Dubai World is suing MGM Mirage to get out of future payments to Las Vegas' $9 billion CityCenter, a legal battle between development partners that threatens to shut down the massive project and deal a further blow to the gambling mecca's already struggling image and economy.
"Right now, there is no indication that CityCenter is not going to be completed," said Jeremy Aguero, a principal analyst with Applied Analysis, a Nevada-based advisory services firm whose clients have included MGM.
MGM Mirage last Friday made the latest debt payment on CityCenter, covering the full $200 million that was supposed to have been split between MGM Mirage and Dubai World.
Yet the possibility of a project shutdown looms, and it sends shivers through an already nervous community. A halt to the project, which MGM Mirage has characterized as the most expensive private commercial development in U.S. history, would be a blow felt across the breadth of tourism- and construction-dependent Las Vegas.
"Everyone from teachers to firefighters to police officers to lawyers ... would be impacted as a result of such a large project failing to materialize," Aguero said.
Currently, some 8,500 people are employed in developing the 76-acre project, which includes six high-rises. Total construction-related employment for CityCenter is expected to peak at 9,000 in May, according to MGM Mirage.
In addition, MGM Mirage is currently taking applications to fill some 10,000 jobs at the hotels, condominiums, casino, shopping and entertainment venues under construction.
And beyond the job losses and resulting decline in tax revenue, a halt to such a high-profile project would create a stigma across Las Vegas and damage its brands, Aguero said.
He emphasized, however, that a shutdown of the project would be a worst-case scenario.
"I do think that there is more to this than meets the eye," he said of the lawsuit filed last week by Dubai World. "I think that both companies are concerned about the immediate future and how they themselves are going to deal with the financial requirements that they created.
"That said, in the long run, both have a vested interest in seeing the project completed. There is a lot of potential on the upside."
Bill Thompson, a professor of public administration at the University of Nevada-Las Vegas, agreed that a shutdown was unlikely.
"I think a delay is more likely," he said. "But it is the biggest private building project in the history of the world, so it would be a severe blow to us if it stopped. If only half of it happens, we can recover over time. But it would be an embarrassment to have a big, empty building right in the middle of the Strip."
Thompson said he thought the lawsuit was an attempt by Dubai World to force MGM Mirage into bankruptcy so MGM could reorganize its debt, or to force it to sell off some of its other properties to help raise the $3 billion Thompson said the partners still owe on the project.
This month, MGM Mirage completed its sale of Treasure Island for $775 million.
It owns 11 other Las Vegas properties, including the Mirage, Bellagio, New York-New York, Luxor, Mandalay Bay and Monte Carlo. It also has casino hotels elsewhere in Nevada and in Atlantic City, Detroit, Illinois and Mississippi as well as an MGM Grand in Macau.
Dubai World, an investment arm of the Dubai government, joined the CityCenter venture two years ago, paying $5 billion for half of the project and a 9.5% stake in MGM.
At the time, Dubai World said the investment was part of its strategy to invest internationally. Since then, however, Dubai World has been hit with its own challenges resulting from the economic downturn.
Dubai is home to some of the world's most luxurious hotels and extravagant developments, such as Palm Island. Like Las Vegas, it was once considered recession-proof. But in recent months, the global financial crisis, coupled with the anemic price of oil, has taken a toll on its once-booming tourism and real estate sectors.
MGM, meanwhile, is struggling with $13 billion in debt at a time when gambling revenue, hotel occupancy and room rates continue to plunge in Las Vegas.
Gambling revenue on the Strip was down 10.6% for 2008, and room rates were off 9.8%. In January, daily room rates were down nearly 20%, and gaming revenues on the Strip were down 14.8%.
Earlier this month, MGM reported it lost $1.15 billion in the fourth quarter. The company also reported that gaming revenue in the final quarter dropped 17%, room revenue decreased 21%, average room rates were off by 15% at its Las Vegas Strip resorts, and occupancy plummeted eight points, from 93% to 85%.
In the lawsuit filed in Delaware last week, Dubai World accused MGM of breaching its agreement and putting the CityCenter project at risk.
Dubai World said that MGM's recent disclosure in filings with the Securities and Exchange Commission that it could not provide assurance that it will be able to meet its future payment obligations on CityCenter had "left it no other option but to act to protect its investment and the future of CityCenter. The current path of the project is simply unsustainable, given our partner's financial troubles."
Dubai World stated that costs had been "significantly over budget, despite downsizing certain of the facilities. This has caused [Dubai World subsidiary] Infinity World to make capital contributions far in excess of the levels originally estimated by MGM."
When Dubai World entered the venture, the project had a budget of $7.5 billion. Estimates are now in the $9 billion range.
Among other setbacks, MGM Mirage announced earlier this year that it was scrapping the top floors of the Harmon Hotel in CityCenter because inspectors had found that rebar had been improperly installed.
Essentially, Dubai World said, it is being asked to pay significantly more and getting less, amid uncertainty about MGM's future.
In a statement, MGM said the suit was "completely without merit."
"Dubai World is well aware of our written commitment to meet our funding obligations and that MGM Mirage has available cash to satisfy those obligations" the company said. "MGM Mirage is ready, willing and able to fund its share of the costs to complete CityCenter, including a required payment this week."
"We look forward to working with Dubai World to resolve any outstanding issues and complete this landmark project."
The lawsuit seemed to have caught MGM off guard. A week earlier, in the company's fourth-quarter earnings call with investors, Chairman and CEO Jim Murren said that Dubai World had recently visited the project and that the two partners were seeking the financing needed to finish the project.
"They left with great awe and pride in CityCenter," he said. "And they realize, as we do, that this is a tough time that we're all in ... and they have been great to work with, and I'm very proud of the relationship that we have with them, and I'm glad that we have them."
