On Adelson, LVS, and Legal vs Illegal Bribery

TAGs: Editorial, las vegas sands, Macau, Rafi Farber, Sand Macau, sands china, sheldon adelson, steven jacobs

On Adelson, LVS, and Legal vs Illegal BriberyWhen looking at the latest legal problems surrounding Las Vegas Sands and its CEO Sheldon Adelson surrounding a wrongful termination suit, I’m reminded of a scene (start at 2:00) from the 1986 Rodney Dangerfield movie Back To School. The scene is Dangerfield’s character’s first economics class, where he challenges the professor who is trying to concentrate only on factory building costs, when Dangerfield says he’s missing a bunch of costs, like greasing politicians, building inspectors, sanitation workers, etc.

Before I get into why, the lawsuit involves Adelson and his former Sands China CEO Steven Jacobs. Jacobs alleges that Sands Macau was involved in illegal dealings with organized crime, bribery to government officials, and other illegal activity, which he tried to stop and for which he got fired. Adelson accused Jacobs of “squealing like a pig to the government” and blackmail.

If you are long LVS and you think Adelson is going to lose this case, now would be a good time to sell. But I seriously doubt that Adelson will lose the case, because too much money is on the table. Reasonable people can differ here, but in my opinion, there is no way that any government authority is going to take down Sheldon Adelson or hurt his company because the economic consequences would be too large, both in terms of political donations and the maintenance of the façade of a “fragile economic recovery”.

Whether we like to see it this way or not, the justice system is a branch of government, controlled by monopoly force which exposes it to the influence of people with money. Aside from that, in a purely ideological sense, no article on this court matter attempts to even differentiate between real crimes, which would be something like Adelson hiring hit men to kill or kidnap his competition, and so-called crimes of bribery to a Chinese official for some business favor, probably to just be left alone or granted an official license to be left alone. What did he bribe officials for? Nobody says. It just says “illegal activities and ties with organized crime”. Organized crime to do what?

When we speak of bribery, we are artificially divided into two camps. There is legal bribery, and illegal bribery. There is no substantive difference between legal and illegal bribery other than the serendipity of random documents written and voted on by politicians. Legal bribery is donating to a political campaign or future political campaign, the recipients of which will then be expected to enact certain policies upon election, or while currently in office if they are incumbents. Politicians are always very careful to make bribery to themselves as legal as politically possible. It is common knowledge that Adelson engages in this type of legal bribery all the time. Does he engage in illegal bribery too? I wouldn’t be surprised. But bribery is bribery, and bribing politicians to leave you alone is legitimate, morally speaking. It’s equivalent to bribing a protection racket. It just depends who you want to label “Organized Crime” vs “Government”. They pretty much do the same thing if you look at it from a bird’s eye view.

But the amount of legal bribery at stake here will probably get Adelson past the courts to win this case.

That’s why this case reminds of that scene from Back to School. All big businessmen grease politicians, building inspectors, and all other government workers just the same. Anyone who seriously doubts this is not a business magnate. I am sure of that much.

If Jacobs can prove somehow that Adelson had somebody killed or kidnapped, which I doubt Adelson ever did and I doubt Jacobs is even accusing him of, he might win the case due to justified public outcry. But I’ve seen no evidence that Jacobs is accusing Adelson of real crime like that. But if it’s just bribing Chinese licensers or something similar to be able to do business without being hassled, Adelson will win the case because of the money involved.

But even if Adelson wins the case, business prospects don’t look so grand for the next few months at least. The Chinese stock market in general is becoming increasingly unstable, and money supply has not grown since mid April. While Macau continues its decline, Sands isn’t making any more money in the US either. The only two properties it has that are growing, barely, are Sands Bethlehem and Singapore, but by nowhere near enough to compensate for Macau’s fall.

A mitigating factor would be that despite Sands’ drop in revenues, that its net income was dropping by less. But that is not the case either. Las Vegas Sands’ net income dropped by 34% year over year last quarter, compared to a drop of only 30% in its revenues. Its bottom line is shrinking faster than its top line. That could change though, so we’ll have to see next quarter. LVS shares have fallen slightly more than that, about 40% from their highs. At this price point, LVS may be a decent long term income investment at 5% dividend yield, but what we must watch out for longer term is 2019 and 2020, when a combined $5.34B in debt comes due, assuming constant interest rates of 2%, with no cap agreements currently on the books.

Now I don’t know exactly when interest rates will rise, but I am fairly certain they will be much higher than 2% by 2020. Sands has to retire that debt now or very soon by replacing it with fixed debt, and pay the difference in premium. Book a smaller financing loss now rather than risk an avalanche in 2020. It may not be able to afford to wait for a Macau recovery in order to cushion those losses. A stitch in time saves nine. If it retires debt early in the next year, LVS could end up being a great buy.

With a Fed rate hike likely now in September, market driven interest rates could jump up very quickly even by the end of this year. So watch out Sheldon. Your bigger enemy may not be the government judicial system, but the Federal Reserve.


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