Billionaire eyes Stratosphere

Gary Thompson

Thursday, June 26, 1997 | 11:48 a.m.

Billionaire investor Carl Icahn beat rival financier Ronald Perelman in a battle for control of Marvel Entertainment Group last Friday.

Now, insiders say, he may be using a similar strategy to seize the reins at Stratosphere Corp., the foundering Las Vegas hotel-casino mired in Chapter 11 bankruptcy proceedings.

Icahn bought about $40 million of Stratosphere first-mortgage notes from agricultural giant Cargill Corp. on Tuesday -- the same day Stratosphere Chairman Lyle Berman sold his Stratosphere debt for nearly $8 million to a bond-trading firm representing an unidentified investor, sources say.

Icahn's possible strategy: Secretly buy enough distressed Stratosphere debt to dictate bondholder committee rejection of the latest reorganization plan offered by Grand Casinos Inc., which owns 42 percent of Stratosphere common stock.

Theoretically, Icahn could gain effective control of the half-billion-dollar resort for a fire-sale price -- as little, perhaps, as $80 million to $85 million, though it's likely the actual figure would be closer to $100 million.

That's because Stratosphere's $204 million of notes have been trading at a discounted 70 percent or so of par value recently, giving the secured debt a market value of about $142 million.

(In fact, the notes dipped to as low as 61 cents on the dollar when Grand announced its revised -- and likely to be rejected -- reorganization plan after the markets closed Friday, but quickly rebounded when someone jumped into the market as a buyer this week.)

Holders representing 57 percent of the bonds -- or about $81 million worth at a price of 70 -- could force Stratosphere into foreclosure or lobby a federal Bankruptcy Court to accept an alternate plan for reorganization -- perhaps one offered by Icahn.

If Icahn has indeed bought $48 million of the Stratosphere's debt, he's already obtained more than half the amount he needs to gain effective control of the property.

The strategy isn't a new one for the 61-year-old financial wizard and medical school dropout who parlayed $4,000 in poker winnings into a billion-dollar net worth through investments in TWA, RJR Nabisco, U.S Steel and Texaco and, more recently, in so-called "vulture investing."

It was his battle with fellow "vulture investor" Perelman that gained him control of Marvel Entertainment, the bankruptcy-bound comic book publisher that owns valuable film rights to such characters as Spider Man, X-Men, the Incredible Hulk and others.

And it was that battle that may have set the stage for Icahn's latest apparent foray.

Late last December, the struggling Marvel -- 80 percent owned by Perelman's MacAndrews & Forbes Holdings Inc. -- filed for Chapter 11 bankruptcy protection to stave off creditors owed about $630 million.

Marvel wanted bondholders to waive restrictions that would have allowed the company to pursue its new business plan -- a tactic similar to the one Grand adopted when it initially asked holders of Stratosphere's first-mortgage notes to accept a three-point cut in the 14.25 percent coupon on the original debt.

In its latest plan, Grand offered to replace the $204 million of mortgage debt with $110 million of new seven-year notes paying 8.5 percent for two years and 12.5 percent for the remaining five. The creditors would also get a 10 percent equity stake in the reorganized company. Holders of existing Stratosphere common stock would get nothing.

Perelman, who sparked much speculation about his plans to invest in the casino industry after winning a Nevada gaming license last year, said he would infuse $525 million of cash into Marvel for production of new television programs and feature films.

Grand's latest plan calls for it to invest up to $75 million for construction of an additional 1,000 rooms at Stratosphere, a move considered essential to boost cash flow at the resort. In addition, it would guarantee payment of up to $25 million in construction cost overruns.

In the Marvel fight, Icahn sued, contending the bankruptcy filing had undermined the value of the company's bonds. Perelman capitulated in March, agreeing to cooperate with a restructuring plan developed by Icahn. Last-minute appeals to block the new plan were rejected by two different courts Friday.

Icahn's plan for Marvel calls for full repayment of all debts through a proposed $365 million rights offering, complete with a standby equity commitment from an Icahn holding company.

If Icahn adopts a similar approach for Stratosphere, it might stand a better chance of gaining Bankruptcy Court approval than Grand's current plan.

But there's also the possibility he's buying merely as a trader, according to some analysts who believe Stratosphere's biggest institutional bondholders were artificially propping up the price of the notes to prevent someone from pursuing just such a takeover strategy.

Others point to his previous dealings with Donald Trump and wonder if the New Jersey gaming magnate who's often expressed interest in acquiring a Las Vegas operation might be lurking in the background.

Whatever Icahn is up to, there's little doubt he can afford it. In February, he sold nearly 20 million RJR Nabisco shares for $36.75 a share -- or about $730 million -- in one of the biggest off-market block trades in New York Stock Exchange history.

Before that sale, his net worth was estimated at $950 million, putting him in Forbes magazine's list of the 400 Richest People in America.

In selling his RJR holdings, Icahn pocketed a $130 million profit and walked away from a proxy fight to replace the cigarette giant's board with his own nominees. He had wanted to split the company's food and tobacco divisions into separate businesses.

Neither Icahn nor Berman could be reached for comment.