Stratosphere stock mystery explained

Gary Thompson

Thursday, Feb. 26, 1998 | 10:51 a.m.

Pssst! Don't tell anybody, but I found out why Stratosphere Corp. stock has been trading so high recently.

The secret is contained in Message No. 56 on an Internet message board where Stratosphere fans trade their thoughts about the company's prospects. Before I get to Message 56, though, a little history.

Once quoted as high as $14, Stratosphere stock has traded as low as 2 cents a share, primarily because its Chapter 11 bankruptcy reorganization plan calls for current shareholders to get absolutely nothing for their stock. In short, if the plan is approved, the shares are worthless.

Nevertheless, the stock traded as high as 31.25 cents a share earlier this month, before a bankruptcy judge ruled that Grand Casinos Inc. doesn't have to pay Stratosphere $60 million to defray cash-flow shortfalls.

The stock began a quick plunge, finally closing at 12 cents on Wednesday -- though why it stopped there continues to mystify analysts.

But they clearly haven't done the appropriate research. If they'd read the Stratosphere message board, they'd get the real scoop.

They'd find out why one savvy investor predicts the stock will go to $20 a share, though skeptics abound.

"Yeah, sure," says one. "I own half of the planet Mars, will sell for $1 an acre."

"I understand that the London Bridge is for sale," says another. "I think your message is full of ....!"

To which the Stratosphere bull indignantly replies: "To those who thought my last message was bogus ... the word is that in October the company will escape Chapter 11. Mark my words!!! All of you negative ........s out there will regret it."

Ahhh, but "contrarian1" may have the real inside story. Herewith Message No. 56:

"I had lunch with Steve Wynn the other day at Burger King," he writes. "He told me to keep it quiet, but I can't resist.

"He plans to buy the Stratosphere for $5 a share. The news will be out end of February '98.

"He wants exposure to that end of the Strip where the hookers, drug dealers and homeless hang out.

"Later."

In the unlikely event you're missing contrarian1's irony and plan to load up on Stratosphere, be warned: The company's existing stock will be worthless if the pending bankruptcy plan is approved. Here's why:

The bankruptcy court proceeded with a disclosure hearing today, the latest legal step toward approval of the reorganization plan that will let Stratosphere cancel all existing stock and issue new equity only to the people who own $203 million of its first-mortgage notes.

Current shareholders would get nothing, not even a chance to vote on the proposed restructuring, which would distribute new stock only to note holders.

Financier Carl Icahn's High River Limited Partnership and American Real Estate Partners, plus Grace Brothers Ltd., own about 88 percent of the mortgage notes, meaning they'd own 88 percent of the restructured company. The rest would wind up in the hands of other mortgage holders.

The plan calls for Stratosphere to issue 2,030,000 shares of new common stock representing 100 percent of the equity interest and voting power of the reorganized company.

First-mortgage holders would get a pro rata share of the new stock and the right to elect new directors and run the company as they please or hire a management team to do it for them.

Various leases on equipment and furnishings would continue to be paid assuming current cash-flow projections are met. But the reorganized company would still have high debt levels, possibly impacting its ability to raise the $75 million required to build the 1,000 or more additional rooms analysts say it needs to compete.

Holders of about $179 million in unsecured claims would get a pro rata piece of just $6 million -- about 3 cents on the dollar. About $1 million would be paid to settle tax, wage and other allowed secured claims.

Some 9,000 people who bought about $13 million in unredeemed pre-paid vacation packages from ex-Stratosphere Chairman Bob Stupak's old Vegas World resort have been excluded from the plan because Stratosphere contends Stupak owes them the money.

Stratosphere, which employs about 1,950 workers, posted a $1.9 million loss -- including $1.7 million of reorganization costs -- in the third quarter on revenue of $33.1 million.

The company owes $313.7 million. If the creditors insist on a Chapter 7 liquidation, a forced sale would raise only an estimated $132.2 million -- "a substantially reduced recovery" for creditors and still nothing for shareholders, Stratosphere says.

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