Jeff's back with more wisdom from his valley enclave. This time he's taking a look at the Fertittas and their situation with Station Casinos - a company they built, extended and then bankrupted.
How did this happen and what's coming next? More after the jump.
Now that the Station Casinos bankruptcy case is almost finished I would like to take a crack at exploring why the Fertitta family retained control over its local casino empire, how the process worked and where the locals market goes from here.
Bankruptcy rules and the ability of Station Chairman Frank Fertitta III to convince big creditor Deutsche Bank that the Fertittas were best able to run the Station assets were the key reasons the casino giant remains whole and in almost the same hands (sorry, Colony).
A shrewd legal strategy and corporate framework allowed Station to carve out some of its most valuable assets from the bankruptcy auction. Separating the company's Red Rock Resort, Sunset Station, Boulder Station, Palace Station and Wild Wild West and its surrounding land from the rest of the assets was a masterstroke, made possible by a deal with the creditors who owned the mortgages on those properties, led by Deutsche Bank. With Green Valley Ranch Station and Aliante Station also left out of the bankruptcy because of their joint ownership by Station and the Greenspun family, the remaining collection of properties that were made available to prospective bidders were simply not compelling enough for an outside bidder to pay more than the $772 million the Fertittas and their Deutsche Bank and other creditor/partners were willing to pay.
Much has been made of the 'Texas Station put' that would have required a non-Fertitta buyer of the remaining Station assets to pay $75 million to buy the land underneath Texas Station from Frank Fertitta III's mother, suggesting that requirement was the primary obstacle preventing prospective bidders from topping the stalking-horse bid from the Fertitta family and its partners. It certainly was one of the big obstacles, cited by Boyd Gaming when it announced its decision not to try to top the stalking-horse bid, but there were other significant problems that made the assets troublesome for a possible buyer.
Among those obstacles:
* A trio of big properties in northwest Las Vegas -- Texas Station, Fiesta Rancho and Santa Fe Station -- are clustered in close proximity on Rancho Road, along with a smaller fourth property in the auction group, the Wildfire Casino. Texas Station, Fiesta Rancho and the Wildfire are in a less affluent neighborhood and Santa Fe Station is relatively close to the valley's best locals casino, Red Rock, and another strong player, Suncoast. Ideally, a buyer would want to buy strong casinos that would allow it to compete in a variety of markets it doesn't have a presence in. For operators without a locals market position like Harrah's and Penn National, the Rancho Road cluster was too much capacity in a less attractive submarket, and for Boyd the three were too close to its Suncoast and its downtown casinos.
* The remaining big casino in the auction group, Fiesta Henderson, is surrounded by stronger competitors (Green Valley Ranch and Sunset Station) and is very close to Boyd's two Henderson casinos, Jokers Wild and Eldorado.
* The tribal casino development and management deals in Michigan and California were obviously worth much more to Station than to an outside buyer, which would have had to renegotiate deals with tribal governments with no guarantee of success.
The bankruptcy judge's decision to go along with Station's plan to require all of the casinos, casino development land and tribal casino deals to be sold together rather than piecemeal made sense, as I'm sure that there wouldn't have been enough bid on the separate properties to top Station's bid for the whole group.
The whining by some observers about the Fertittas staying in control of the company despite being unable to pay its creditors and seeking bankruptcy protection after taking on so much debt to finance its going-private deal a few years earlier is understandable, but misplaced. If you want to blame someone or something, blame the bankruptcy code or Deutsche Bank. The Fertittas were able to persuade Deutsche Bank that they were best able to run their properties and I'm not surprised. They know them best. The company timed its loading up on debt poorly but they aren't alone in the casino business -- or in Las Vegas business journalism -- in failing to predict the economic downturn. I certainly didn't anticipate it.
Station has now reduced its debt and, pending Nevada regulatory approval, is about to emerge from bankruptcy protection as a stronger entity better able to contend with continuing terrible market conditions in the worse-than-weak locals market. Let's hope the economy turns around soon enough for Station to return to profitability.
-- Jeff Simpson, August 2010