Morgans Hotel Group Co., which signed on in May to acquire the Hard Rock Hotel Casino in Las Vegas and related assets from Peter Morton for $770 million, has tapped DLJ Merchant Banking Partners as a joint venture partner for the acquisition and redevelopment of the property. The joint venture, Hard Rock Holdings, will invest as much as $250 million in equity for the endeavor.
Developed in 1995 at a cost of $80 million, the Hard Rock is a 647-room hotel with 30,000 square feet of casino space and 60,000 square feet of event space. Developer Morton spent and additional $100 million to expand the property in 1999. As per the acquisition arrangement, along long with the hotel comes an adjacent 23-acre parcel, as well as operating assets and intellectual assets.
The joint venture agreement calls for New York City-based MHG to contribute $50 million of the initial $150 investment in exchange for a one-third interest in the joint venture, while DLJMB, also headquartered in New York City, will put in $100 million for a two-third interest. The deal commits DLJMB to financing the redevelopment of the Hard Rock in its entirety for up to an additional $150 million.
Bringing in an equity partner on the acquisition had been MHG's plan from the start.
"It's a good buy that Morgans Hotel is making," John Knott, executive vice president of CB Richard Ellis' Global Gaming Group, told CPN. "Hard Rock is an institutional name in the gaming industry; it appeals to a crowd that is younger and affluent. What would make it more profitable is to look at what can be done with the land, and Morgans looked to a partner so that the value of the asset overall could be maximized over time.
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Upon closing of the deal, MHG will sign an agreement to manage the property and related businesses under a 20-year contract. And a lease deal has already been signed with a Golden Gaming Inc. affiliate for the operation of the casino.
As noted in a recent MHG filing with the U.S. Securities and Exchange Commission, the letter of intent allows Golden Gaming the option to invest as much as $100 million in the Hard Rock.
For MHG, the purchase of the Hard Rock marks one of several endeavors the company has in Las Vegas. MHG has joined forces with a Boyd Gaming Corp. subsidiary for the development of the 600-room Delano and 1,000-room Mondrian hotels, which are scheduled to debut in 2010.
In the aforementioned SEC document, MHG officials acknowledge that, although Las Vegas is the largest hotel market in the country, the Hard Rock and the two hotels under development could be adversely effected should tourism decline as a result of new gaming facilities in surrounding states; many states have legalized casino gambling, and new casinos are popping up as a result of contracts with Native American tribes to develop on their land. Some industry experts, however, do not foresee a negative impact on Las Vegas. "You have to look at it market by market, but as it relates to this acquisition, there's not much risk from Indian gaming in the surrounding markets and California and Arizona," Knott noted.
MHG, whose company stock opened at $14 today, has 10 existing hotels in the U.S. and England, and has a bevy of other ventures in progress.
DLJMB is a division of Credit Suisse's Alternative Investments business, which currently manages over $29 billion in private equity assets.
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