Six degrees of separation – Ho family influence in Macau gaming is not abating

Las Vegas Business Press, June 14, 2006

Six degrees of separation
Ho family influence in Macau gaming is not abating
BY DAVID MCKEE
BUSINESS PRESS

“(Ho’s) very name brings an air of class and style to gambling, and anything he touches is known to turn to gold.” — Gambling Online Magazine, 2004

What do Kim Jong IL and J. Terrence Lanni have in common? They’ve both done business with Stanley Ho, who is the undisputed casino king of Macau, site of this week’s Asian Gaming Expo. Ho is “a long-standing friend of the North Korean government,” according to the Los Angeles Times, and owns a casino in Pyongyang, adjacent to Workers’ Party headquarters. In 2003, Ho acted as a go-between when Kim Jong IL’s regime offered asylum to Saddam Hussein.

As MGM Mirage CEO, Lanni paid Ho $209 million for a Macau casino subconcession, a joint venture between MGM Mirage and Pansy Ho, the elder Ho’s daughter and business “heir apparent,” according to China Daily. MGM Mirage owns half of the joint venture, MGM Grand Paradise, as does Pansy Ho. She also receives a consulting fee, .87 percent of the $1.06 billion cost of the in-progress, 28-story MGM Grand Macau casino-resort.
Pansy Ho’s minority interest in the 28-story MGM Grand Macau has attracted scrutiny from gaming regulators.

Pansy Ho, 44, is managing director of Shun Tak Holdings, the Ho family’s blue-chip transportation outfit, founded in 1972. It controls more than 90 percent of the ferry traffic between Macau and Hong Kong, including a 20-vessel jetfoil fleet. Shun Tak holds an ownership stake in Stanley Ho’s profitable conglomerate, Sociedade de Turismo e Diversoes de Macau (STDM). STDM is majority owner of Ho’s casino business, Sociedade de Jogos de Macau (SJM). In June 2004, the Hong Kong Standard reported that Shun Tak directly owned 11.5 percent of SJM. In 2003, Pansy Ho was elected to STDM’s board. She also chairs the Macau Tower Convention & Entertainment Centre, built by her father. Small wonder a Las Vegas Sands executive described the Ho family’s Macanese connections as “byzantine.”

The related-party transaction between MGM Mirage and the Ho business empire has been sufficient to prompt a New Jersey Division of Gaming Enforcement inquiry. “Pansy Ho’s reputed independence from her father (is) at issue,” reported the Las Vegas Sun, which later reported that the pact “has raised eyebrows in the investment community because of Stanley Ho’s business dealings in Macau, where gang warfare and loan sharking were once rampant.”

In 2002, then-Las Vegas Review Journal reporters Dave Berns and Jeff Simpson described Ho’s monopoly-era product as “dingy, organized crime-ridden offerings … plagued by (triad) control of individual gaming tables, prostitution and loan sharking.” The previous year, Macanese legislator Stanley Au told Asia Week, “the feeling you get when you visit Macau is that (it’s about) hard, desperate gambling.”

INQUIRY NEARING END?

The Nevada Gaming Control Board is also looking into the Hos’ business relationship, pursuant to MGM Mirage’s application to have Pansy Ho approved under Nevada’s “foreign gaming” statute. The Control Board’s Mark Clayton said he is precluded from comment because the inquiry hasn’t concluded, although fellow board member Bobby Siller characterized it as close to completion 14 months ago. Nevada regulators have been examining the Ho businesses for almost two years. Mississippi regulators have already given the arrangement a thumbs-up.

Calls to New Jersey’s DGE and Casino Control Commission were not returned.

“The issue,” explained James Rutherford, the overseas desk editor for “International Gaming & Wagering Business” magazine, “was whether SJM (Stanley Ho’s casino entity) would in some way be involved in the MGM development or its operations.”

Generally speaking, Clayton said, Nevada gaming companies venturing overseas are well advised to perform the best due diligence possible on their partners and the regulatory structure to which they’ll be subject. Gambling, he added, is expected to be conducted at the same standards as in Nevada and any “misstep” abroad can bring discipline at home.

Responsible for a third of Macau’s gross domestic product and tax revenues alike, Stanley Ho is the colossus who dominates the Macanese business scene, much as his 1,109-foot Macau Tower overshadows the former Portugese colony. “His companies have been, for all intents and purposes, the Macau economy, and are significant players in Hong Kong and throughout East Asia,” said Rutherford.

“With all respect, no, he’s not” in every facet of Macau’s economy, responded MGM Mirage spokesman Alan Feldman, “and it’s perfectly possible to not do business with Stanley Ho.”

“Any Macau citizen or tourist who decided to avoid spending money on Stanley Ho Hung-sun’s properties would find life very difficult,” declared a South China Morning Post feature story, published in May 2004. It noted that when business rival, Venetian Hotel & Resort owner Sheldon Adelson visited Macau, he had to stay at a Ho-owned hotel. Macau entrepreneur David Chow told Asia Week that when he pitched the $110 million Fisherman’s Wharf amusement park, Stanley Ho rolled out a comparable proposal. Chow felt his only option was to bring Ho onboard in a joint venture.

WAR PROFITEER

Stanley Ho was born in Hong Kong in 1921. After the fall of the city in 1941, he made neutral Macau his base of operations and earned his initial fortune trading with the Japanese during World War II, gaining preferential access to shipping lanes from the occupiers. After the war, the Empire of the Rising Sun fell, but Ho’s ascent continued unabated.

In 1962 he won the rights to Macau’s casino operation for $410,000. A decade later, he opened his flagship, Hotel Lisboa Casino, described by the Washington Post as “a windowless space that epitomized the seedy reputation of this gambling enclave in southern China.”

That initial casino has grown into a 16-property empire in Macau alone, including the new, $799 million Oceanus, slated for a 2009 opening. Ho has achieved this expansion partly by dint of selling subconcessions to operators like Greek Mythology Entertainment Group. Its casino, in the New Century Hotel, pays 40 percent of its take to Ho’s Sociedade de Jogos de Macau and another 20 percent to Ho himself.

Rutherford describes Ho as “an extremely astute operator who was instrumental in transforming an industry backwater in Macau into one of the world’s largest table game markets.” This was done by Ho’s innovation of leasing private gambling rooms to subconcessionaires who, in return for absorbing the risk, brought junkets of high rollers from Hong Kong and mainland China.

GANGLAND TRIADS

Out of this lucrative side business extends much of Stanley Ho’s disrepute. As Rutherford and others have noted, Macau’s casinos operated in a gray area, not illegal yet barely regulated. Casino scholar Angela Veng wrote, “a ‘lawless’ space was created for triads” who soon staked out rival turf, sometimes violently, and “it is not uncommon for triads to blackmail the gambling room operators or their customers,” some of whom were also shaken down for tips.

Since casinos couldn’t extend credit, gambling salons became the province of loan sharks. “Prostitutes prowl outside the gaming halls,” reported the Tapei Times, while the Telegraph observed that, at Hotel Lisboa, they “stroll brazenly around the well-worn carpets.”

As for the VIP rooms, Veng noted that by the 1990s they “had become dysfunctional and served as a vector for corruption, loan sharking, money laundering and skimming operations.” In fact, the U.S. State Department designated Macau’s casinos as a nexus for money laundering in March 2005.

Rutherford places much of the blame for this degeneracy upon laissez-faire colonial policies, when “a spike in gangland violence in the closing years of Portuguese rule may have been a prime factor in China’s decision to dismantle Ho’s monopoly. Beijing has a vested interest in Macau’s success and its ability to attract foreign investment and is not going to stand for any triad shenanigans that might impede that or damage the resort’s reputation.”

Through 65 years, Ho’s business reach has extended to airlines, hotels, banking, dredging operations, utilities, roads, bridges, golf courses, amusement parks, horse racing, dog tracks, television and gambling ventures in Spain, Portugal, Vietnam and North Korea — not to mention an Antigua-based Internet casino, DrHo888.com.

Since Sands Macau doesn’t venture into the private gambling room business (and would probably face great regulatory peril if it did), Ho’s dominance of the VIP trade appears secure. Perhaps that will change by next summer, when the $1.2 billion Wynn Macau opens. “The Sands challenged Ho in terms of the grind market,” said an industry source familiar with Macau. “Now Wynn’s going to challenge Ho in his own market.”

Feldman believes there’s elbow room in all Macau niches. “From all we can gather, Sands has come into the market and been hugely successful. Mr. Ho’s operation has grown,” expansion that Feldman expects to continue when MGM Grand Macau opens in autumn 2007.

BUYOUT AGREEMENTS

As Pansy Ho undergoes the vetting process in both Nevada and New Jersey, the question arises: What becomes of MGM Mirage’s investment if regulators find either Ms. Ho or her business relationship to her father “inappropriate?” Feldman responded that the joint venture agreement clearly spells out, in such an eventuality, one party can buy out the other.

As the end of his gambling monopoly drew near, Ho warned of dire consequences unless the Chinese government extended it. “If there is more than one licensee, there will be fighting between the two licensees. This would be dangerous,” he prophesied darkly to the “Far Eastern Economic Review”. Ho forecast an apocalyptic scenario of lower betting limits, plummeting salaries, falling employment and depleted tax revenues.

Yet the post-monopoly era has seen Macanese gambling revenues escalate to a scale rivaling the Las Vegas Strip. Sands Macau, the brainchild of Adelson, does $2.6 million per day and Ho’s Casino Lisboa rakes in 2.5 times as much. Macau’s casinos are on pace to exceed $6 billion in revenue this year. Wagering on greyhounds, instant lotteries, soccer and basketball have seen varying degrees of decline, some quite severe, while horse racing remains volatile.

“Stanley Ho has no relationship to this company at all,” Feldman said of the overlapping ownership between MGM Mirage, Pansy Ho, Shun Tak, STDM and SJM. “You need to separate ownership and control. I may own a thousand shares of Station Casinos. That makes me a part-owner of Station Casinos. But that doesn’t mean I control anything at Station Casinos. The fact that, through one of her other businesses, Ms. Ho may have some percentage or shares in SJM doesn’t mean that she has any control over anything in that company.” Nor does it mean that Stanley Ho could impose his will on MGM Mirage simply because Pansy Ho has a foot in both companies, Feldman’s argument ran.

American regulators, he added, need to exercise constant vigilance. “But in this particular case, I am aware in a first-hand sense of the fact that the whole profile of this has been raised to almost hysteria by other licensees in that market who clearly fear the competition.”

MGM Mirage’s other prospective competitors in Macau include Galaxy Casinos, Wynn Resorts and the newest subconcessionaire, a joint venture between Australian media heir John Packer and Stanley Ho’s son, Lawrence. The latter duo paid Wynn $900 million for their subconcession, already appraised at $1.36 billion.

Was MGM Mirage’s $209 million fee a bargain? “It speaks for itself,” Feldman said.