Kerzner International Limited

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Kerzner International Limited

Coral Towers
Paradise Island
Bahamas
Telephone: (242) 363-6000
Fax: (242) 363-5401
Web site: http://www.kerzner.com

Public Company
Incorporated: 1993 as Sun International Hotels Ltd.
Employees: 11,485
Sales: $561.3 million (2003)
Stock Exchanges: New York
Ticker Symbol: KZL
NAIC: 713290 Other Gambling Industries

Based in the Bahamas, Kerzner International Limited is a publicly traded premiere resort operator listed on the New York Stock Exchange and named after its famous founder and chairman, Solomon "Sol" Kerzner—the one-time vilified builder of South Africa's Sun City resort. Although all but one of the company's properties features a casino, Kerzner relies less on gaming income than does his competitors, focusing his attention instead on income derived from rooms and the sale of food and beverages. The company's flagship property is the Atlantis, Paradise Island resort complex in the Bahamas. Taking the legend of Atlantis as its theme, the resort offers 2,300 rooms, 35 restaurants and lounges, a 100,000-square-foot casino entertainment complex, an 88,000-square-foot convention center, and a full-service marina. Kerzner also operates a string of smaller, luxury five-star resorts under the One&Only brand. On Paradise Island, the company operates the Ocean Club, which has been catering to Hollywood celebrities and royalty since the 1940s. In addition, the One&Only label has been applied to resorts located in the Maldives, Mexico, Dubai, and Mauritius. Kerzner also has attempted to crack the U.S. market, resulting in setbacks in Atlantic City and Las Vegas. The one success is the company's 50 percent interest in the Mohegan Sun, a Connecticut tribal gaming resort. Howard Kerzner, the founder's son, now serves as the company's chief executive officer.

Company Founder: A 1950s Accountant

Sol Kerzner was born in 1935 in a poor section of Johannesburg, South Africa, the child of Russian Jewish immigrants. As a youngster he worked in the family's small hotel, peddling potato chips and chewing gum. He proved to be ambitious and aggressive and went on to college at the University of Witwatersrand in Johannesburg, where he earned a degree in accounting and became a welterweight boxing champion. After graduating in 1958, Kerzner took a position at one of South Africa's leading accounting firms. Although he became a junior partner by the age of 25, he found the work less than stimulating and decided to become involved in the hotel business, but in a manner decidedly different from his family's kosher hotel. He told Hotels in a 2004 profile, "I always thought a hotel should be more than a bed factory. It should have good restaurants, nice pubs, good entertainment." Kerzner convinced his family to buy a second hotel—described by some as a fleabag hotel or a "dockside dive"—that had a liquor license. He leased the hotel and managed it at night and on weekends while continuing to hold down his accounting job. Kerzner's concept of adding entertainment to a hotel was novel in South Africa and proved very popular.

The taste of success only whetted Kerzner's appetite, inspiring him to build South Africa's first five-star hotel, despite never having seen a five-star hotel or having been out of the country in his life. Nevertheless, in 1963 he was able to raise $200,000 from a former accounting client and forged ahead. He acquired some beachfront property in a small fishing village near Durban, South Africa, and then did some belated homework. As he told Hotels, "I decided I should probably get on a plane and see that I wasn't building something stupid." Kerzner spent several days in the United States visiting hotels in New York City and Miami Beach. Although he would not visit California, when it came time to name his new 80-room five-star hotel, he chose Beverly Hills, "because it sounded glamorous, and I knew it was going to be a glamorous hotel and that all the glamorous people in South Africa were going to want to be there." He was proven right, and he followed this success with another luxury hotel in Durban, the 450-room Elangeni, turning to South African Breweries (SAB) for financing. Because SAB wanted to make the transition from the beer business to the hotel business, Kerzner now had the financial backing to become a hotel magnate. Over the next several years he built the Southern Sun chain of more than 30 high-end hotels in South Africa.

The crown jewel of the Southern Sun chain was the Sun City resort. South Africa at the time was both segregationist, practicing the notorious apartheid system that kept blacks and whites separate, and puritanical. With the exception of horse racing, gambling was illegal. When the government established black homeland states, which were allowed to make their own laws, Kerzner took advantage of the situation and in 1977 he struck a deal with Bophuthatswana—a state with a population of 1.4 million and an average annual income of less than $500—to gain exclusive gaming rights. Here he built the legendary resort Sun City, which opened in 1979. It featured a man-made lake, a 148,000-acre wildlife park, four hotels, casino, two golf courses, and a 6,000-seat arena. To open the arena in 1981, Kerzner paid Frank Sinatra $2 million for nine performances over a week.

Guilt by Association Hindering 1980s Growth

Because South Africa's apartheid system was receiving increased condemnation from around the world, Sun City had to pay entertainers a premium. Kerzner maintained that Sun City was unfairly targeted by anti-apartheid forces, arguing that Bophuthatswana allowed blacks and whites to mix openly, and that the resort provided thousands of jobs to blacks and brought in tax revenue to the homeland state. Nevertheless, Sun City became a symbol of apartheid to many, its reputation firmly established in 1985 by the protest song "Sun City," in which such celebrity singers as Bruce Springsteen, Bono, and Bob Dylan chanted a pledge, "I ain't gonna play Sun City." In 1983 Kerzner broke away from SAB, retaining Sun City and four other casino hotels located in the independent homelands. His company was called Sun International South Africa. Although he harbored international ambitions, Kerzner found it difficult to transcend his association with South Africa and apartheid. In the early 1980s he failed to convince Atlantic City to allow him to build a $250 million hotel casino. Investments in France and Australia were also rebuffed. It was not until the release from prison of Nelson Mandela, the longtime black opponent of apartheid, that Kerzner began to see business pick up at Sun City and he was able to expand internationally.

Kerzner's first order of business was to upgrade the Sun City complex. In 1992 he opened The Lost City, a $300 million resort designed to look like a city buried by a volcano and rediscovered centuries later. In addition to a 338-room hotel called The Palace, The Lost City included a man-made jungle complete with rivers and waterfalls. While The Lost City helped to renew interest in Sun City, it also served as a trial run for Kerzner's next project: the Atlantis resort on the Paradise Island stretch of beach near Nassau, in the Bahamas.

During the 1980s and early 1990s both Donald Trump and Merv Griffin failed to turn Paradise Island Resort & Casino into a gambling mecca in the Caribbean. The property fell into disrepair and eventually filed for bankruptcy under Griffin. In 1993 Kerzner incorporated Sun International Hotels Ltd. in the Bahamas in order to purchase the Paradise Island complex from Griffin's Resorts International, Inc., paying $125 million for the property in 1994—Kerzner's first major acquisition outside of South Africa. He picked up three hotels, a golf course, a small airline and airport, and acres of undeveloped beachfront property. He also took over a complex that was in woeful condition, both in terms of the operation and the physical condition. Most of the buildings leaked and the famous Ocean Club had been virtually destroyed by termites. Not only would Kerzner have to rebuild Paradise Island's structures, he also faced the daunting task of repairing the marketing damage done to the resort, as many people who had once vacationed in the Bahamas now traveled to resorts elsewhere in the Caribbean, Puerto Rico, and Mexico. Kerzner quickly took steps to integrate the Paradise Island properties into a massive resort and get it opened for business, essentially designing while building. As he explained to Hotels, "When we started Atlantis my idea was to bring the ocean into the resort and create these fish habitats. I again felt that if we were really going to do it, it really had to be the right scale." During this first phase, Kerzner spent $100 million to build a themed hotel tower and add a water park that offered raft rides, water slides, and an outdoor aquarium with live sharks. The resort reopened in December 1994 as the Atlantis Paradise Island, occupancy quickly increased by 16 percent, and the resort essentially revitalized the Bahamas' tourism industry. But Kerzner was only beginning to realize his dream for Paradise Island. Construction on phase II of Atlantis, costing nearly $500 million, was already underway.

Company Perspectives:

The Company's gaming business is focused on owning, developing or managing casino properties in attractive markets where the Company can capitalize on its development and operating expertise.

Even as Kerzner was dedicating a great deal of his resources to the Bahamas, he also was turning his attention to the United States. In the early 1990s he became involved in the rapidly growing tribal gaming industry. The Indian Gaming Regulatory Act of 1988 gave Native American tribes the right to conduct gaming on tribal lands, including casinos with state permission. One of the most successful of the Native American casinos was the Foxwoods resort, located near North Stonington, Connecticut. It was run by the Mashantucket Pequot Indians, which as a matter of historical fact were virtually eradicated by English settlers and rival tribes in 1637. Members of the reconstituted tribe had to be one-sixteenth Pequot, but these requirements were soon loosened so that anyone who could trace his or her lineage to a Pequot listed in the 1900 or 1910 census was eligible to apply for tribal membership. Foxwoods, located close to New York and Boston, was an immediate success, attracting the attention of another branch of the Mashantucket Pequot family tree, the Mohegans, who broke away before the 1600s and moved to Connecticut. For years a group of about 1,000 people claiming Mohegan lineage petitioned the U.S. Bureau of Indian Affairs to be recognized as a sovereign tribe. Helping them through the process that would lead to a highly coveted gaming license was hotel developer Len Wolman. After the Mohegans gained their recognition, Wolman, who had never run a casino, turned to Kerzner for help. Sun International and Wolman's group of investors formed Trading Cove Associates, which built Mohegan Sun, a casino resort located just ten miles away from Foxwoods in Montville, Connecticut, opening in October 1996. Trading Cove would operate the resort for several years, taking 40 percent of the profits, and after the Mohegans assumed control, the venture would continue to receive a cut of the profits.

Disappointment in the U.S. Market in the 1990s

Flush with successes in the Bahamas and Connecticut, Kerzner tried once more to become involved in Atlantic City, as well as Las Vegas. Again he looked to pick up the pieces left behind by Merv Griffin. After selling his interest in Sun City in 1996, he bought Merv Griffin's Griffin Gaming & Entertainment, acquiring an older 644-room casino. He promised to bring something special to Atlantic City, but the venture proved to be one of the few failures in Kerzner's career. Atlantic City was too mature a market and he was simply unable to compete on price. Eventually Sun International Hotels sold the property, altogether losing $1 billion on the venture. During the late 1990s Kerzner also cast his eye on Las Vegas. He was on the verge of buying the Desert Inn casino located in the heart of the city's Strip and famous for housing the reclusive Howard Hughes. In the end, Kerzner backed out of the deal, concluding that he could spend $2 billion and still have difficulty standing out in a market like Las Vegas. Chastened by his experience in Atlantic City and Las Vegas, Kerzner chose to concentrate on what he did best, developing one-of-a-kind theme resorts where he was able to operate as a virtual monopoly.

Phase II of Atlantis Paradise Island opened in 1998, adding the 1,200-room Royal Towers hotel, which featured a six-story "Hall of Waters" lobby and 50,000-square-foot casino. Despite the slump that hit the tourist industry in the aftermath of the September 11, 2001, terrorist attacks on the United States, business at Atlantis remained strong and the resort continued to contribute the lion's share of revenues and profits for Sun International. However, Kerzner, although well into his 60s, continued to harbor big dreams. He was now aided by his son, Butch Kerzner, who, after earning an M.B.A. from Stanford University, spent several years on Wall Street involved in mergers and acquisitions. Although he would not officially become chief executive officer until 2003, several years earlier he took over the day-to-day responsibilities of running Sun International Hotels, which in 2002 changed its name to Kerzner International Limited.

The younger Kerzner brought a new aggressive spirit to the company, launching a number of initiatives. In 2002 the company unveiled its One&Only brand of luxury resorts, a label applied to its collection of luxury resorts to serve as a marketing umbrella. One&Only started out with five properties, including the Ocean Club in the Bahamas and properties in Mauritius and Dubai. Soon the collection was supplemented by the addition of a resort in the Maldives and the reopening of a resort in Mauritius. The company also bought a half-interest and took over the management of the Palmilla Resort in Los Cabos, Mexico, and the Royal Mirage in Dubai was doubled in size. Kerzner International also looked to brand its Atlantis concept. In 2003 it struck a deal to develop a $650 million Arabian-inspired resort on man-made Palm Island located off the coast of Dubai, to be called Atlantis, The Palm. In much the same way that Disney transplanted its theme parks around the world, The Palm was Kerzner's first step in making the Atlantis brand global, perhaps one day taking it to Europe and Asia.

In the meantime, the company had not forgotten about its flagship Paradise Island resort. After negotiating about $93 million in concessions from the Bahamian government in 2003, it launched a $600 million expansion project, immediately breaking ground on three luxury villas at the One&Only Ocean Club. The plan also called for the construction of a 1,200-room Pirate's Cove hotel, new water-entertainment features, new restaurants, retail shops, expansion of the convention space, and a new 18-hole golf course. The company owned a considerable number of acres of Paradise Island, more than enough to accommodate its ultimate goal of 5,000 rooms in the complex. Kerzner International, along with American competitors, also began pursuing opportunities in the United Kingdom, which was in the midst of deregulating its gaming industry to allow Las Vegas-style gambling. With a second generation of the Kerzner family well established in a leadership role, there was every reason to expect the resort operator to continue to pursue an aggressive growth strategy for many years to come.

Principal Subsidiaries

Trading Cove Associates (50%); Harborside at Atlantis (50%); Sun Hotels International (Bermuda) Limited; Sun International Management (UK) Ltd.

Principal Competitors

Caesars Entertainment, Inc.; Harrah's Entertainment, Inc.; Trump Hotels & Casinos, Inc.

Key Dates:

1979:: Sol Kerzner opens Sun City resort in South Africa.
1993:: Kerzner forms Sun International Hotels Ltd. to acquire Paradise Island resort.
1996:: Mohegan Sun resort opens.
1998:: Phase II of the Paradise Island complex is completed.
2002:: The Kerzner International name is adopted.
2003:: Ground is broken on phase III development of Paradise Island.