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| How To
Buy Into One Of Europe’s Most Expensive Tax Havens - The Back-door Route
To Owning In Monaco |
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| US$1 equals
.79 euro |
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| Thanks to
a glamorous casino and a personal income tax rate of 0%, Monaco has become
one of the world’s most expensive property markets. Apartments in prime
locations cost $1,869 to $2,243 per square foot, and even at these prices
supply is scarce. But even if you have only a few thousand dollars to invest,
there is a way to claim a stake in this thriving city-state, to invest
in its real estate marketat prices last seen decades ago. |
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| I’m not talking
about a straight property investment but shares in a listed company that
owns the better part of the Monaco property market - it’s a back-door route
that even Europeans hardly know about. |
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| World’s
Most Famous Casino |
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| The roots
of this investment opportunity date to 1863, when a Frenchman, Francois
Blanc, started a company that planned to operate a casino in Monaco. |
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| The
casino in Monte Carlo became the country’s most famous institution. Other
than Las Vegas, no other place on earth is as closely linked to casino
gambling as Monaco. |
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| You can buy
a stake not only in this, but in other casinos of Monte Carlo as well.
The five casinos of Monaco belong to the Société des Bains
de Mer et Du Cercle des Etrangers à Monaco SA (SBM), loosely translated
the Sea-Bathing Society and Foreigners’ Circle of Monaco. The company was
originally set up to run a sea bath, which in those days was a fig leaf
to cover the operation of certain “amusent facilities.” Its shares are
listed on the Paris market. |
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| SBM doesn’t
only operate the casino, it also owns four luxury hotels (the legendary
belle epoque properties Hotel de Paris and Hotel Hermitage, also the more
recently built Monte-Carlo Beach Hotel and the Hotel Mirabeau), 26 restaurants
(among them the 3-Michelin star restaurant of celebrity chef Alain Ducasse),
the open-air nightclub Jimmy’z (one of the world’s most expensive),
the only private beach of Monaco, the Monaco Golf Club (on French soil),
the opera, the spa, the tennis club, and the world’s largest private wine
cellar. On top of that the company is one of the biggest landlords in Monaco,
having spent decades accumulating rental apartments and commercial properties
with the profits from the casinos. |
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| Sleeping
Beauty Of The Paris Market |
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| The ruling
Grimaldi clan - headed by 81-year-old Prince Rainier, husband of the late
Grace Kelly - owns 69.6% of the shares, but the remaining shares are bought
and sold freely on the Premier Marché, the highest segment of the
Paris market. The American fund management group Fidelity has for years
been holding a 5.41% stake. |
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| SBM has practically
zero debt and at last count sat on $128 million cash, thanks to its steady
cash flow, and that’s after the company ploughed $137 million of cash into
refurbishing and building activities last year. Its rental properties are
worth approximately $744 million, and its hotels would fetch some $992
million, if sold. |
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| Rumour in
Monaco has it that SBM will redevelop its headquarters, possibly turning
it from a five-storey building into a 20- to 25-storey office and apartment
development. Profits from selling off apartments in such a prime location
would likely be two to three times the company’s current market capitalization
- and it’s a good guess that other SBM properties are suitable for redevelopment,
too. |
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| One of the
other hidden assets is the casino concession, which, based on gambling
market research conducted by Deutsche Bank, I estimate to be worth $1.24
billion to $2.48 billion. |
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| Adding it
all up, the company’s net asset value is at least $1,892 to $2,500 per
share, compared to a current share price of just $454. |
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| The discount
isn’t due to the ruling family using SBM as a convenient cash cow, to be
looted at the cost of outside shareholders. The opposite is true. When
SBM extended its casino concession in January 2003, Prince Rainier granted
it more favorable terms than in the past - leading to SBM’s coffers being
filled quicker in the future. |
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| The French
media reports only briefly on the company’s results, and, without media
attention, the share has been overlooked. |
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| Investment
banks aren’t interested in analyst coverage either, because they couldn’t
expect business from SBM - the last time the company had to raise capital
was in 1963! There are only 1.8 million shares outstanding, which is why
typically only a few hundred shares change hands per day. Despite the seeming
lack of interest, the share has recently started rising, going from $202
in June 2003 to the current $454. |
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| New Strategic
Partnership |
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| It’s no coincidence
that the share started rising at exactly the time when a Las Vegas casino
impressario signed a strategic agreement with SBM in June 2003. Steve Wynn
heads Wynn Resorts, a Nasdaq-listed casino outfit that will open the world’s
most expensive casino property, the $2.4 billion Wynn Las Vegas, in April
2005. Wynn had previously gained notoriety for opening the world’s most
profitable casinos, among them the Bellagio and the Mirage. |
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| Officially,
Wynn and SBM will work together only on marketing projects, but the rumors
are getting louder that the two parties are about to form a joint venture
to build a mega casino on the sea. In Barron’s, a fund manager with a 1%
stake in Wynn Resorts said that Wynn Resorts has an alliance with the owners
of the Casino de Monte Carlo and may launch a new property in that market. |
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| The obvious
question is, where on earth would such a casino be built? Steve Wynn is
not one to build a back-room casino in an existing property, as can be
seen from his current 197-acre development in Las Vegas. At such a size,
a new casino would take up half the landmass of Monaco! |
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| The likely
answer is that the new venue wouldn’t be based on land, but on the sea
in the bay of Monaco. This may not be as ridiculous as it may sound.Monaco
has, in fact, done feasibility studies for such a project. |
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| Manhattan-On-The-Sea |
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| Monaco has
expanded its land base from 150 to 195 hectares during the reign of Prince
Rainier, by reclaiming land from the sea. Prince Albert, heir to the throne,
has indicated in a press interview that “the only direction we can expand
is on the water.” |
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| It was the
September issue of Cote, the principality’s magazine, that gave away the
vital clues for how these plans are to proceed. Cote featured the latest
architectural renderings of an ocean city, and the director of Monaco’s
Urbanism Projection and Survey agency added: “Once utilization of the
landmass has been totally optimized, which isn’t far off now, there’ll
be only one solution left: to build on the sea.” |
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| One of the
architectural drafts envisions an expansion of Monaco’s landmass to 580
hectares by building what can best be described as Manhattan-on-the-Sea:
the entire Bay of Monaco would be filled with new developments, skyscrapers
even. |
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| Such a project
couldn’t be realized overnight, but the idea of Monaco embarking on a mission
to expand and re-invent itself is likely to hit the press soon. The Economist
mentioned in its Oct. 2 issue that Wynn has discussed the potential for
building an offshore casino with Monaco. The secrets have started to leak
out. |
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| The development
would be reminiscent of Las Vegas in the mid-1970s, when most American
casinos were in dire need of a new strategy and a face lift. In the ensueing
20 years, Vegas-based casino developers made billions by introducing the
world’s biggest and most spectacular hotel casino resorts. The shares of
the company Steve Wynn took over in 1973 rose 24.9% per year for the next
27 years, turning each $10,000 invested into a tidy $3.62 million. |
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| The European
Alternative |
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| Buying into
SBM today is similar in my mind to buying into Las Vegas gambling companies
during the 1970s, when shares of these outfits were still dirt cheap. Your
broker would prefer you to buy shares of Nasdaq-listed Wynn Resorts, of
course, as it would be a lot less hassle for him than buying a foreign
share. But Wynn Resorts is already valued at $4.7 billion, despite not
having opened a single casino property yet. |
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| Personally,
I prefer to get value for money, especially when it comes to investing.
That’s where SBM gets attractive. It is an investment that is profiting
from American expertise but that you can still buy into at deeply discounted
European prices. Yes, it’s more effort to buy into SBM, but chances are
it will also be more rewarding. Here is why: |
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| SBM has just
extended its casino monopoly concession until 2027. Because of SBM’s monopoly,
a new Monaco casino without the participation of SBM would be a non-starter. |
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| That’s one
of the reasons why Wynn teamed up with SBM - without the local company,
he knew he couldn’t get involved with the Monaco casino market. |
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| Steve Wynn
is renowned for building the world’s most profitable casinos, and a stake
in a joint venture with him would likely provide a considerable boost to
SBM’s bottom line. What’s more, such a project would revitalize all of
Monaco, and lead to increased revenues for SBM’s other properties, such
as the existing hotels. |
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| It is unlikely
that SBM’s gilt-edged assets will be available at the current deeply discounted
price for much longer. In our media-driven world, the eventual coverage
of such a project will propell SBM onto the center stage of the European
stock markets. And American investors will eventually notice how cheaply
they can buy into Steve Wynn’s expertise, if only they know the right stock
to buy. By then, SBM shares are unlikely to be available still at such
a screaming discount to the company’s assets. SBM will likely turn out
to have been an opportunity that only those who acted quickly were able
to take advantage of. |
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| How To
Invest Into SBM |
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| On the Paris
market, SBM shares (ISIN number MC0000031187) are traded using an ancient
system of a twice-daily price fixing. The price is set at 10.30 a.m. and
4 p.m., and, while you can theoretically place orders until a second before
that time, your bank or broker will realistically need a couple of minutes
to route your order to Paris. |
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| Alternatively,
you can trade SBM shares on the OTC market of Berlin and Frankfurt, where
trading is continuous. Quotes and charts are available on www.bigcharts.com. |
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| Monaco
In A Nutshell - Six Fast Facts |
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| 1.
The Principality of Monaco is the world’s second smallest sovereign state
with a landmass of just 1.2 square miles - only the Vatican is smaller.
It borders the Mediterranean Sea on the southern coast of France, near
the border with Italy, and currently has some 32,000 residents. |
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| 2.
Only 6,000 hold a Monagesque passport, all others are expat workers and
rich tax exiles. |
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| 3.
The country did away with all forms of personal income tax in 1870 and
for decades solely lived off casino revenues. After decade-long efforts
to diversify the economy, the casino now accounts for only 5% of local
revenues. |
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| 4.
Monaco has established itself as a busy tourist and conference hub. There
is a thriving financial services industry, and the country has even attracted
small manufacturing companies (including cosmetics, aeronautics, and
automobile parts). |
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| 5.
Prince Rainier III is the current head of state, his heir-apparant is Prince
Albert. Prince Rainier signed a new bi-lateral agreement with neighboring
France in October 2002, which secured the country’s longterm survival (previously,
France would have been able to claim ownership if there were not a male
heir to the throne). |
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| 6. The
tiny nation is an accident of history, but after more than 700 years of
uninterrupted rule by the Grimaldi Clan, seems destined to continue.. |
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