2nd UPDATE: Las Vegas Sands: Macau Rejects Request For Cotai Rights

Las Vegas Sands Corp. (LVS) said Thursday the Macau government has rejected its unit's application for rights to a plot of land in the territory's lucrative Cotai area, presenting a fresh obstacle for its development plans and a reminder of the policy risks associated with investing in the booming market.

Sands China Ltd. (1928.HK) received a letter from the local government dated Dec. 2 stating that its application to acquire exclusive rights to land known as sites 7&8 had not been approved, Las Vegas Sands said in a filing with the Securities and Exchange Commission following an earlier Dow Jones Newswires report.

Sands China, whose shares were suspended from trade in Hong Kong on Thursday pending the release of this announcement, has already spent US$102.4 million on pre-construction costs on the sites as of Sept. 30.

Las Vegas Sands' shares were 3.5% lower at $49.56 in recent trading, recovering from a low of $47.20 hit earlier.

The company said that the government also offered it two avenues for appeal, which it was currently considering. Sands China has 15 days to apply to Macau's chief executive for a review of the decision; it also has 30 days to appeal to local courts, Las Vegas Sands said.

A representative of the Macau government's lands department told Dow Jones Newswires earlier Thursday that the application procedure for land rights for sites 7&8 "is not fully completed" and that the government would announce the result later. Macau legal experts said the government's statement likely referred to Sands China's right to appeal the decision.

The news comes as the company struggles to complete a long-delayed expansion project on another site in the Cotai area, and after rival operator SJM Holdings Ltd. (0880.HK) said it had sent the government a letter expressing its interest in sites 7&8.

Wells Fargo analyst Carlo Santarelli said in a report that the sharp share price fall in reaction to the news was overdone, noting that the bank hadn't been ascribing "much, if any" value to the project. But he added: "Today's announcement serves as yet another reminder of the unpredictable nature of policy decisions in Macau, something we believe will be a recurring theme in 2011."

Morgan Stanley analyst Mark Strawn wrote that the news shouldn't affect Las Vegas Sands's valuation given that this project was not likely to open until 2018 at the earliest but said that in the near term, the announcement could negatively impact Macau stocks "as it highlights a willingness to control growth through increased government intervention."

Macau, set to rake in four times the casino revenue of the Las Vegas Strip this year, is the only place in China where casino gambling is allowed. Sands China pioneered a plan to transform Cotai's swampland into the Las Vegas Strip of the East, and has already spent US$6 billion on projects in the area.

It isn't unusual for Macau casino operators to start work on land after receiving verbal approval from the government but before receiving exclusive rights to the land as Sands has. Though a risky move--Sands China did say in its global offering documents that if it failed to obtain a land concession for the plot, it could forfeit all of its investment in the project--this is the first time the strategy appears to have hit a snag.

It's unclear what will happen to the land now. If an appeal by Sands China is not successful, industry executives said the plot could be auctioned off to rival operators or even just left to hang in limbo for a while.

Sands China is currently building a US$4.1 billion project on sites 5&6, whose construction has been delayed because of a government-imposed labor shortage. The company, after announcing several delays, has most recently said the project's completion date isn't currently determinable with certainty given the inadequate amount of construction workers. Analysts have said they expect the first two phases of the project to begin operations in mid-2012.

Further complicating matters for Sands China in the Chinese territory are allegations by the company's former chief executive, Steve Jacobs, who said in a lawsuit filed in Nevada in October that he was ordered to arrange secret investigations of Macau government officials. Jacobs also alleges Las Vegas Sands Chairman Sheldon Adelson demanded he try to convince major Chinese banks to use their relationship with Macau officials to help the company receive favorable treatment.

Sands denies the claims, made by Jacobs in his wrongful-termination lawsuit against the company, but the allegations haven't gone unnoticed by the local government.

The Macau government's decision not to award the company land rights comes just under three months after competitor SJM Holdings Ltd. (0880.HK) Chief Executive Ambrose So told Dow Jones Newswires in a September interview that the Hong Kong-listed company had sent a letter to the government asking for permission to take over sites 7&8. So also said he expected land rights to build on Cotai would be granted for SJM, controlled by Macau gambling tycoon Stanley Ho, Wynn Macau Ltd. (1128.HK), and MGM Macau by the end of this year.

Sands China, which already operates the Venetian and Plaza casino resorts on Cotai, has two other outstanding projects on Cotai for which it has already secured land rights. The Macau government earlier granted Sands China a two-year extension to complete site 3, which now must be finished by April 2013. Sites 5&6 must be completed by May 2014, according to the land contract.

-By Kate O'Keeffe, Dow Jones Newswires; kathryn.okeeffe@dowjones.com

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