Boyd Gaming threw in the towel today, ending its pursuit of two-thirds of Station Casinos‘ assets. This makes it virtually a shoo-in that sock-puppet bidder Fertitta Gaming will prevail at the upcoming bankruptcy auction. The latter, a front for Station CEO Frank J. Fertitta III (left) and his loopy partner, Colony Capital CEO (and Stephenie Meyer groupie) Tom Barrack, is offering $772 million for a ragbag of Station properties ranging from tiny grind joints to large-scale facilities like Texas Station. Boyd had topped that with a $950 million — bid but that money’s off the table. Since Boyd has not waived its right of first refusal on the Borgata, you can guess where that money will now be spent.
Boyd balked at the sweetheart deal Station crafted for itself with the assent of Judge Gregg Zive (rhymes with “dive”). Among the things that stuck in Boyd CEO Keith Smith‘s craw were the infamous “Texas Station put” (whereby Fertitta Gaming gets the underlying land for nothing but anyone else would have to pay Mamma Fertitta 75 mil). Also, Station would have the prerogative of removing any and all employees of the casinos up for auction, leaving Boyd with unstaffed, dead-in-the-water properties. The casinos could also be denuded of various physical and intellectual-property assets that would further diminish their value.
Greatly undermining Boyd’s position was Station’s suasion of its unsecured creditors. Despite being out $2.8 billion, they’re willing to kick in $100 million more for a 15% stake in the reorganized Station. (They’d get as much as — roughly– $430 million worth of equity at a fire-sale price.) The premise of the bondholders’ lawsuit still stands, in our opinion. Namely that “projections were way off” at the time of the LBO and Colony Capital turned a majority ownership stake into a minority position on the board. The fact that Station is worth 70% less than during the LBO speaks for itself. Zive’s ruling against the plaintiffs in a similar Herbst Gaming was — what’s the legal terminology? — full of crap because anybody following the casino industry can tell you that Herbst’s Sands Regent and Primm acquisitions put in a world of hurt long before the Great Recession hit.
Not to put too fine a point on it, Station’s reorganization scheme stinks to high heaven but management is going to come out smelling like roses. For outsiders, the only roseate lining in this septic tank is the fact that Deutsche Bank has its own guy, CFO Marc Falcone, signing the checks. One hopes he will be a “check” upon some of the Fertitta family’s more reckless tendencies — like continuing to pursue condo development in a downed economy.
What’s more, for all of the Fertittas’ and Colony’s boasting as to their own liquidity, the Fertitta Gaming buyout is going to be financed mostly with — get this — borrowed money, $455 million worth. Even though there’s less than an arm’s length of separation between Fertitta Gaming and bankrupt Station, financiers are apparently ready, willing and able to essentially loan Station even more money via a de facto subsidiary. One hopes those same banks are prepared to bend over, grab their ankles and kiss that money goodbye. Lending nearly a half-billion to the Fertittas (who took that much “mad money” and more out of the company when it went private) is a big risk, to say the least, and only a fool would entrust their money to Colony at this point. Barrack’s casino investments (like forfeited Resorts Atlantic City, above) almost invariably crash and burn.
Still, this relieves the Nevada Gaming Commission of a potentially prickly antitrust question, were Boyd to absorb the bulk of Station. Also, as Smith writes, “given bidding procedures that favor Station insiders, and our current view of the limited potential value of the operating and development assets, we have concluded this opportunity no longer makes sense for our company.” Very true, I’m afraid, and more evidence of why Smith is one of the industry’s most underrated CEOs. Certain of his colleagues wouldn’t stop playing Capt. Ahab to Fertitta’s Moby Dick until it was too late.