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Huge Las Vegas Strip Project Faces Big Problems

It's perhaps the most-visible construction on the Strip right now and its owners face some major money issues.

Nothing in Las Vegas actually exists until the doors open. That's a lesson learned over time as countless projects have hit snags that force construction delays and even cause ownership changes.

The Fontainebleau Las Vegas project may be the most famous example of this as it has gone through numerous construction stops and starts while changing owners multiple times over its nearly 20-year odyssey. That project, which seems set for a 2023 opening, has improbably fallen back into the hands of its original owners.

And while the Fontainebleau tale might be the most extreme example, it's a fairly common story when you're talking about construction that ranges from hundreds of millions to billions of dollars. Cost overruns can cause people to lose their jobs, companies to lose control of a project, and sometimes the deal to collapse completely.

Construction on the Las Vegas Strip is incredibly complicated and expensive. That's a lesson the Madison Square Garden Entertainment (MSGE) - Get Free Report company has learned as it tries to build MSG Sphere, a first-of-its-kind entertainment venue. MSG  has gone over budget and now faces a bit of a crisis when it comes to the project and the health of the company in general.

MSG Sphere Las Vegas Lead JS

What Is the MSG Sphere?

Sitting near the Venetian, on the Las Vegas Strip, MSG Sphere was meant to be a purpose-built music and show venue designed to help its owner lure big acts away from Caesars Entertainment (CZR) - Get Free Report and MGM Resorts International (MGM) - Get Free Report which dominate the big-name Las Vegas residency market.

The visually striking 366-foot-high steel sphere will "be covered with about 580,000 square feet of fully programmable LED panels, forming the largest LED screen on Earth," according to the Las Vegas Review-Journal. "The 17,500-seat venue will have a high-resolution display plane, which is larger than three football fields, the world’s largest beam-forming audio system with more than 160,000 speakers and it will deliver superior sound to every seat in the house."

Sphere is expected to open in fall 2023 headlined by U2 performing its first Las Vegas residency. The problem -- and it's a big one -- is that Sphere has cost a lot more than it was originally projected to.

MSG Makes Big Changes

The parent company on the project, underwent layoffs this week as the cost estimates for the Sphere have increased from $2 billion to $2.175 billion, The Athletic reported.  Layoffs also hit sister companies MSG Sports and AMC.

These changes cast the future of the Sphere project into some doubt. And, while it's very unlikely that construction won't get finished, ownership changes are possible.

"MSG hopes to open the venue during the second half of 2023. But it is also facing questions about how it will continue to fund the project," the Athletic reported.

CFO David Byrnes said on the company's Q1 earnings call that MSG will be able to pay for it with its cash on hand and through cash flow. The company is also pursuing spinning off Sphere into a new company.

"We are also continuing to make progress in evaluating a number of areas, including potential organizational structure and the division of corporate overhead between the two companies," Byrnes said. "Assuming we move forward with the spin-off, the live entertainment and media company would take on the name Madison Square Garden Entertainment Corp., while the remaining parent company consisting of our MSG Sphere and TAO Group businesses would be renamed MSG Sphere Corp."

Creating a new company would, in theory, allow for a stock sale to further fund construction.

"At this time we have not set a timetable for completion of this potential transaction, which would be subject to various conditions, including final board approval," the CFO added. "We continue to be confident that this separation would create enhanced flexibility for both companies to pursue their own distinct business and capital allocation strategies while providing investors with greater visibility into each company’s businesses and growth prospects."

Sphere remains on track for a fall 2023 opening, according to Byrnes.