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October 25, 2014

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The back story on a pair of leveraged buyouts

Two leveraged buyouts of gaming companies, approved Wednesday by the Gaming Control Board, will likely be the last in Nevada for some time as the debt markets, hurt by major defaults on subprime loans, attempt to recover.

Real estate funds affiliated with the Goldman Sachs investment bank received board approval to purchase the Stratosphere, the two Arizona Charlie’s casinos off Strip and the Aquarius casino in Laughlin for $1.3 billion.

What was discussed: Plans to invest at least $25 million in the Stratosphere, $10 million in Arizona Charlie’s Decatur and $19 million for a room renovation at Aquarius.

With luxury resorts sprouting at the north end of the Strip, “the time is right” to execute a bigger redevelopment at the Stratosphere, said Richard Brown, CEO of the casino’s parent company. Longtime Goldman Sachs partner Highgate Holdings will receive a cut of hotel profit, using new yield management software to boost room revenue. Regulators said the deal, including $212 million in equity, is the most highly leveraged private equity deal but will benefit as new investments begin to make money.

What wasn’t discussed: Seller Carl Icahn’s $1billion gain on the sale of the properties, which have received minimal investment over the years. The billionaire dealmaker successfully turned around the once-bankrupt Stratosphere, upgrading the Aquarius and making the money-losing Boulder Strip casino profitable but “didn’t want to be a development person,” Brown said.

Meanwhile, Morgans Hotel Group and DLJ Merchant Banking Partners received approval to take over management of the Hard Rock Hotel & Casino – a property they already own but has been managed by PT’s Pub and locals casino owner Golden Gaming.

What was discussed: Regulators questioned the parties’ lack of experience in the casino management business but praised investors for earmarking more than $800 million toward upgrades over the next two years, including two hotel towers, a larger pool area, more restaurants, bars, retail stores, meeting space and a new music venue. “We’re putting the `rock’ back in Hard Rock,” Morgans CEO Fred Kleisner said.

What wasn’t discussed: The reasons why Morgans’ ex-CEO Ed Scheetz and company founder Ian Schrager won’t have any business relationship with Morgans or the Hard Rock. Scheetz stepped down in September after news surfaced of his girlfriend’s death from a drug overdose – which allegedly occurred in his Las Vegas condo while he was out. The company also severed a consulting agreement with Schrager, who opened the drug den nightclub Studio 54 and was briefly jailed for tax evasion. While the Scheetz scandal is too fresh, Schrager, a respected visionary who pioneered the hip, metropolitan boutique hotel and now operates his own development and consulting company, could conceivably have been forgiven for sins committed in the 1970s.

Both deals await Nevada Gaming Commission approval this month and are expected to close next month.

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