Trick or Trump?

Trump Hotels & Casino Resorts (OTC BB: DJTC)
trading at $1.30 as of 10/26/04

Does Donald Trump's hair qualify as a Halloween costume? I ask only because his casino company, Trump Hotels & Casino Resorts, is about as frightening as they come. It would be the perfect candidate for a short sale -- indeed, we've done that before here at Fool.com -- except that there isn't much money left to be made with the stock trading at $1.30.

In that sense, The Donald's gaming business is the ultimate trick: You simply can't win, whether you're betting for it or against it. Like a teenage girl in a slasher film, all you can do is run. Don't wait in the hallway. Don't go through that door that appears to be open just a crack. Leave. Now.

The haunted house of false hope
The problem with Trump Resorts is that sense of false hope the firm radiates. It's like the guy who thinks he's escaped the monster only to feel that odd sensation of being watched -- right before the kill, of course.

For example, in August Trump brokered a deal whereby the casino operator would enter bankruptcy and receive $400 million to recapitalize its business from private equity firm DLJ Merchant Banking, a subsidiary of Credit Suisse (NYSE:CSR). Remarkably, the deal involved Trump relinquishing the role of CEO.

In some ways, the agreement underscored the deal-making prowess of The Donald as he effectively persuaded debtors to accept a buyout at below face value. However, the deal fell through as bondholders sought a fairer shake. (Although you have to wonder whether Trump giving up management control ultimately was a deal breaker. A company report said the parties walked away by "mutual agreement." )

Beware the undead, or the brain dead
As of late September it appeared Trump Casinos was going to be either taken private or relegated to the scrap heap through bankruptcy. And yet Trump, ever the re-animator when it comes to his casino operations, last week achieved approval for yet another re-capitalization. Then yesterday, Morgan Stanley (NYSE:MWD) agreed to help subsidize the restructuring with a $500 million credit line.

But check out the specifics of this deal: Trump Casinos will enter bankruptcy in late November while bondholders exchange $1.8 billion in debt for $74 million in cash, $395 million in stock, and $1.25 billion in new debt. If you're thinking that's a deal that only a zombie could love, you're right. The debtors are left holding the bag while the company sees its obligations plunge by more than $400 million. The effective interest rate is also expected to be lowered to 8.5%, resulting in annual interest savings of $98 million.

What does The Donald give up? Not much. He supposedly is investing $71 million to kick off the deal, $55 million in cash. That's apparently enough for him to keep a 27% stake in the business, down from more than 50%, and the CEO title. Morgan Stanley actually makes out OK, too. Its financing is secured by a "first priority" lien on pretty much everything Trump Casinos owns. (Translation: If Trump screws up, we get everything.)

If it goes bump in the night, short it
Most troubling is investors' reaction to the deal. Since it was announced last week the stock has nearly doubled -- from almost worthless to not quite worthless. Such unbridled enthusiasm in the face of this horrific monstrosity makes me immediately rule out any shorting of Trump's shares. For now.

However, there is a scenario where a short would not only be warranted but attractive. You have to dig a little, but in this press release you'll find a clause that says the private Trump Organization, which I wish was public, will have the rights to any construction projects the company orders. Now couple that with this phrasing in the Morgan Stanley announcement: "The Financing would also provide financial resources for the Company to potentially invest in additional jurisdictions." Yep, you read that right. Trump Resorts -- a business whose casinos are supposedly so worn down that they're driving gamblers away -- is contemplating expansion. And you-know-who would get the construction contract.

Ahem.

Look, it's no secret that The Trump Organization does body work for the casino business. It has for years. But look where Trump Resorts is now. Is this really the time for a little corporate favoritism? Yeah, probably not.

So, the second I hear about a Trump Taj Mahal in Vegas, or The Apprentice Palace in Atlantic City, I'll follow in David Gardner's Foolish tradition and take a nice, fat short position. And that's no trick.

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Even after the ghosts and ghouls of Halloween have past, Fool contributor Tim Beyers will continue following the exploits of the candidates to be Trump's next apprentice. Join him and fellow Fools Dayana Yochim and Rick Munarriz each week, or chime in yourself at the Trump's Apprentice discussion board. Only at Fool.com. Tim owns no shares in any company mentioned in this story. You can view his Fool profile and stock holdings here .

The Motley Ghoul's Tricks or Treats represent the opinions of each Fool only and should in no way be taken as the opinion of either The Motley Fool, Inc. or any company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So do your homework, and review The Motley Fool's disclosure policy.

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