Showboat mulls ways to spend cash

Gary Thompson

Wednesday, Jan. 15, 1997 | 11:59 a.m.

Somebody may be missing the 'boat.

Showboat Inc.'s stock price retreated 7 percent Tuesday, closing at $21.63, after an 18 percent jump Monday on news that Australian billionaire Kerry Packer would pay Showboat about $266 million to buy control of the Sydney Harbor Casino.

Normally, investors would be scrambling to climb aboard a company that stands to haul in a cool quarter billion in cash within the next six months -- especially when the company is one of the two mid-capitalization casino operators most often mentioned as a takeover candidate.

So what caused Tuesday's selloff?

Analysts say Showboat's casinos in two key markets -- Las Vegas and Atlantic City -- have performed dismally and there are uncertainties over the outlook for the Chicago-area riverboat operation that debuts in April.

Also damping enthusiasm for mid-level gaming operators perceived as catering primarily to local gamblers was the State Gaming Control Board's report that Nevada's casino revenues fell 6.2 percent in November, the worst drop since February 1993.

But for Showboat executives, the deal is a big one.

"When you look at where Showboat stock is trading, this transaction has a dollar value that's pretty close to what the whole company is trading at," said Greg Nasky, Showboat executive vice president.

With slightly more than 16 million shares outstanding, the stock is valued at around $350 million. That means the Packer deal is worth nearly 75 percent of Showboat's current market valuation.

Tax and transaction costs will trim Showboat's total cash windfall, which won't be known until the transaction closes. "But any way you cut it, it's a great deal of fresh, unencumbered cash," Nasky said.

There's the potential for more, as well. The deal with Publishing & Broadcasting Ltd., which is 45 percent owned by the Packer family's Consolidated Press Holdings Ltd., could yield nearly $80 million more to Showboat, depending on what happens with an options package.

The initial sale, coupled with Showboat's current cash position, will leave the company with more than $300 million, giving it the ability to consider acquisitions or expansion projects, as well as some breathing room as it struggles to reverse losses in Las Vegas and declining margins in Atlantic City.

But the money, plus Showboat's relatively low stock market valuation, could make the company a tempting target for bigger operators looking for a foothold in the two largest domestic gaming markets.

"We have a poison-pill plan in place and are absolutely not looking for anyone to approach us about buying Showboat," Nasky said. "Anything's possible, but we're just concentrating on improving shareholder value through other ventures.

"We have a very active development group looking at opportunities in the United States and abroad."

Nasky said Showboat wasn't looking to sell any part of its position as largest shareholder and owner of 85 percent of the management contract for the Sydney Harbor Casino.

"We were approached out of the blue by the Packer group, which put a compelling offer on the table. When we looked at it, we saw big benefits for everyone involved."

The deal calls for the Packer organization to buy 55 million shares of the Sydney casino's stock from Showboat for about $79 million. That will leave Showboat with 80 million shares, or 14.6 percent of the casino's stock, with options to buy another 37.4 million shares for 90 cents a share.

Showboat also will receive $187 million for its management interest, and has the right to sell Packer's group another 54 million shares at $1.44 a share if the Sydney casino's stock falls below that price. The stock has been trading above $1.70 a share.

"We think the combined effort and expertise of Showboat and the Packer company is like adding two plus two and getting five," Nasky said. "The combination produces a greater value for shareholders."

A Packer executive agreed.

"We believe the investment will show very attractive financial returns over time," said Brian Powers, chairman of Publishing and Broadcasting. He added, "This transaction represents a major move into the gaming industry for PBL and provides us with an ideal base from which to build a substantial business in this dynamic industry."

J. Kell Housells, Showboat president, said in a statement the deal "provides an opportunity to realize a superior return on our investment while maintaining a major ownership position in what we believe will be one of the best casinos in the world."

While Showboat has about $530 million in long-term debt outstanding at an average cost of 11 percent, the Australian deal gives it some added financial strength.

That leverage and its presence in the top two U.S. gaming markets has savvy investors taking a closer look at the company.