Sun International Hotels Limited

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Sun International Hotels Limited

Coral Towers
Paradise Island
Bahamas
(242) 363-6000
(800) ATLANTIS [from U.S.A.]; (800) 321-3000 [from Canada]
Fax: (242) 363-5401 Web site: http://www.sunint.com

Public Company
Incorporated: 1993
Employees: 13,000
Sales: $558.91 million (1997)
Stock Exchanges: New York
Ticker Symbol: SIH
SICs: 7011 Hotels & Casinos

Sun International Hotels Limited (Sun International) is headquartered on Paradise Island, The Bahamas. The company owns almost 70 percent of 800-acre Paradise Island and, through its subsidiaries, is an international leader in family entertainment and gaming destinations on Paradise Island, the location of the world’s largest island resort; the Indian Ocean countries known as the Comoro Islands and Mauritius; and the United States. The company operates nine hotels containing approximately 4,500 rooms and three casinos with gaming space containing more than 6,000 slot machines and 350 gaming tables.

The Early Years: 1993-94

Solomon (Sol) Kerzner, born in South Africa of Russian emigrants, built that country’s first five-star hotel in 1964. Then, in partnership with South African Breweries, in 1969 he established the chain of Southern Sun Hotels, which revolutionized tourism in South Africa with the nation’s first leisure resort, Sun City. By 1983 Southern Sun operated 30 luxury hotels with more than 5,000 rooms and posted a net income of about $35 million, an annual compound growth in earnings per share of over 30 percent. Then, in 1983, Sol decided to concentrate on casino resorts within the company’s portfolio and sold his shares in Southern Sun in order to focus on Sun International (South Africa), which grew to 33 resorts in Africa and Mauritius, among other locations. In 1993, Sol formed Sun International Hotels Limited in order to acquire Paradise Island Resort and Casino, the Ocean Club Golf & Tennis Resort, and the Paradise Paradise Beach Resort from American-based Resorts International Inc.

Butch Kerzner, Sol’s son, took the lead in managing the complex transactions necessary to acquire properties and finance the company’s wide range of activities, thereby freeing his father to focus on the design and development of Sun International’s global destination resort and casino business. The $125 million Paradise Island acquisition was completed in May 1994.

Decline and Rise of Paradise Island: 1994-96

The Paradise Island Resort opened in 1921 but, prior to Sun International’s acquisition, experienced a steady decline in its business. The 1969 occupancy rate of 77 percent had fallen to 62 percent by 1993 and room rates had spiraled down from $122 in 1989 to $95 in 1993. Sun International seized the opportunity to develop almost an entire island and invested $140 million in an Initial Development Program geared to the reconstruction of its Paradise Island facilities in an oceanthemed environment based on the myth of Atlantis. According to Plato, Atlantis was an island fortress ruled by the five sets of twins of Poseidon, the god of the sea. There, within concentric rings of water and land, Atlanteans lived a life of harmony and abundance. This evolved civilization flourished for years until it was suddenly lost to the sea, submerged by an unforeseen volcanic eruption.

In December 1994, only seven months after completion of the Paradise Island acquisition, Sun International launched the renovated 1,147-room Atlantis Resort and Casino with its unique 14-acre saltwater marine life habitat, home to over 14,000 fish representing more than 100 species. By December 1995, Atlantis achieved an average occupancy of 85 percent at a room rate of $122.

The east end of Paradise Island was dominated by the “boutique” resort known as the Ocean Club. Sun International’s initial redevelopment of Paradise Island included returning the Ocean Club to its former grandeur. The Ocean Club had been built in the 1930s as an estate called Shangri-la on what was then known as Hog Island in The Bahamas. In 1962 Huntington Hartford, heir to the Great Atlantic & Pacific Tea Company fortune, bought the estate and built a small, elegant 52-room resort and restaurant. He managed to have the island renamed Paradise Island. Sun International completely redid the colonial-style clubhouse and refurbished the guest rooms and villas. The resort’s famous Versailles Gardens and their Italian-marble statues of world figures, as well as the 12th-century French cloister, were carefully preserved.

In the “new” Ocean Club—which included four suites and five two-bedroom villas—guests enjoyed the ultimate in luxury and all the amenities offered in Europe’s finest hotels. Ocean Club guests could access complimentary shuttle transportation on Paradise Island, use the casino at Atlantis, play tennis at the Paradise Island Tennis Club, and enjoy championship 18-hole golf at the Paradise Island Golf Club. For value-conscious tourists, Sun International operated the Paradise Paradise Beach Resort, a 100-room beachfront resort hotel.

North American Operations: 1995-97

In early 1994 Sol Kerzner met Chief Ralph Sturges of the Mohegan Nation. The Mohegan Indians had struggled for many years to obtain federal recognition as a nation. Sol joined them in their quest for federal recognition and the development of a casino resort. Sun International formed a 50 percent partnership with Trading Cove Associates (TCA) and entered into a management agreement with the Mohegan Nation to develop and manage a casino resort and entertainment complex to be known as Mohegan Sun Casino, in Uncasville (near Montville), Connecticut. Construction began in October 1995 and was completed within a year. Although Mohegan Sun began to operate during the slow season, from October 12, 1996 through December 31, 1996, the property recorded net revenues of $97 million.

The casino’s architectural features and designs incorporating natural elements—such as timber, stone, and water—symbolized various elements of Mohegan Indian culture and history. For instance, guests entered Mohegan Sun through one of four major entrances, each one distinguished by a separate seasonal theme—winter, spring, summer, or fall—and connoting the importance of seasonal changes in tribal life. The 600,000-square-foot Mohegan Sun complex included 150,000 square feet of gaming space for 3,000 slot machines and 180 gaming tables.

In December 1996, Sun International completed the acquisition of Griffin Gaming & Entertainment, Inc. (renamed Sun International North America, Inc.), and became the new owner of the oldest casino on the Boardwalk: the Resorts Casino Hotel in Atlantic City. Sun International planned a major expansion to transform the property into a themed destination resort, the first of its kind in Atlantic City.

Thus, in the short span of two years Sun International positioned itself as one of the leading gaming and resort operators on the East Coast of North America. The redevelopment of Paradise Island in 1994 established the company’s presence in the North American market. In October 1996 the $300-million Mohegan Sun Casino further enhanced this presence when it opened to a crowd of 60,000 people. The company’s December 1996 purchase of Resorts International Hotel & Casino established the company in the Atlantic City market.

Indian Ocean Operations: 1995-97

Sun International also carried on business in Mauritius, the largest island of the Republic of Mauritius, a small, multiethnic, independent country consisting of several islands located in the Indian Ocean, and in the Comoro Islands, also located in the Indian Ocean off the east coast of mainland Africa. Sun International owned a 22.8 percent equity interest in Sun Resorts Limited, a Mauritian company publicly traded on the Mauritius Stock Exchange. Sun Resorts Limited owned five beach resort hotels in Mauritius: the luxurious 175-room Le Saint Géran Hotel, Golf Club & Casino; the exclusive 200-room Le Touessrok Hotel & He Aux Cerfs; the 248-room La Pirogue Hotel & Casino; the 333-room Le CoCo Beach; and the 238-room Sugar Beach Resort. Furthermore, Sun Resorts Limited owned the 182-room Le Galawa Beach Resort & Casino in the Comoros. Sun International managed all six of these resorts.

At Le Saint Gérant, which had more staff than guests, service was impeccable, dining was superb, and every activity and recreation imaginable was offered. The resort was situated on a private peninsula with soft white sand beaches. The hotel was a member of Leading Hotels of the World. Conference facilities accommodated up to 150 people; the Sun Kids Club was available for children and for babysitting. Le Touessrok Hotel & lie Aux Cerfs, nestled on a cluster of tiny islands, was considered one of the most romantic and elegant resorts in the world. There were 200 rooms and suites, many of them connected to the main building by wooden bridges, and eight restaurants. Le Saint Gérant and Le Touessrok offered deluxe accommodations; the European travel trade considered them to be among the finest beach resorts in the world. They were a haven for celebrities and dignitaries, such as Prince Andrew, Prince Phillip, and Princess Caroline of Monaco.

Company Perspectives:

“We have a pretty basic strategy that is in no danger of making its way into business-school textbooks. Quite simply, we develop unusual destinations where people have fun and where we make money. We like to operate in markets that enjoy barriers to entry or where we can truly distinguish ourselves from the competition.”

—Solomon Kerzner, Chairman/CEO

On the other hand, the La Pirogue, Le CoCo Beach, Sugar Beach, and Le Galawa resorts catered to mid-market and budget travelers. La Pirogue, situated on a beachfront tropical-garden paradise, offered a variety of accommodations with a full complement of amenities and comforts, three restaurants, a casino, a children’s club, all water sports, and one of the longest beaches in Mauritius. Le CoCo Beach, brilliantly patterned and boldly designed, was a resort with a Calypso beat and stood out as one of the great bargains on the island. The resort offered the widest possible range of recreational activities on land and at sea, themed entertainment, meeting facilities for 400 people, and a large number of services. In the Sugar Beach Resort were 66 beach villa rooms, 80 Manor House rooms, two suites, and 90 villa rooms with a view of the sea. Each room was furnished in the colonial style: cane furniture, rattan towel rails, and other authentic touches. The “Paul & Virginie” restaurant offered fresh and grilled seafood; a new restaurant opened in December 1998 delighted guests with its colonial architecture and delicious Italian and Mediterranean dishes. A full range of recreational activities, including a certified scuba school, and all traditional services were available. A new conference center opened in December 1998.

Situated on one of the best beaches on Grande Comoro Island, the 181-room Le Galawa Beach Hotel & Casino offered not only excellent service but also the largest selection of recreational activities—including a full range of water sports as well as tennis and other games—in the Indian Ocean. Themed dinners, great entertainment, delicious cuisine, and a casino made the resort a perfect, first-class choice for every member of the family. The Indian Ocean properties maintained an occupancy of 74 percent during 1997. Sun Resorts Limited, the Mauritian company that owned these six properties managed by Sun International, increased its net income by 28 percent over that of the previous year.

Reporting on fiscal year 1996, Chairman/CEO Sol Kerzner wrote that there now existed “a solid foundation on which to build our company.... Having turned the Paradise Island operations around in 1995, we expect earnings growth to continue as Atlantis’ reputation continues to spread.” In 1996, Atlantis’s average occupancy rose to 87 percent at a room rate of $158. So it was that in November 1996, seeking to capitalize on the success of Atlantis, Sun International began construction of an approximately $480 million expansion project, dubbed Atlantis Phase II, which was to double the company’s room base on Paradise Island, significantly increase its casino capacity and convention space, and expand the attractions of experiencing the ocean-themed adventures available at Atlantis.

Continual Profits and Expansion: 1997 and Beyond

In 1997 Sun International’s earnings per share of $2.14 was 35 percent above 1996 earnings and almost 150 percent higher than those achieved in 1995. Paradise Island, the company’s flagship and the primary driver of its earnings, had the most profitable year in its 30-year history. The Atlantis resort and casino recorded an 88 percent average occupancy rate at a $173 average room rate that was a ten percent increase over the 1996 average rate. The Ocean Club established its position in the high end of the market. While maintaining an average occupancy of 76 percent, the Ocean Club had an average room rate of $420, an increase of 18 percent over 1996. Paradise Paradise Beach Resort had average occupancy and average daily room rates of 85 percent and $83, respectively.

Furthermore, in order to profit from the boom in the timeshare industry and to diversify the product mix available at Atlantis, the company formed a joint venture with Vistana, Inc. to build a 375-unit, luxury timeshare resort—known as Villas at Atlantis. Sun International contributed seven acres of land on the harbor side of the island adjacent to Atlantis; Vistana agreed to a $7 million cash equity. Sales of the first group of 175 units began during the second half of 1998; the project was to be completed in late 1999.

Resorts Casino Hotel in Atlantic City increased operating income by 32 percent over the previous year but, because of the former low operating base, this growth amounted to earnings before interest and tax deductions of only $35 million for the year. In his 1997 annual report, Sol Kerzner pointed out that “this result was not unexpected” and that Resorts Casino “had been acquired for its development potential.” According to Amy S. Rosenberg’s story, dated May 6, 1998, in the Philadelphia Inquirer, in 1996 Sun International had proposed a $500 million plan to transform the casino hotel into “a mega-resort unlike anything else on the Boardwalk,” but scaled back those plans to a $150 million renovation, including construction of a 600-room tower consisting of a re-themed Victorian-style resort known as the Beach Club. In 1998, however, Sun International scaled back renovation to a cost of $15 million to $20 million. Rosenberg quoted President Butch Kerzner as explaining that “In addition to renovating the existing hotel rooms, we are seriously evaluating the possibility of developing a larger project on our undeveloped real estate [in Atlantic City] through which we could more fully realize the enormous potential of the concept of the Beach Club. Because of the condition of old areas of the buildings, we finally determined the project could not get done for $150 million. We are still committed to the Atlantic City project. The market has been very good,” Butch added.

The Mohegan Sun Casino had an outstanding first full calendar year of operations. The complex hosted over 6.6 million arrivals, served more than 3.5 million meals, and enrolled more than 600,000 people in the slots club. The property posted gross earnings of $150.8 million, representing a 47 percent cash-flow return on investment, the highest return ever achieved in the industry for an investment of this size. Sun International found that the average length of stay was 110 minutes and concluded that it had penetrated only the geographic markets in close proximity to the casino. The Tribe’s ownership of 240 acres of land offered almost unlimited potential for development of a hotel-casino complex. Furthermore, Mohegan Sun enjoyed the relative protection of the tribal-state compact between the Mohegan Tribe and the state of Connecticut: if that state were to legalize any gaming operation other than one sponsored by an Indian tribe on Indian land, the Mohegan Tribe would no longer be required to make payments from its slotmachine revenues to the state. As of fiscal 1998, the Mohegan Tribe and the Pequot Tribe (operators of Connecticut-based Fox woods, one of the leading gaming facilities in the United States in terms of the number of slot machines) annually gave 25 percent of their revenues from slot machines to the state.

In February 1998, the Mohegan Tribe appointed TCA to develop a $450 million expansion of Mohegan Sun by building a 1,500- to 2,000-room luxury hotel and a convention center. According to Lyn Bixby’s story in the February 11, 1998 issue of the Hartford Courant, The Tribe also announced that it was buying out the contract of their professional management team. “Self-sufficiency has always been a goal. We’re ahead of where we wanted to be,” said Jayne Fawcett, tribal council vicechairwoman. “Our goal is to have the premier gaming resort in the world by the summer of 2000,” Fawcett commented. TCA and the Tribe agreed that, as of January 1, 2000, TCA would turn over management of the Mohegan Sun Resort Complex to the Tribe. These developments were published in the Tribe’s newspaper, Ni Ya Yo, a title meaning “It is so.”

In December 1998, Atlantis Phase II was completed on schedule and Sun International unveiled its creation of mythical Atlantis. Among the arcadia of lagoons populated by almost 50,000 fish and containing numerous waterfalls, rose a new casino straddling the lagoon between the 1,138-room Atlantis and the new Royal Towers, a 1,202-room deluxe hotel. The result was the creation of the world’s largest island resort. And at The Dig, centerpiece of the Royal Towers, visitors could visit an imaginative, full-sized re-creation of the ruins of Atlantis and explore the incredible inventions of the ancient Atlanteans during an interactive, total-immersion entertainment experience. Walking through a series of interconnected passageways, boulevards, and chambers with gigantic picture-windows, visitors could view deep-water environments inhabited by a wide variety of live underwater life ranging from piranhas and sharks to jellyfish and eels. Furthermore, a $15 million, 10-acre marina with 40 berths catered to luxury yachts up to 200 feet long—thereby positioning Paradise Island as the Monte Carlo of the Caribbean.

As the 21st century drew near, Sun International Hotels Limited stood out as a symbol of what a father and his son could create in in the realm of world-class resort entertainment. Given the company’s illustrious past, what would happen to the business in the next century doubtless would be profitable, dramatic, and even surprising.

Principal Subsidiaries

Sun International Bahamas Limited; Sun International Representation, Inc.; Sun Cove Limited; Sun Resorts Limited (Mauritius; 22.8%); Sun International North America, Inc.