Valuation of the Week #10: Applying the Soda Can approach to valuing the Venetian
The Set Up
Given the heavy stuff that you have been going through in this class (the quiz, valuing Valeant, your DCF and the upcoming mystery project), I thought it would be a good time to take a light touch (with more profound implications about pricing in general) to this week's valuation of the week. You may (or may not) remember that I talked about the soda can approach to valuing hotels, where you take the cost of a soda at the hotel in question (in your room refrigerator, if you are in upscale hote) or in the vending machine next to the ice machine at motel, add five zeros to it and multiply by the number of rooms in the hotel. I know that you probably thought I was making up stuff (and I do sometimes), but this is real hotel valuation technique. In fact, take a look at this manual for valuing hotels, written by two experienced hotel appraisers:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/HotelValuationTechniques.pdf
Turn to page 6 and look at the highlighted section. I especially like the last sentence in this section, where the appraisers "urge market participants to use this technique judiciously, as some properties seriously misprice soda in relation to property values.
The Application
I was in Las Vegas yesterday and today and am actually on the plane back to New York, as I write up this valuation. I stayed at one of those Vegas monstronsities, the Venetian, and the picture is below:
According to the hotel's website, the Venetian has 4049 rooms. When I checked in, the first thing I did was take a picture of the in-room menu, shown below with the price of a soda can highlighted:
The Pricing
Let's try the soda can approach to valuing the Venetian.
Value of the Venetian = Price per can of soda X Number of rooms X 100,000 = $5.00 (4049) (100,000) = $2.025 billion
That's it! Would Sheldon Adelson (who owns Las Vegas Sands, which owns the Venetian) take $2.025 billion for it? I have no idea but think about it. No need to estimate cash flows, check out financial statements and do all the due diligence that you do in any DCF. I told you that pricing was easy and fun. Of course, you may be missing some serious differences across hotels when you do this. In a casino, after all, it is not what you collect in room rates that drives your value but the expectation that your hotel customers will find their way to the slot machines and poker tables and try to win against the house, a game that you (as the house) will almost always win!
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