In the casino business, the saying goes that the house always wins. In Red Rock Resorts Inc.’s upcoming initial public offering, the Fertitta brothers certainly stand to come out on top.

Frank, 54, and Lorenzo, 47, are chief executive officer and director, respectively, of Las Vegas-based Red Rock, a casino operator scheduled to price its IPO on April 26. At the high end of its marketed range, Red Rock could raise $572.25 million, making it the largest IPO so far this year, according to data compiled by Bloomberg that excludes REITs, special purpose companies, and closed-end and country funds.

The brothers stand to get several jackpots out of the deal: Proceeds from the sale of their casino management unit, annual payments linked to the tax benefits of becoming a public company and a huge chunk of voting rights once the shares are sold. They’ll also get the standard IPO proceeds from selling their own shares.

“It’s not ideal, that structure,” said Kathleen Smith, principal at Renaissance Capital Ltd., which manages IPO-focused exchange traded funds.

“It’s not that we don’t like the family, the issue is with the distributions and that they have so much control,” she said.

Red Rock is pitching the brothers’ control over the company as a plus for prospective investors, according to its roadshow presentation.

“We’re significantly committed,” Frank said in the presentation. “This is a big part of our family’s wealth and investment and we think it will be a good partnership between us and the public shareholders going forward.”

Casino Management

The biggest windfall -- about $335 million -- will come from the Fertittas’s casino-management unit. As part of the IPO, Red Rock will buy Fertitta Entertainment for $460 million minus debt, according to the offering documents. The brothers will each receive $113.5 million from the sale, while trusts for the benefit of their six children will receive a combined $106.8 million.

That’s a hefty premium to the valuation given in a management contract filed with regulators in February. According to the filing, if Fertitta Entertainment were to be sold its value would be equal to management fees. Those fees totaled about $53 million last year, according to the IPO prospectus.

The brothers expect to be the sole owners of new super-voting shares in the company after the IPO, according to the prospectus. That will give them 87 percent of the voting power, assuming the minimum anticipated number of shares are sold.

New shareholders will buy into Class A shares that have combined voting power of just 7.3 percent.

The IPO is being managed by Deutsche Bank AG, JPMorgan Chase & Co., Bank of America Corp.’s Merrill Lynch and Goldman Sachs Group Inc.

Las Vegas

Investors in the IPO aren’t just making a bet on the Fertitta brothers’ management skills, they’re also gambling on the health of the Las Vegas gaming market. Central to Red Rock’s growth strategy, as laid out for potential investors in its IPO prospectus, is the belief that “our existing Las Vegas portfolio should benefit from improving economic conditions.”

The Fertittas know first-hand the pitfalls of depending on that market.

In 2007, the brothers took the company, then called Station Casinos, private in a $9.1 billion leveraged buyout, months before the casinos business was hit by the financial crisis and housing market collapse. Station filed for bankruptcy in July 2009.

That could have been the end of the story. Instead the pair, who also own the UFC mixed martial arts league, fought off a hostile offer in bankruptcy court from Boyd Gaming Corp. They pumped about $250 million of their own money into the company, and emerged in 2011 with a stake twice the size of the one they had before the buyout, Frank Fertitta said during the road show presentation.

Deutsche Bank, which is leading the IPO, advised the bidders and provided debt financing when Station Casinos was taken private. Through the bankruptcy process, Deutsche Bank ended up with a 24 percent stake in what’s now Red Rock Resorts, which it will sell part of when the casino company goes public.

Five years on the Las Vegas economy is stronger, with growth in retail sales, employment and real estate values recovering in recent months.

Still, Sin City’s continued prosperity features high on the list of potential risk factors for Red Rock.

“We depend on the Las Vegas locals and repeat visitor markets as our key markets, which subjects us to greater risks than a gaming company with more diverse operations,” the company said in the prospectus.

Representatives for Deutsche Bank and Red Rock declined to comment on the IPO.

Palace Station

Red Rock was founded by the Fertittas’ father Frank, a former black jack dealer who opened The Casino -- now known as the Palace Station -- just off the main Las Vegas Strip in 1976. With 100 slot machines and 90 employees, the casino was among the first to cater specifically to the local residents of Las Vegas, rather than to tourists.

Frank and Lorenzo worked for their father throughout high school and college, taking on more responsibility and eventually leading the company to its first IPO in 1993, raising $294 million. It was the largest gaming public offering in history at the time, with a $600 million market capitalization at the end of its first day of trading.

Under the brothers’ direction, the company has grown to own or manage 21 casinos in three states. Last year it had net income of $143 million on net revenue of $1.35 billion, according to the filing.

Tax Benefits

On top of the proceeds of the sale, the brothers along with other current owners of the company could also be in line to receive substantial payments from Red Rock going forward. Converting their shares from a limited liability corporation to a traditional corporation comes with tax benefits, of which they’ll keep up to 85 percent.

If the underwriters of the Red Rock IPO chose to buy all the shares on offer to them, those payments could total as much as $59 million for the Fertittas and their partners, according to the offering statement.

“If they can pull off a deal like this, that just reemphasizes the fact that Vegas has come back,” said William Thompson, a professor emeritus of government at the University of Nevada Las Vegas who studies the casino industry.

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