Deutsche Bank AG Market Cap (as of 16/05/2014): $42.9bn
Blackstone Group LP Market Cap (as of 16/05/2014): $32.8bn
On 15th May 2014, Deutsche Bank (DB) announced that it would be selling its 100% stake in Nevada Property 1 LLC, the owner of The Cosmopolitan, a popular Las Vegas resort and casino. The sale will be to Blackstone Real Estate Partners VII, for a value of $1.73bn to be paid in cash. The price is set at almost 17 times the property’s 2013 EBITDA of $103.3m.
The Vegas Cosmopolitan has proved simply to be too wrong for Deutsche Bank to handle.
Deutsche Bank took ownership of the Casino resort in 2008 after it’s previous owner, Ian Bruce Eichner, defaulted on a loan provided. The 2960 room resort took a total of $3.9bn to constrict, and was transferred to Deutsche Bank’s “bad bank” after having cost an additional €760m (nearly $1.2 bn) in write-downs.
Worse still, after having officially opened in 2010, the casino has made an average of $110m in net losses per year, owing largely to the economic downturn, which hit Nevada particularly hard.
However, recent trends appear more optimistic, with revenues rising 9.5% in 2013 ($653 m).
Nevertheless despite this shimmer of hope, Deutsche appears relieved about the sale.
“As part of our Strategy 2015+, the Bank is committed to reducing its non-core legacy positions in a capital efficient manner which benefits shareholders“, said Pius Sprenger, Head of the Non-Core Operations Unit. “We are pleased to have agreed to this sale and to have delivered on our commitment.”
They claim to have booked a profit on the sale itself, indicating the value of the asset had already been marked down heavily.
In addition to this, the bank has other reasons to be content. The sale will have a net positive impact on the Bank’s CRD4 pro-forma fully loaded common equity tier 1 ratio. The increase of five basis points will therefore be a welcome change under the Basel III bank rules.
Lastly Deutsche Bank’s withdrawal from the gambling industry will help lift a stain on its reputation that has arisen from having almost as much exposure to Vegas gambling as to peripheral Eurozone debt (around $5bn).
On the other hand, the purchase represents Blackstone’s first major casino investment. The company is betting on a further economic recovery in Nevada. It believes that the properties will increase in value and the city’s economy will improve and become more diversified. Indeed, the New York based company is heavily investing in this country: it has acquired about $3.5bn of property in the city and other parts of Nevada. Last September it bought the Hughes Center, a 68-acre office complex for $347m. Blackstone is also a major owner and operator of warehouses in Reno.
As a matter of fact, in March Las Vegas saw 3.7m visitors, the highest monthly total ever, according to Las Vegas Convention and Visitors Authority. Hotel room rates are back to the level precedent to the crisis and occupancy rates are topping 90%.
Moreover, with gambling proliferation, Las Vegas hotels aim to attract more and more tourists with fine dining, nightclubs and other entertainments. Indeed, according to Union Gaming Research total revenues on the Strip were $15.5bn in the fiscal year that ended on 30th June, up from $15.3bn in fiscal year 2012 and the highest since 2008.
After a day from the announcement, Deutsche Bank AG’s share price has decreased by -2%, while Blackstone Group LP’s share price has increased by 2%.
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