Wynn's CEO Starts Cashing Out

October 8th, 2009
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Contributed by: Eric Jackson, Ironfire Capital
Steve Wynn and his chief operating officer are pushing back from the table. Since the end of July, Steve Wynn has sold $114 million worth of shares in Wynn (WYNN) and his Chief Operating Officer Marc Schorr has sold over $7 million. It's the first time in the last decade that Wynn has sold such a large chunk of shares. For Schorr, the proceeds from his sale exceeded his average annual total compensation over the past three years.

For these casino operators, their sales might be a canary in the coal mine to other investors to take some profits on the gains in this sector since the March lows. Since March 9, Wynn is up 343%, MGM is up 480% and Las Vegas Sands (LVS) is up a whopping 886%.

The valuations are rich, with Wynn sporting an 80 times forward price-to-earnings ratio, with Las Vegas Sands at 60 times. Meanwhile, Wynn carries a debt load of $4 billion and a meager free cash flow of $456 million. Las Vegas Sands is saddled with $11 billion in debt and $242 million in free cash flow. Forward P/E figures weren't available for MGM, but it has $12 billion in debt and $885 million in free cash flow.

Wynn's stock price is virtually unchanged from a year ago. Is the forward-looking prognosis for this sector really the same today as back then? Just a few days ago, MGM's mega-project, City Center, announced that over 160,000 applicants swamped their job fair for 12,000 positions. That suggests to me that -- while Vegas may still remain a playground for celebs and the super-rich -- the regular consumer will find it difficult to splurge for a trip to Sin City for the foreseeable future.

Beyond fundamentals and the macro-environment, there's another reason to be wary of investing in these casino stocks: poor governance. Maybe it's not surprising in a town where the high-rollers get the red carpet treatment, but the ultimate red carpet treatment is saved for the executives who run these casinos. Perks abound, rubber-stamped by crony boards. If shareholders don't like it, buy an electrical utility. This is Vegas, baby!

Casino honchos have received some of the sweetheart deals and perks in past years -- all paid for by shareholders. They include:

* Personal use of aircraft. Steve Wynn racked up over $1 million in personal trips last year and both Wynn and Las Vegas Sands lease their aircraft fleet from companies controlled by Wynn and his counter-part Sheldon Adelson.
* Leasing Steve Wynn's personal artwork collection and then picking up the tab for the insurance.
* Valuing a coffee bar within a hotel as worth $3.1 million and then buying Adelson's 50% stake from it.
* Setting up jobs for wives, step-daughters, nieces and nephews with total annual compensation worth as much as $4 million.
* Paying $3 million for security costs related to protecting Adelson and his family (although Adelson chipped in $800,000 to the total bill).
* Help in buying stock near the all-time lows, such as when Adelson's wife bought preferred stock and warrants last November which has since led to paper gains of over $1 billion. Las Vegas Sands' shareholders paid the $500,000 in legal fees she incurred in making this purchase.
* Covering rent and amenities at the Wynn's personal residence for $580,000. Interestingly, a recent third-party analysis of this residence determined that the rent would not be reduced for the coming year, despite "the significant deterioration in the rental market in Las Vegas."
* Personal construction of Las Vegas Sands's SVP Robert Goldstein's house in the amount of $364,000.

Of course, Wynn downplayed his mega-stock sale in August. He explained that he needed the additional "liquidity" in preparation for his upcoming divorce from his wife, Elaine. He was also quick to point out that this sale represented only 10% of his entire holdings. Yet, this is the second time that Elaine (who is also a Wynn director) will divorce. No additional liquidity was needed to fund the first divorce.

The fact that the sale also occurred so close to Wynn's COO dumping shares is also noteworthy and, I don't think, a coincidence. When you comb through these SEC filings and you see the kind of perks these executives sock away for themselves at the expense of shareholders, it's clear that an action like a stock sale doesn't happen with a lot of thought and consideration. It will be interesting to see what other execs at Sands and MGM do in the coming weeks. For now, the stocks are all still near 10-month highs.

What's next for these volatile stocks? If eBay (EBAY) is a gauge -- as discussed in my column last week -- Wynn could be headed for trouble. Its CEO is distracted by personal trips on the corporate jet to the tune of $1 million and a messy divorce. Its COO is also now 61 and presumably starting to think about golfing full-time. It's time to start cashing out.

These firms are minding their own interests -- it's time for shareholders to start minding theirs.

Disclosure: At the time of publication, Jackson's fund did not have any positions in the companies mentioned.
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Ironfire Capital
Related People: Eric Jackson; Jackson Leadership Systems, Inc
Related Entities: Ironfire Capital US Fund LP
Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Hedge Fund Resources and Featured Partner News

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