MGM Confident It Won’t Need to Use Escape Clause for Osaka IR

Posted on: March 17, 2022, 10:01h. 

Last updated on: March 17, 2022, 11:49h.

Erik Gibbs Read More
Expertise: Asia Pacific Gaming, Gaming Business, Global Gaming.

MGM Resorts International is confident that it, along with Osaka and its casino partners, have a solid plan for an integrated resort. Things are allegedly in place so perfectly that it won’t need to use an escape clause in its contract.

Yumeshima island in Osaka
Yumeshima island in Osaka, the planned location of an integrated resort. MGM and Orix, Osaka’s casino partners, are confident the project is viable. (Image: Japan government)

MGM Resorts and Orix are the leading operating partners for Osaka’s integrated resort (IR), should the national government select it. Costs for the project have been skyrocketing, which means MGM and Orix will need to be ready to invest more.

If, after all of the final pieces of the puzzle are in place, MGM and Orix get cold feet, they have an escape clause built into the contract with Osaka. However, the companies are confident the clause is irrelevant.

MGM, Orix Ready for Osaka IR

MGM and Orix, each with 40% of the project, are on the hook for more than $4 billion each for the $10-billion IR. However, when first considering the project, the gaming environment was a little different.

Analysts, as well as the casino industry, previously thought that IRs would begin to arrive in Japan by last year. MGM’s own CFO, Corey Sanders, predicted in 2019 that construction would begin sometime in 2021.

That was before COVID-19 and a tumultuous couple of years for operators. However, MGM is in for the long haul. Its CEO, Ed Bowers, and Orix executive officer Toyonori Takahashi reiterated their positions at an Osaka City Council meeting yesterday.

Both of the executives downplayed the possibility of using the escape card. They stated that they have no plans on calling off the IR arrangement and that they’re totally committed to making it a success.

Still, the clause remains, ready to be wielded if the consortium decides, at its own discretion, to back out. The contract allows them to cancel their participation, under certain conditions, if the environment for development proves to be unstable or unfavorable.

Should they decide to back out, MGM and Orix will have to pay a penalty. The contract stipulates a fee of $5.6 million in the event the casino partners use the escape clause.

Costs on the Rise

MGM and Orix knew what they were getting into financially when they began discussing their participation with Osaka. However, that was before everyone dove deeper into the project.

Testing of the soil where the IR will be built revealed that major improvements will need to take place before construction. These will result in at least another $1.2 billion in additional costs.

That falls on Osaka to cover. But other surprise costs may suddenly emerge as well. Those, on the other hand, belong to the MGM-Orix consortium.

MGM is fine with the possibility of having to pay more. It told the Osaka City Council yesterday that it remains positive that the IR is worth over $4 billion a year in revenue. That would give the operators a considerably rapid return on their investment.

The casino partners have some ideas in mind that they feel will boost local and national support for the project. Japan wants its IR leaders to concentrate on community stimulus, and the consortium is answering the call. It stated yesterday that it will likely incorporate a formal system at the property to ensure the procurement of goods and services from local vendors.

The project design, as well as those of competing prefectures Wakayama and Nagasaki, are due to Japan’s national IR policy group no later than April 28. All three have said they are on track to present their ideas on time.