Post of the Day
May 12, 1998

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Trump Hotels & Casino Board


Subject: What's Donald Worth?
Author: JDavid38

Patient readers will follow this note all the way, because I deal with what I think is somewhat suspicious activity in DJT's stock at the end. But first, let's look at Donald Trump, the man.

The speculation about Donald T. is amusing, because let's face it, the man himself is one of the more interesting hucksters of our time. As I understand it, there is a body of thought that says one should own DJT stock because Donald is a "winner" with a huge net worth tied up in New York real estate who won't let this highly visible public investment falter. Another, more sinister, view holds that Donald is cleverer than the rest of us and will "screw" shareholders to feather his own nest.

I disagree with both perspectives, although I would add that the second has a little more validity in light of Trump's 1996 comp of $5 million, his selling the Castle to the public company for several hundred million more than it's worth, other self-dealing, etc.

But I would like to propose a third theory that's less conspiratorial, and suggests that time is simply running out on this guy. And the company is doing some dubious things to stave off the inevitable collapse.
Donlad J. Trump, the supposed billionaire, has margined his stock to his investment bank DLJ for a $40 million loan, according to theStreet.com. The piece said that if the stock falls below a certain price, Donald's in default to DLJ and they can take over his stock. DJT's 1997 10-K, in fact, referred to this bizarre transaction, and said a default could trigger a change in control.  
First, let's deal with Trump's net worth. It is simply a myth that he has much equity in New York real estate. I know, Forbes says he's worth $1 billion, but Forbes is wrong and knows it (did you notice how much nicer Donald was to the late Malcom Forbes in his current book than in "Staying on Top?" Did you notice how many ads Trump International Hotel had in the Forbes 400 this year?)

Here are the facts, he lost the Plaza hotel when creditors forced him to sell it to CDL and the Saudi Prince. He had to sell his interest in the Grand Hyatt for less than the debt when his partners the Pritzkers put the squeeze on him. "Trump International" hotel on Columbus Circle is owned by General Electric, and they paid Trump a development fee for building out the condos, and possibly to manage the hotel. The massive Manhattan West Side rail yards site is owned by a Hong Kong consortium. Trump's minority interest is about 30%, and is subordinate to the debt on the property. There, too, he gets development fees. I could go on. The fact is, Trump "owns" almost nothing - maybe he has equity in 40 Wall St. Virtually all his equity is tied to his casinos. As of today, that equity is worth $126 million, minus whatever personal loans he has against it. That's a tidy sum, to be sure, but it would probably place him about 5,000th on the list of richest Americans.

As for his gaming company, I am on record saying Trump is at risk of default on his bonds by early 1999, and events of the past quarter suggest I may have been too generous.

Keep in mind that in 1997 - despite more rosey predictions on the board from the likes of TrumpAC and others - DJT achieved $233 million of EBITDA, and had roughly $215 million of debt.

If you recall, management had said it could achieve $285 million of corporate EBITDA in 1998, which would suggest over 20% EBITDA improvement. So far, DJT is off to an abysmal start, as its EBITDA DROPPED 19%. In April, things appear to continue to deteriorate, as Trump's properties each fell about 10%. With Caesars opening 1,000 new slots by the summer and Delaware race tracks gearing up for expanding their casino capability, things should continue to deteriorate.

In other words, $200 million of EBITDA is not out of the question in 1998 - and thanks to additional borrowing, his interest expense has climbed to $222 million!

None of this is new to anyone - except those hapless souls still owning the stock.

So here we have company that has negative cash flow, with no real prospects for improvement - no expansions are in the works, competition is heating up, etc.

So what did the company do with its precious cash in the first quarter? It bought back close to 1.5 million shares of its stock! Because DJT loses money, the buyback was dilutive to earnings. Isn't that odd?

Now, let's consider one final fact that's been written about in theStreet.Com., but nowhere else that I'm aware of.

Donlad J. Trump, the supposed billionaire, has margined his stock to his investment bank DLJ for a $40 million loan, according to theStreet.com. The piece said that if the stock falls below a certain price, Donald's in default to DLJ and they can take over his stock. DJT's 1997 10-K, in fact, referred to this bizarre transaction, and said a default could trigger a change in control.

So what we have here is a company that's hurting, that has negative cash flow, and a Chairman who's using the precious cash to buy stock back and who - coincidentally I'm sure - defaults on a separate loan if the stock drops below a certain price. This, in my mind, is an act of desperation that will not work without a radical and quick transformation of the Atlantic City, which is not in the cards.

It's complicated, I know, but it's it's all in the public domain. And the facts are right. The noose is tightening.


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