Sources say Rio eyes sale to REIT

Gary Thompson

Wednesday, Feb. 18, 1998 | 10:27 a.m.

Rio Hotel & Casino executives are negotiating the sale of the company to a real estate investment trust for more than $800 million, sources said.

The reported asking price is at least $35 to $38 a share, or between $860 million and $935 million. That represents a 30 percent to 40 percent premium over Tuesday's closing price of $26.375 for Rio stock.

The most likely buyer is Patriot American Hospitality Inc., a REIT in the midst of a $3 billion buying spree. That's in addition to the $3.2 billion the Dallas-based company spent last year acquiring Wyndham Hotel Corp. and Interstate Hotels Co.

Rio Chairman Anthony Marnell II declined to comment. Patriot American Vice President Suzanne Cottraux said the company had no comment.

A deal would involve the sale of Rio's real assets, including 83 acres at the corners of Flamingo Road and Valley View Boulevard, as well as the 2,500-suite hotel-casino, one of the most successful in Las Vegas.

The company also owns about 64 acres along Boulder Highway and recently acquired control of an upscale golf course in Henderson.

Rio reported fourth-quarter 1997 earnings of 41 cents a share, up from 20 cents a share in the 1996 final period and 28 percent above analysts' estimates.

Full-year earnings jumped to $1.30 a share (before pre-opening expenses related to a major expansion) from 90 cents a share in 1996. Cash flow for 1997 was $96.2 million, the company reported.

Conservative estimates put Rio's anticipated 1998 earnings before interest, taxes, depreciation and amortization at $100 million, which would value the purported transaction at 8.6 to 9.4 times projected cash flow.

Crescent Real Estate Equities' recently announced bid to acquire Station Casinos Inc. values that transaction at about 10.5 times Station's cash flow.

That deal, announced in the midst of early talks between Patriot and Rio, apparently gave Patriot "less negotiating room with Marnell," according to a source familiar with the discussions.

As a result, the talks cooled off for several weeks before resuming recently, the source said.

Such negotiations often fall through, noted one prominent gaming analyst who cautioned, "Buying stocks because of prospective buyouts is an excellent method of generating tax losses."

Rio executives have turned the off-Strip property into one of the most profitable in Las Vegas, appealing to an eclectic customer mix ranging from middle-income locals to high-rolling Asians lured back for repeat visits to a resort featuring high-energy entertainment and exquisite food.

In the past several months, Rio has managed to capture a significant percentage of the lucrative though volatile baccarat business traditionally dominated by Caesars Palace, The Mirage, MGM Grand and the Las Vegas Hilton.

Yet Rio's appeal is such that it manages to generate about 30 percent of its casino business from locals. And its suite revenue jumped sharply in 1997 at a time when increased hotel-room capacity drove occupancy rates and room revenues lower for most other major Las Vegas hotel-casinos.

Most of Rio's current executives would presumably stay on as part of an operating company to manage the resort for the new owner, a "paired-share" REIT that can avoid federal income taxes if it passes on 95 percent of its earnings to shareholders. The management company would pay most of its cash flow as non-taxable "rent" to the REIT.

Rio's biggest shareholder, Marnell is said to be interested in devoting more time to the construction business he chairs. Marnell Corrao Associates has built some of the biggest hotel-casinos in Las Vegas, including the Rio.

Patriot Chairman Paul Nussbaum told analysts earlier this month the REIT's acquisitions were being accelerated by the economic turmoil in Asia. In addition, White House proposals to erase the tax advantages enjoyed by paired-share REITs have set off a scramble by some to negotiate mergers before any adverse legislation is passed.

"We are probably looking at $3 billion in acquisitions -- although not all of that is going to be done at one time," Nussbaum told analysts in New York.

Patriot shares closed at $25, down $1.1875, in New York Stock Exchange trading Tuesday.