Market Ponders Icahn's Next Fontainebleau Move

"I think it is likely that he is going to sit on it and wait for better times," says Robert La Forgia, founder and principal of Apertor Hospitality, an asset management and advisory firm serving the hospitality and gaming industries. "I think the most likely thing that he will do is to wait for the market to settle down here (in Las Vegas) and start to see when the demand generators start reversing course," La Forgia tells GlobeSt.com.

Icahn has said that he would wait for the Las Vegas market to stabilize before making up his mind what to do next with the property, which still leaves the question of whether he would finish construction of the project or sell it to someone else and make his money that way. La Forgia points out that, if Icahn ultimately does decide to complete construction of the Fontainebleau, "The question is, how do you define finishing it?" The Apertor Hospitality founder says that he has no knowledge of what Icahn plans, but based on Icahn's history, "If he finishes it, he will value-engineer the property so that any spending he does will be high-impact, as opposed to building something that would only appear to the higher end." In other words, La Forgia says, he thinks Icahn would be more likely to build something that appeals to a broader customer base rather than a high-end project with narrower appeal.

How much it would cost to finish the Fontainebleau "is anybody's guess," says Jacob Oberman, director of gaming research and analysiswith CB Richard Ellis in Las Vegas. Some published reports have estimated the cost of finishing the Fontainebleau at $1 billion to $1.5 billion in addition to the $2 billion already spent on it. Oberman tells GlobeSt.com that until all of the contracts are renegotiated with the contractors for the project, and the final design has been determined, the cost remains a question mark. "A lot of the interior design features haven't been finalized yet," which will be one of the factors affecting the cost of the project, Oberman points out.

Oberman describes Icahn's situation as a "build or no-build decision." If Icahn can build the project and produce a return on his investment in it, then he might build it. If Icahn calculates that he can't do that right now, then perhaps he is buying the project―as some have suggested―to just sit on it for a period of time, and hope for the land and property to increase in value "until the decision not to build becomes a decision to build," Oberman says.

Another question is whether the strength or weakness of the Las Vegas hotel market will drive Icahn's decision regarding the Fontainebleau. The market is often described as saturated or overbuilt, with room rates down 30% to 40% from their peak.

La Forgia of Apertor Hospitality points out that the recent opening of the 4,000-room CityCenter brings the number of hotel rooms in Las Vegas to something like 147,000. "Besides the macro-economic issues that Las Vegas is facing, with businesses tightening their belts and consumer budgets stretched, I think that the group hotel room business is a big unknown here," La Forgia says. "Nobody sees a big robust recovery coming in the near term," he says, so it's likely that Icahn will wait for existing supply to be absorbed and for pick-ups in consumer and business spending.

As CBRE's Oberman sees it, whether Icahn chooses to build or not to build will depend on whether the billionaire investor feels that he can make a profit despite the lower room rates and competition from other hotels. "To my understanding, he doesn't own anything else in Las Vegas at the moment," Oberman says, so that means that if Icahn chose to build, he could do so without cannibalizing any of his own rooms as he would if he already owned rooms in the market.

Icahn's acquisition of the Fontainebleau is scheduled to close by Feb. 9. La Forgia says that the soon-to-be new owner of the Fontainebleau has the financial wherewithal to hold onto it however long it takes for the market to recover. "This is classic Carl Icahn," La Forgia says. "At the end of the day, this will be a great deal for him."