Post of the Day
February 9, 1998
From our AOL
Trump Hotels & Casino Board
Subject: Donald to Sell - Wanna' Bet?
Wow! The Wall Street Journal says that "according to people familiar with the plans," that Donald has retained two investment banks to sell his casinos.
Haven't we been to this movie before? I recall that Trump was going to do a huge deal with the Rank Organization to convert the Castle to a Hard Rock - Salomon Bros. was going to do that deal. I recall he was going to sell the Trump Plaza for $1.5 billion. Merrill was the lucky investment bank with that assignment. I recall he and Colony Capital had "serious discussions" to sell DJT for $28 per share. I don't know of a bank retained to do that one. Amazingly, none of the above came to fruition.
Now DLJ and Bear Stearns are going to sell the company for $28 per share, says the Journal. Boy it's amazing how a tight-lipped guy like Trump keeps letting these stories leak out.
For starters, let's not confuse someone's intention to sell at a high price with another party's willingness to pay that price. Interested parties can leak all they want about comparative valuations, Station's multiple, etc. Before Brigam pops his champagne cork, here are some sobering facts to consider:
1. Bally Entertainment, which operates the most succesful and well-run property in Atlantic City - Bally Park Place, sold to Hilton for roughly 8.5 times forward EBITDA. That figure does not include two new projects Bally had in the pipeline at the time - Wild West in AC and Paris in Las Vegas. Bally also had a lot of fat coming out of its Chicago headquarters. When about $50 million of cost savings are taken out, the multiple Hilton paid becomes much lower. And let's not be delicate here - Arthur Goldberg is a truly great operator. I'm not sure we could say the same about the other side. So let's call it 8 times EBITDA, PLUS TWO NEW PROPERTIES IN THE PIPELINE. Harrah's acquisition of Showboat appeared to be done at higher that 8 times EBITDA, but actually wasn't after one strips out Showboat's equity in the Australian casino, and its cash. If SHowboat and Bally sold for roughly 8 times EBITDA, why should a company with less growth, higher-cost uncallable debt, and weaker management sell for more?
2. The Journal says DJT will do $300 million in EBITDA? That was last year. I say it's less this year. Caesars' new suites in AC are already putting the Taj's high-roller business under pressure. This January, with AC up over 10%, the Taj's revenues were down. Also, Asian gamblers will be coming to AC in smaller numbers. Also, Gary's numbers are deteriorating. IN Decemeber, the latest month available, the Trump boat had the lowest revenue in the state. And while the Marina won't be developed by Mirage for several years, it will put tremendous pressue on the Plaza and Taj. My view is that DJT will do $280 million of EBITDA in 1998 and is worth 7 times that number (if you can find someone to buy it). At that valuation, DJT has an enterprise value of roughly $1.96 billion. Subtract out the $1.7 billion of debt (not the $1.6 the Journal said, I believe), and you have an equity value of about $260 million of about $6.50 per share.
Why the lower multiple? First, unlike Station or Bally, there is no reason to expect DJT's cash flows to grow much. It is fully leveraged, so it can't borrow to make capital improvements. It has no new projects. There are a modest amount of new rooms talked about for the Taj, but no plans as of yet announced. Second, DJT's cost of debt is quite high - I believe it's around 11%, and much of its bonds are not callable for several years. How bad is its credit? I believe DLJ underwrote $100 million of 11% bonds last quarter for DJT, only 500 BASIS POINTS above the long bond.
3. Finally, who will buy DJT? Let's look at the REITs. Changes in the REIT rules proposed by Clinton will chill the paired share REITs ability to buy. Starwood has its hands full with ITT, Patriot has said it's not interested in gaming. Meditrust and Santa Anita, the other paired share REITs, simply won't do it while Congress is poring over the Clinton bill. Moreover, since DJT has never reported a profit, REITs can't take advantage of their tax shelter by buying DJT - you don't pay taxes if you don't make money. Vornad Realty is rumored to be interested in gaming, but it's not likely Chmn. Steve Roth, after tangling with Trump over their Alexanders Dept. Store holdings in the 80s would want to buy what DJT is selling.
How about the big players - Hilton, Mirage, Circus, Harrah's, MGM. You must be smoking. Each of these companies are under pressure with the coming overcapacity in Las Vegas. Hilton is overweight AC, Mirage hates Trump and vice versa, Circus wants to build its own, Harrah's is overweight AC (with its SBO acquisition) and MGM has its own plans there.
In conclusion, it's all well and good for unnamed sources to say they plan to sell DJT at $28 per share. The numbers don't work, the players don't add up. What do Bear Stearns and DLJ's gaming analysts think the value of the company is? Maybe that's the reality check we all need.