Monday, November 23, 2009

Mohegan Investors Making More Than Tribe From Casino

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This installment of The Tribe In The Media is another article by Bill Cummings in the past few days on the Mohegan's business dealings.

As revenue falls, tribe's investors now making more than Mohegans draining assets of Mohegan tribe
By Bill Cummings
Newstimes.com
November 23, 2009

The international investors who helped the Mohegan Indians build their casino 13 years ago are making more money from it than the tribe.

Since 2000, South African casino mogul Solomon Kerzner and his partners earned $542 million from the Mohegan Sun, the casino they helped build and finance, according to publicly available documents.

The 1,700-member Mohegan tribe, which owns the casino, earned $475 million during the same period.

In fact, the tribe's annual take from its casino has steadily dropped since 2005, while payments to Kerzner and his partners have risen.

The money pouring into Kerzner's bank accounts will continue until January 2015, when his contract with the tribe ends. Although Kerzner was instrumental in running the Sun during its early years, he has not had a management role since 2000.

Financial experts estimate that Kerzner and his partners will walk away with more than $1 billion when their contract ends, depending on how well the casino does in the future.

That huge annual obligation to Kerzner is draining the Mohegans, who are suffering from a toxic combination of dwindling revenue because of the recession, growing competition and high payments on $1.6 billion in accumulated debt.

MEGA-BUILDER

In the early 1990s, Kerzner, a South African billionaire and casino mogul known around the world for creating mega-resorts, saw opportunity in the hills of southeastern Connecticut.

The Mohegans had gained federal recognition and, like their neighbors 10 miles away, the Mashantucket Pequot Indians, the tribe now had permission to build a casino, complete with hotels, restaurants and other resort features.

Kerzner formed a partnership with Len Wolman, a Mystic hotel chain owner and the head of the Waterford Group, and created a new company called Trading Cove Associates. Kerzner and TCA invested about $10 million in the original Sun and backed $90 million in bonds that were sold on Wall Street.

The tribe obtained $175 million in bank notes to finish the initial $280 million casino, which opened in 1996. The developer later oversaw the next phase of the Sun, a $1 billion expansion that added another casino, a new hotel and a variety of other features. That expansion opened in 2002.

For its efforts, TCA initially received as much as 40 percent of the net revenue from the casino, a hefty amount that drew criticism for being too generous. Kerzner's company was also assigned the role of managing operations at the Sun.

In 1999, Kerzner struck a new deal with the tribe that ended his management role, effective in 2000. In return, the Mohegans gave TCA five cents for every dollar spent at the casino, its restaurants, hotels and other businesses.

The new contract marked a big change for Kerzner.

Along with ending his management duties, Kerzner's take was previously calculated on the basis of net revenue, the amount the tribe kept after expenses. Now his payments were calculated against gross revenue, the total amount taken in.

For Kerzner and his partners, it was a windfall.

In 2000, the year TCA ended its management role, the developer and his partners earned $20 million. Those yearly payments grew to $77.5 million in 2007 and $76 million in 2008.

At the same time, the tribe was earning less. The tribe collected $50 million in 2000. By 2008, the tribe earned $58.2 million, $18 million less than the group led by Kerzner.

`EGREGIOUS'

The new deal with Kerzner was immediately panned within the American Indian gaming industry as too generous. Bradley Beecher, a former head of the Connecticut State Police gaming unit who investigated Kerzner when he sought a Connecticut gaming license, said the tribe was unable to stand up to such an international business superstar.

"They got taken advantage of," Beecher said.

The National Indian Gaming Commission called the deal "egregious," and declared the management contract to be far above the legal limit, which is 30 percent of a casino's profits for no more than five years.

But as the gaming commission reviewed the complicated contract, it concluded the deal was a consulting contract, not a management contract. That meant the commission had no jurisdiction, and the deal stood.

The distinction, some call it a loophole, between a management contract and a consulting contract is allowed under the national Indian Gaming Regulatory Act, which oversees Indian casino transactions and partnerships. Under the act, investors can avoid caps on their return by calling their deals anything but a management contract.

In filings with the federal Securities and Exchange Commission, the Mohegans refer to their contract with Kerzner as a "relinquishment agreement," which at face value appears to indicate the ending of a previous relationship.

"We and TCA agreed to terminate the management agreement," the Mohegans explained in their 2008 annual report to the SEC, the most recent available. "This termination occurred on December 31, 1999. On January 1, 2000, we assumed the day-to-day management of Mohegan Sun.

"To compensate TCA for terminating its management rights, we agreed to pay to TCA five percent of revenues, as defined in the relinquishment agreement, generated by Mohegan Sun during the 15-year period commencing on January 1, 2000 and ending on December 31, 2014," the SEC filing explains.

Federal lawmakers, including Sen. John McCain, attempted to change the rules and close the consulting contract loophole. But aggressive lobbying by the gaming industry, including Kerzner, foiled the attempt.

Len Wolman, Kerzner's partner in TCA, declined to comment regarding arrangements with the Mohegan tribe. He referred all questions to the tribe.

"We have a really good relationship with the Mohegans, but they comment on anything related to their facilities. You have all the public information," Wolman said.

Mohegan tribal officials did not return calls regarding TCA or Kerzner. Representatives for Kerzner did not respond to requests for comment.

`WORLD'S BEST SALOON KEEPER'

When Kerzner opened his flagship casino in South Africa in 1979, the famed Sun City resort, Frank Sinatra remarked that the developer was the "world's best saloon keeper." Sun City was vintage Kerzner: a heavily themed, over-the-top resort that offered hundreds of hotel rooms, dozens of restaurants and, most importantly, huge areas for slot machines and table games.

He continued to develop international resorts, most notably the massive Atlantis Resort in the Bahamas. One Kerzner company, One & One Resorts, manages seven luxury properties in the Bahamas, Mexico, Mauritius and the Maldives.

Kerzner is also involved with the Twin River slots and greyhound racing parlor, one of Rhode Island's top revenue producers. That operation recently entered bankruptcy, although state officials are backing moves to restore it to good health and keep the revenue stream pouring into state coffers.

But despite his reputation as a premier resort builder, controversy followed Kerzner from the moment he arrived in Connecticut. Former Gov. John Rowland, who later resigned and pleaded guilty to corruption charges, tried to block Kerzner from receiving a gaming license, his first in the United States.

Allegations of bribes paid to South African officials followed the developer to Connecticut, and Rowland declared the casino mogul unfit to do business in his state.

"There was serious pressure on me to make sure he didn't get a license," said Beecher, the former state police trooper who later headed the state police gaming unit.

Beecher said the bribe allegations were thoroughly investigated, a process that included sending Connecticut investigators to South Africa. In the end, Beecher concluded there was nothing to the accusations.

"Sol stood up to a very intense state police investigation. This was a 10-year-old allegation that was never prosecuted. It just did not hold weight," Beecher said.

"Everyone was saying, `Make sure this guy does not get a license.' It was so bad that Rowland hit up Wolman for season tickets to the (formerly Hartford Whalers) while we were conducting the investigation of Kerzner. I was livid.

"What was the difference between what was going on and what Kerzner was accused of doing?" Beecher said.

MOVING EAST

Kerzner and Wolman recently set their sights on a tract of land in Middleborough, Mass., and signed a deal with the Mashpee Wampanoag tribe to build a $1 billion casino on the rural site near Cape Cod.

The Wampanoags have identified more than 500 acres, but the federal Department of the Interior has yet to approve its application.

Casinos are a hot topic in Massachusetts, where a number of ventures are on the table, backed by recognized tribes and commercial operators.

The Mohegans proposed a casino for Palmer, Mass., pledging to serve as a commercial developer, and others are circling with similar projects.

The Massachusetts state Legislature is expected to vote next year on whether to allow gaming.