Icahn's Big Bet On Low Rollers

Are there enough budget gamblers out there to make his mini-empire of ragtag casinos pay off?

Carl C. Icahn has always loved other people's trouble. So, soon after the Stratosphere casino and hotel headed for bankruptcy court in 1997, just nine months after opening at a cost of $550 million, Icahn sensed opportunity. The famed bottom-fisher shelled out $61 million to buy the Stratosphere's junk bonds at fire-sale prices. That eventually enabled him to wind up with 89.6% of the casino and its 36-story hotel--with a roller coaster on top.

The Stratosphere is a prominent feature of the fast-rising Las Vegas skyline. But it's in a sleazy part of the Strip known for dives and drug deals, far from the hottest casinos. Yet Icahn, the 63-year-old onetime corporate raider who waged more than a dozen high-profile takeover battles in the 1980s, is making it the flagship of a ragtag gambling empire he has been quietly assembling for the past two years. Where he once went after the likes of Texaco, USX, and Trans World Airlines, these days Icahn is targeting such properties as the downscale 258-room Arizona Charlie's Hotel & Casino, which he picked up for an estimated $39 million, according to industry insiders.

BANKRUPTCY HOUND. It may not be glamorous, but there's logic to Icahn's backdoor entrance into the booming gaming industry. Like others, he's eyeing the strong economy and consumers with cash to burn. But rather than spend billions on huge projects, Icahn is betting he can lure the masses with low-fare junkets. His strategy: fix up his threadbare casino holdings into a destination for budget-conscious vacationers. Icahn, who declined comment for this story, is even getting into the travel business to help his plan along.

The deals are classic Icahn, albeit on a vastly smaller scale than those of the '80s. In the case of Arizona Charlie's, he bought bonds pledged against a Missouri casino company that failed. To get it out of bankruptcy, its owners swapped the profitable Arizona Charlie's for the bonds. In Atlantic City, Icahn has snatched up roughly one-third of the bonds issued by the Sands Hotel & Casino and Claridge Casino Hotel, two neighboring casinos that are both in bankruptcy court. Some believe Icahn may soon combine the two casinos. "That's how Carl likes to do it," says Dan R. Cassella, CEO of Stratosphere Corp. "Buy things on the cheap and get the efficiencies out by cutting costs."

Still, that doesn't quite explain what a billionaire dealmaker is doing snapping up second-rate joints that only a low roller could love. To be sure, casinos are hardly Icahn's only investments. His publicly traded real estate investment trust company, American Real Estate Partners, with assets of $1.2 billion, owns properties as diverse as an East Hampton (N.Y.) development and a Canadian garbage hauler.

TOUR GUIDE. But Icahn figures he can make real money in gaming. To help fill his casinos, he has also launched a Web travel agency. In April, Lowestfare.com Inc., 79% controlled by Icahn, filed for an initial public offering in hopes of raising $91 million. The online service will offer discount packages to the Stratosphere and other Icahn properties. And it will get folks to those places for prices that won't make much of a dent in their gambling stakes. Icahn, who headed TWA from 1985 to 1993, left the airline with the right to buy more than $600 million in airline tickets at deeply discounted prices. He plans to use those tickets by offering huge discounts to anyone willing to gamble at his casinos. "If he decides to become a big tour wholesaler, he might be able to turn all of this into a real business," says Saul F. Leonard, a Los Angeles hotel-and-casino consultant.

Icahn's low rolling doesn't always win. He was recently outbid for Desert Inn, the faded former hangout of Frank Sinatra and Howard Hughes that was bought in May for $275 million by South African casino operator Sol Kerzner. And resurrecting the downtrodden casinos he has won't be easy or cheap. In the six months since Icahn assumed control of the Stratosphere, revenues have fallen by 7% even as the rest of Vegas has enjoyed a huge resurgence. To turn it around, Icahn wants to build 1,000 new rooms, an $80 million investment.

Known for his quick investment flips, Icahn seems to be into gaming for at least a while. In July, he turned down an estimated $80 million from Station Casinos for Arizona Charlie's, which would have given him a fast $10 million return. His own personal haunt has so far been the swank Bellagio, where industry sources say he has a $1 million credit line. "People think of him as a raider," says Jeff Silver, his lawyer in the Arizona Charlie's deal. "But he really seems to like the casino business."

Icahn certainly knows his way around the gaming tables. Raised in Queens, N.Y., he played chess as a boy with his father, a lawyer and cantor. But after graduating from Princeton University, then dropping out of medical school at New York University, Icahn became an avid poker player during a stint in the U.S. Army, according to earlier published accounts. When he got out of the service, Icahn went to work in the early '60s as a broker for Dreyfus Corp.

EARLY WINS. Not long afterward, he used $4,000 in poker winnings to help start his own options business and began publishing a stock-tip sheet. By 1968, he had launched Icahn & Co. He made huge gains by selling stock he had accumulated back to such companies as American Can and Owens-Illinois Inc. That set the stage for his notorious decade as a 1980s raider.

Icahn is unlikely to ever make as much from his collection of casino assets as he did in the '80s. The newest, flashiest places in town are in style, and as long as people have extra cash, that's usually where they want to blow it, industry analysts say. That's why casinos on the Strip routinely gut five-year-old gaming palaces only to build ever-bigger and snazzier ones in their places. Concedes the Stratosphere's Cassella: "Every time something new opens on the Strip, we get killed."

But Icahn is convinced that even in the act of throwing their money away, many consumers will prefer to do so frugally. That's why his collection of what looks to everyone else to be losers in the game of flash and cash may turn out to be anything but. If nothing else, they prove that Carl Icahn loves long odds.

Before it's here, it's on the Bloomberg Terminal.