Boyd Gaming Eyes Station's Casinos

The Las Vegas casino operator offers $950 million for 10 of its rival's properties

Don't mistake this for a love note. On Feb. 23 the management of Boyd Gaming (BYD), a Las Vegas casino operator, sent a letter to cross-town rival Station Casinos Chairman and CEO Frank Fertitta III, offering to buy some of his company's prized assets for $950 million. The offer throws a monkey wrench into Fertitta's own plans for Station. He's asking bondholders to take as little as 10¢ on the dollar in a restructuring after an ill-timed leveraged buyout left the company $5.3 billion in debt.

The battle for Station shows that even in this weak economy bond holders may have other options than taking whatever buyout groups and company managers offer them. Late last year Station offered to exchange some of its junk bond debt for new loans at 29¢ on the dollar. But 66% of bond holders, representing about $1.5 billion in debt, rejected the deal, and Station was forced to withdraw the offer.

Next, Station played the bankruptcy card, saying on Feb. 3 that it would likely make a voluntary Chapter 11 filing. On that date, Fertitta offered bondholders new terms of anywhere from 10¢ to 50¢ on the dollar for $2.3 billion of the company's debt. He and his investors are offering to put $244 million in new cash into the deal. The terms must be voted on by Mar. 2. Perhaps to give bondholders a sense of urgency, the company skipped its February interest payment.

Investors Confused About the Offer

Boyd is offering $950 million for 10 Station casinos and indicated it may be interested in the whole company, which has 18 casinos in all. Deutsche Bank (DB) casino analyst Bill Lerner said in a research note that the deal could be a winner for Boyd, adding to the company's earnings, thanks to the $250 million in projected cash flow from the 10 properties. Bond ratings agencies Fitch and Moody's are taking a wait-and-see position on Boyd's credit ratings. Investors still don't know quite what to make of the offer either, with Boyd stock jumping initially on the news but falling 10% on Feb. 25, to $4 a share.

Station went private at the peak of the buyout boom in 2007. It was an $8.8 billion deal led by Station's largest shareholders, brothers Frank and Lorenzo Fertitta, as well as the private equity firm Colony Capital. Station said in a prepared statement that it intends "to continue to work with our lenders and bondholders to pursue our previously proposed plan of reorganization, while simultaneously evaluating the terms of Boyd Gaming's proposal." Colony declined to comment.

Boyd and Station are the two largest players in what was once a lucrative little niche, operating casinos that cater to local residents of America's gambling capital. Both companies expanded greatly during the past decade as Las Vegas led the nation in job growth due to booming tourism and home construction industries. But the sour economy and the bursting of the housing bubble has hit both companies hard. Station said in a preliminary filing with the Securities & Exchange Commission that its revenues fell 19% in the fourth quarter. Cash flow fell 25%. Boyd is due to report earnings on Feb. 26.

on beyond bingo

Both companies have their roots as family businesses, far from the glittering Las Vegas Strip. Sam Boyd came to Las Vegas in 1941 with $80 in his pocket. After working his way up from dealer to casino manager, he and son William acquired the Eldorado casino in the Las Vegas suburb of Henderson.

William Boyd, 77, still serves as chairman of the company. He's taken some big gambles, including an upscale resort in Atlantic City called the Borgata, which opened in 2003, but he's ultimately proven more cautious than his rivals. Last summer, the weakening economy prompted Boyd Gaming to halt construction of the Echelon, a $4.8 billion resort on the Strip. Twelve stories were already built.

Station began as a Las Vegas bingo hall controlled by Frank Fertitta Jr., the father of the current management. Brothers Frank and Lorenzo expanded the empire to include ever-flashier resorts in the Vegas suburbs. Properties such as the Green Valley Ranch, Red Rock, and the recently opened Aliante contain upscale restaurants, spas, discos, and modern design more reminiscent of the Strip.

The Fertittas, both whom are in their forties, live a lifestyle that would make even the fictional stars of the HBO hit Entourage jealous. They separately own the Ultimate Fighting Championship martial arts league, the Gordon Biersch brewery, and a contemporary art collection that includes works by Damien Hirst and Jean-Michel Basquiat. Of course, if Boyd Gaming is successful, what the empire will no longer include is a chain of casinos.

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