fact that the new owners have a clear vision, and insists the Tropicana has at least two great things going for it—the prime location on the Vegas strip and its large pool area, which is uncommon. “The Nikki Beach club,” he says, could turn out to be very lucrative, noting “the beach club at Encore has made a lot of money for Steve Wynn.” Then again, as the analyst points out, Nikki Beach has failed at casino hotels in other markets. “There is definitely risk here,” Schwartz says, “but Yemenidjian improves the odds. I hate to say it, but in this case, time will tell.”

Yemenidjian has rolled the dice and lost before. At MGM, he bet the US$115-million movie Windtalkers, starring Nicholas Cage, would be an Oscar contender. This time, however, the game is personal. The Tropicana’s new boss never wants to retire or work in another industry. With Onex at his side, he wants to build an empire. Lady Luck will have a say, but Yemenidjian knows exactly where he wants to take the Tropicana, and he is determined not to let tough times or underperforming employees get in his way. In other words, Yemenidjian’s odds are probably better than playing against his house.

Originally appeared on PROFITguide.com
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