Investing mastermind Benjamin Graham, Warren Buffett’s teacher, tells us:
“[T]here are just two basic questions to which stockholders should turn their attention:
1. Is the management reasonably efficient?
2. Are the interests of the average outside shareholder receiving proper recognition?”
I’m concerned that Las Vegas Sands Corp. (NYSE:LVS) fails the second test. Here are some issues that raise my concern.
An abundance of related-party transactions
Las Vegas Sands’ 2013 proxy lists a large quantity of related-party transactions (i.e., business deals that took place between the company and individuals with whom insiders had a special relationship before the deal).
While some related-party transactions can be legitimate, they can create the potential for conflicts of interest and result in outcomes that put the interests of insiders directly ahead of the interests of shareholders. For this reason, cautious companies often try to avoid engaging in an abundance of related-party transactions to avoid the appearance of misconduct.
Key deals
Las Vegas Sands agreed to shell out $3.1 million to buy the assets and lease interests of Carnevale Coffee Bar, which was previously 50% owned by one of CEO and Chairman Sheldon Adelson’s family trusts. The proxy makes no mention of how the coffee bar’s value was appraised and whether Las Vegas Sands got a good price for it.
In 2008, Las Vegas Sands Corp. (NYSE:LVS) sold Adelson’s wife shares and warrants “on substantially the same terms as those offered to the public in a simultaneous public offering.” However, I question the contractual provision that required the company to pay “$280,000 in costs and expenses of Dr. Adelson relating to the Hart-Scott-Rodino Act clearance for the exercise by Dr. Adelson of the warrants she held” when she exercised them in 2012. Was this a privilege that the company would have offered to any investor taking such a large stake during this time of great need at the company, or was this a special favor granted to Adelson’s wife because of her special relationship with him?
Adelson’s son-in-law was paid $675,000 for his work as Las Vegas Sands Corp. (NYSE:LVS)’s vice president of corporate strategy. But was he the best person for the job, and can that salary be justified in terms of long-term shareholder value?
While none of these deals is necessarily bad for shareholders, taken together they make me uneasy. Also, because Adelson and family control the majority of share votes, there would be little shareholders could do to change things if they were to discover that Las Vegas Sands Corp. (NYSE:LVS) was using shareholder capital irresponsibly.
Industry trends
Other businesses in the industry also have copious related-party transactions. In particular, founder-led businesses Wynn Resorts, Limited (NASDAQ:WYNN) and Boyd Gaming Corporation (NYSE:BYD) reported a large number of such transactions in their 2013 proxies, including employment of relatives, employee use of company services, and employee use of company-owned property. MGM Resorts International (NYSE:MGM), on the other hand, didn’t have to report any related-party transactions in its 2013 proxy.
