Two Way Hard Three | Las Vegas Casino & Design Blog

August 30, 2010

SIMPSON ON VEGAS #006: Bankruptcy Bonanza

Posted by Hunter

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


Read archived comments (7 so far)
August 30, 2010 11:14 AM Posted by Jeff in OKC

Good anaylsis, which leads perfectly to a question I thought of last week, while re-reading "Double Or Nothing" by Tom Breitling. According to Breitling and his partner, Tim Poster, the Fertita brothers are the nicest, most humble people on earth. Yet, a common opinion among most stories I read about the brothers does not describe them in those terms. Almost the opposite, in fact. So, I'm curious about you would profile the Fertitta brothers, Mr. Simpson?

August 30, 2010 12:09 PM Posted by parchedearth

What astounds me is the bankruptcy went perfectly for the Fertittas. DB and Colony just took the losses. Usually, somebody gets upset when multi-billions are being lost. Do we know if any of the original bankers/investors were fired or even got so much as a reprimand? I'm amazed that DB, Colony, Texas Pacific, Apollo, Credt Suisse et al are still able to raise money and willing to put even more into gaming properties.

August 30, 2010 12:15 PM Posted by parchedearth

I have always suspected that Boyd's interest was a diversion to keep it's creditors from asking for the Echelon money to be returned. My understanding is they still have $2B and a desire for a major strip property (Mandalay mile or Mirage).

August 30, 2010 2:32 PM Posted by Paolo

I love getting the inside story on this kind of strategy- I think your analysis is pretty on-point. Keep up the good work!

August 30, 2010 6:15 PM Posted by mike_ch

I think the real problem here is it continues a national trend of socializing losses and businesspeople who make bad decisions being insulated enough to endure the consequences of their bad decisions and remain in control of their companies.

If you or I make gross miscalculations, our lives will decline noticeably for a time, but for the Fertittas it's just yet another day, just with a footnote that they once sent attorneys to bankruptcy court.

Now, I'll admit I've never liked these guys and have been saying on MMA/UFC boards for over a year that I was excitedly looking forward to them losing their assets and being forced to go cry into piles of money. But animosities aside, can't you really say what you said above about almost any Station property?

I mean, Boulder Station would not have been any more attractive to Boyd, given they already have a big place on Boulder Highway. Between Sam's Town and the old Gaughan properties, they pretty much had a counter to every Station except I guess GVR (which IIRC is taking a licking) and Aliante (and who really wants that?)

Some of this makes sense, but I get the feeling you're reaching to just play devil's advocate on this one.

August 30, 2010 7:10 PM Posted by Jeff Simpson

Thank you for the feedback, but please believe me that I wasn't intending to play devil's advocate. Perhaps I didn't explain my take well enough.
First, you write "for the Fertittas it's just yet another day, just with a footnote that they once sent attorneys to bankruptcy court."
I blame that on the secured creditors, the biggest of which is Deutsche Bank, along with the bankruptcy rules that allow current management to work with a majority of creditors to reorganize. DB believed in the Fertittas operating expertise. I'm sure Boyd made a pitch to DB, but the bank made its call in favor of the Fertittas.
Second, most of the properties not available for bid would definitely have been attractive, to Boyd and others. Boyd said it would swallow all of the parts, but was unwilling to bid on the parts left for auction. I was trying to show that the "Texas Station put" was not the only reason the remaining four big casino properties and the other assets (small casinos, land for casino development in Las Vegas and Reno and tribal deals) were not compelling enough for Boyd to top the $772m Station/DB bid.
As for your contention that the same objections could be made to the six big casinos carved out from the auction (Red Rock, GVR, Aliante, Palace, Boulder and Sunset), I'd disagree.
Aliante is in a tough locale now, but should eventually be in a good spot if and when the economy and real estate improve. GVR, as you said, would be attractive for anyone -- Boyd, Harrah's or others. Same for Red Rock (even though Boyd already has Suncoast, as the demographics are sweet enough in and near Summerlin to allow both places to thrive in a good economy). Sunset Station would also be attractive for Boyd. Palace and Boulder, you're right, would have less appeal, for Boyd and others, but in a good economy they both threw off substantial cash flow and Boyd would have happily taken them, as well as the up-for-auction properties, if they could have achieved market dominance by buying ALL the Station assets -- great, mediocre and challenged.
My column was trying to make a couple of key points:
1) Deutsche Bank's confidence in the Fertittas is what allowed the company to remain intact.
2) A brilliant legal strategy allowed Station and DB to carve out a group of properties for auction that would have significantly more value to Station than to Boyd or anyone else.
I understand why folks don't like it when companies use the bankruptcy process or the threat of bankruptcy to eliminate, reduce or delay the repayment of debt. I'm not excusing it, just explaining why I think the Fertittas were able to use the law and the support of their biggest creditor to stay in control, reduce debt, get some more capital and keep all of their properties. I don't think you have to like it to appreciate the strategy and results.

August 31, 2010 10:23 AM Posted by socalduck

I was a bit dumbfounded when I first heard the Fertitas would retain control, so Jeff's article definitely helped me better understand how this was possible. I'm not familiar enough with the Fertitats or the Station properties to comment on their ability as operators, but I would think this is probably the best outcome for all of the employees and vendors that depend upon these casinos for their livelihood.