You've heard this many times from many executives in many industries: If we could only go private, we wouldn't have to deal with all those pesky Wall Street analysts and their unrealistic assumptions. If we could only go private, we wouldn't have to focus on those quarterly reports and short-term considerations.
If only …
Going private sounded good when the casino industry was booming and credit was plentiful just a few years ago. Today, however, as public companies like MGM Mirage (NYSE: MGM) and Las Vegas Sands (NYSE: LVS) stagger under the weight of debt (even factoring in MGM's latest debt restructuring today) and the lightness of stock prices, there's plenty of private pain and not so much private gain.
If you're a bondholder or shareholder, you're not happy with the leveraged-up-to-the-eyeballs public companies. If you're a bondholder, you're distraught with Harrah's Entertainment and Station Casinos, which went private via leveraged buyouts and whose balance sheets make debt management at MGM Mirage, Las Vegas Sands, and Wynn Resorts (Nasdaq; WYNN) look like objects of envy.
No simple solution
I agree with fellow Fool Matt Koppenheffer's recent exhortation that public casino companies should act like LBOs in cutting debt, shedding assets, and trimming costs.
Alas, they haven't done as good a job as those LBO specialists who preach "buy it, strip it, and flip it."
It's one thing to give the LBO treatment to a relatively healthy, underperforming industrial machinery company -- then fire people, sell assets, refine the strategy, and go public again. It's another thing to try that approach with a service-oriented industry like gambling, whose marketing-management mantra is the antithesis of the bare-bones industrial LBO approach.
Sure, you can sell assets, but you have to sell enough assets to make the strategy meaningful. And you can't be expanding or planning to expand until you get your fiscal house in order. In a weak economy, casino finances are often out of order.
Drowning in debt
Harrah's Entertainment went private in early 2008 when it was acquired by Apollo Global Management and TPG Capital. Shareholders received $90 per share, a 36% premium to Harrah's closing price on Sept. 29, 2006, the day before the private equity companies made their initial offer.
Since then, bond investors have had a tough time at the company, which owns or operates 53 properties in the U.S. and five other countries. Harrah's continues to renegotiate and restructure its borrowings as well as seek more debt financing.
For the quarter ended March 31, it had $24.2 billion in long-term debt plus another $376.2 million in long-term debt listed as a current liability. Debt makes up 97% of its capital.
Station Casinos is shaky, too. For the quarter ended March 31, it reported $2.55 billion in long-term debt plus $3.18 billion in long-term debt recorded as a current liability. The stockholders' deficit is $705.3 million.
Station was taken private in 2007 via a buyout engineered by its top executives and an affiliate of the Colony Capital investment firm. Shareholders received $90 a share, or a 30% premium for Station's closing price on Dec. 1, 2006, the day before the initial buyout bid was made.
Since the deal closed in November 2007, bondholders have gotten a lot of headaches. Station continues talking to lenders about debt restructuring, and it is seeking yet another extension of a forbearance period until July 17.
Even though MGM Mirage, Las Vegas Sands, and Wynn Resorts are struggling with debt, at least they still have positive shareholders' equity. So do small-cap companies like Isle of Capri Casinos (Nasdaq: ISLE) and mid-caps like Boyd Gaming (NYSE: BYD).
Addition by subtraction
In a perverse fashion, the best example of a casino LBO is the one that got away.
Penn National Gaming (Nasdaq: PENN) was targeted in June 2007 when Fortress Investment Group (NYSE: FIG) and Centerbridge Partners bid $67 a share, a 31% premium over Penn's pre-bid closing price.
But the deal fell through, and Penn received $1.475 billion in parting gifts. Of course, shareholders would have liked the $67 a share, considering that Penn's stock has been beaten down like most casino stocks (it's now trading at less than half the buyout bid).
However, Penn's balance sheet looks pretty respectable for a casino company. For the quarter ended March 31, Penn reported $2.28 billion in long-term debt plus another $99.8 million in long-term debt classified as a current liability; debt makes up 53% of capital.
The lesson for casino financing lies in aphorisms that investors' parents taught them long ago. "The grass is always greener on the other side" serves as a reminder that going private doesn't always solve your financial/management goals. "Your eyes are too big for your stomach" illustrates that if you ignore the first aphorism by pursuing an ill-timed, ill-conceived LBO, you'll choke on debt.
More gambling Foolishness:
Closed for 15 months – opening 10 days only! Get notified ahead of time as our expert portfolio manager invests $1 MILLION in the best opportunities from across The Motley Fool’s premium investment services. This is the first open since August 2008, by invitation only. Enter email below.
Terms & Conditions
RSS Headlines
Fool UK