Changing the guard at Atlantis
Legend has it that the city-state of Atlantis, after a failed attack on Athens, slipped beneath the sea never to rise again. Sir Sol Kerzner’s island paradise, which he acquired from the late entertainer and talk show host Merv Griffin, was transformed into a $2.6 billion world-class resort and renamed Atlantis. Kerzner decided to delist his company, Kerzner International, from the New York Stock Exchange by taking it private in 2006 and at the same time sinking it into an ocean of debt; the new Atlantis, unlike the legendary Atlantis, was rescued from its ocean of debt by a Canadian asset management company called Brookfield Asset Management.
Brookfield Asset Management, formerly Edper Enterprises, is a conglomerate owned by the Bronfman family of Montreal, descendants of the founder of Seagram; an operation renowned for its business exploits in Canada and around the globe. It appears that the Brookfield group, with nearly 70 billion dollars in real estate holdings and other investments in infrastructure, energy and private equity, had advanced Kerzner about $175 million in debt capital, which gave it the right to obtain equity in the company if the debt was not repaid (mezzanine financing in the trade). In effect, a hedge fund owned by Brookfield has stepped in as owner of the Atlantis Resort and will retain the 76-year-old Kerzner on a four-year management contract while it manages the other outstanding senior debtors, which include other hedge funds such as Centerbridge Capital Partners LLC, TPG Capital, Fidelity Investments, among others.
News of this changing of the guard at Atlantis was received with mixed reviews both nationally and abroad. The near and medium-term prospects for the Atlantis properties in particular, and the tourism industry in general in The Bahamas, ranged from favorable to a mild sense of trepidation. The optimists noted the over $150 billion in assets under management held by the Brookfield group, and somewhat heroically assumed that one of the most astute asset managers on the globe would place those assets at the disposal of The Bahamas to ward off a decidedly aggressive group of hedge fund managers whose primary purpose is to maximize the returns to their shareholders. Others, more cautiously, noted that Kerzner, as owner of the resort, had a deep and personal commitment to the property and the country; an important qualitative element that could hardly be expected to be found in an international hedge fund.
Moreover, with his personal dream and long-term vision shattered by the wide range of approvals granted to a competing mega-resort plan for New Providence, the Baha Mar project, it is felt that Kerzner may no longer have the enthusiasm to take the property to the next level.
To the extent that the Atlantis operations in The Bahamas represent more than 20 percent of the room capacity, almost five percent of the labor force and a sizeable proportion of GDP that exceeds the contribution by the agricultural and fisheries sectors, the transfer of ownership to a non-tourist resort operator has serious implications for both the country and it largest economic sector, tourism.
Given the current economic challenges of downgrades by rating agencies, growing deficits and national debt together with historically high unemployment and under-employment, the declaration of near bankruptcy by the leading private sector entity in the country certainly does not bode well for the near and medium-term economic prospects.
More importantly, the new owners have a responsibility to produce the best returns for their shareholders; not to The Bahamas. And in pursuit of that objective, if it means that the property has to be sliced, diced and disposed of, that decision is likely to be made in some boardroom in a major city in Canada, as opposed to the small meeting room of the Bahamas cabinet.