Costs nightmare for Packer’s City of Dreams casino

James Packer’s Macau gaming joint venture, Melco PBL Entertainment, has taken on more debt to help fund climbing construction costs for its City of Dreams casino complex on the Cotai strip.

The cost of building and designing the project, which includes a casino, shops, three hotels and a block of serviced apartments, has jumped 23 per cent to USD 1.85 billion (AUD 2.2 billion), the company said in a statement to the US Securities and Exchange Commission on Friday.

Including land costs and working capital, the budget has climbed to USD 2.47 billion. Its opening has also been pushed back three months to the end of March 2009.

Melco PBL has entered into a new debt agreement with a group of banks giving it access to USD 2.75 billion in funds, replacing the USD 1.6 billion facility it had previously.

The cost blow-out comes on top of the Chinese Government’s recent crackdown on visas to Macau and the decision by casino tycoon Steve Wynn to delay his expansion in the Asian gaming hub.

These developments have put pressure on Melco PBL shares, which trade on the Nasdaq market.

On Friday, they closed at USD 12.62, well down on their USD 19 December listing price.

But they were up almost 5 per cent on the day in line with other gaming stocks following the announcement of a AUD 6.1 billion private equity buyout of US casino group Penn National.

Melco PBL‘s chief financial officer, Simon Dewhurst, said the group’s new debt financing arrangement was a major milestone for the company.

„It secures the necessary financial capital to fully fund our existing development pipeline in Macau,“ he said in the statement.

Melco PBL said part of the increase in costs was due to the new USD 353 million plan for a serviced apartment hotel complex, a significant increase on the initial USD 96 million proposal.

The company is also building a USD 169 million 1700-seat theatre and expects a new production by Franco Dragone, of Cirque de Soleil fame, to open by the end of 2009.

Melco PBL is a venture between Publishing & Broadcasting Ltd and Hong Kong-based investor Lawrence Ho, son of controversial Macau casino king Stanley Ho.

PBL‘s shares have fallen more than 10 per cent in the past two weeks, closing at AUD 19.20 on Friday, partly because of concerns about the joint venture.

Most analysts have already taken into account the risks associated with the business.

Citigroup analysts discount the carrying value of the joint venture by 25 per cent when setting their valuation for PBL, „given the inherent uncertainty surrounding earnings from the three properties (Melco PBL) is constructing in Macau“.

PBL Melco recently opened Crown Macau and plans a third casino on the Macau Peninsula.