Analysts say Station Casinos is in a tough position

Monday, Aug. 10, 1998 | 10:13 a.m.

Station Casinos officials say the big Las Vegas locals gaming operator is doing just fine.

That's despite the collapse of its merger with Crescent Real Estate Equities, the threat of long and costly litigation, a massive debt load and a plummeting stock price.

"Our business is better than it's ever been," said Glenn Christenson, Station's chief financial officer. "We're in great shape."

But gaming analysts and investors see a different picture.

"This is a very difficult situation for Station," said Jason Ader of Bear Stearns & Co. "It is a very leveraged company in a very competitive business."

"It's an unfortunate situation for Station, which is in a tougher situation now than they were in last fall," said David Wolfe of CIBC Oppenheimer.

"They have fewer options, partly because of a higher debt load and partly because the market has shut off certain financing possibilities."

"Based on what I see of their capital structure, this would be a challenge for the best of managements," said Dave Ehlers, chairman of Las Vegas Investment Advisors Inc.

The analysts said they weren't surprised by Crescent's announcement Friday that it was terminating its $1.5 billion merger agreement and was suing the Las Vegas-based casino company for damages.

Since the merger deal was announced last January, investor skepticism about the real estate investment trust's plan to enter the crowded Las Vegas gaming market had cut 26 percent from its stock price.

Crescent shares rebounded Friday, however, closing at 30 1/16, up 1 11/16, on trading of 1,546,100 shares, more than three times normal daily volume.

Station stock hit a new 52-week low Friday, losing 2 1/8 to close at 5 7/8 on very heavy volume. The stock had traded as high as 16 5/8 this year before beginning a freefall once the Crescent merger started to unravel.

Officially, the deal began to unfold when holders of $103 million of Station's convertible preferred convertible stock, unhappy with a lower premium than Crescent was offering for Station common, threatened to vote the merger down.

Unofficially, though, there were reports of personality clashes between executives of the two companies, which gained credence with the unusually strong comments the companies made after Station canceled a shareholder vote slated for Aug. 4.

Analysts said the loss of a potential $115 million cash infusion from the sale of preferred stock to Crescent puts added pressure on Station's balance sheet, which is saddled with more than $1 billion in debt.

Company executives pointed out cash flow rose 36 percent in the June 30 quarter from the year-ago period. But Station still wanted Crescent to buy $20 million of new preferred to help pay for $96 million of planned expansions at Texas and Sunset Stations.

"I think they'll have to defer the expansions," said Wolfe.

"Crescent brought them opportunities to increase investment in Las Vegas and the locals market and that's no longer the case, which could jeopardize their future growth plans," said Ader.

Both companies face hefty legal fees if their lawsuits drag on for years, as executives and analysts said they expected. Crescent is also suing Station for damages and to force payment of a $54 million breakup fee.

Christenson said the merger agreement specified the breakup fee would be payable only if Station shareholders voted the merger down, or if the company opted for a higher third-party offer. Because Crescent itself terminated the merger, Station should not have to pay the fee, Christenson argued.

"We believe that we absolutely will not have to pay the breakup fee," Christenson said.

Crescent officials declined comment.

Christenson also said Station was surprised to receive Crescent's letter last Friday terminating the deal. Despite the Station lawsuit, Crescent officials had told Station earlier last week the merger was still on, Christenson said.

At least one major Crescent shareholder was relieved the merger fell apart.

"This should be a blessing in disguise for Crescent," said Bruce Garrison, managing director of Houston-based research firm Harris, Webb & Garrison.

"Gaming earnings just aren't as stable as earnings from office buildings. Our investors were never sold on the deal."

Crescent owns office buildings, psychiatric hospitals, cold-storage companies, shopping centers, hotels and residential developments.

Station controls about 40 percent of the "locals" gambling market in Las Vegas and owns two casinos in Missouri, where anti-gaming forces using the so-called "boat-in-a-moat" issue are causing uncertainties.

Before announcing its proposed merger with Crescent last January, Station had planned to convert to a REIT.

Bloomberg news contributed to this report