Station Casinos $1.7 billion merger in trouble

Gary Thompson

Monday, July 27, 1998 | 10:56 a.m.

Holders of about $100 million in Station Casinos Inc. preferred stock are holding up the Las Vegas company's $1.7 billion merger with Crescent Real Estate Equities Co.

Station said today it's postponing indefinitely next week's scheduled vote on the merger by holders of its common and preferred stock.

Station said it "needs additional time to communicate with the holders of the 2.07 million shares of Station preferred regarding terms of the pending merger with Crescent as they relate to the Station preferred."

The company's statement didn't disclose what the problem is, and officials weren't available for comment this morning.

Analysts, though, speculated that holders of the Station preferred were holding out for a different conversion ratio in light of a drop in Crescent's stock price since the merger agreement was announced earlier this year.

Crescent stock was trading at $31 today, down from $38 a share six months ago. Analysts attributed the price decline to concerns that Crescent may have overpaid for Station stock.

Crescent's $18-a-share bid was estimated at nine times cash flow, a premium over the stock's trading range of 6.4 to 7.1 times cash flow in the months leading up to the merger announcement. Station was quoted at $13.125 today.

The bid called for Crescent to swap 0.466 of its common shares for each share of Station common, assume $919 million of debt and issue $103.5 million of Crescent convertible preferred stock in exchanges for existing Station preferred.

After the initial merger announcement, Crescent responded to investor concerns about mixing gaming and traditional REIT assets by saying it would spin off 40 to 50 percent of Station's assets into a new, publicly traded gaming company.

Station indicated today that if the preferred shareholders' concerns cannot be overcome, it could resolve the problem by simply canceling (redeeming) their stock and paying them for it.

Station said today its preferred stock has an aggregate liquidation preference of $103.5 million and may be redeemed for Station Common at a 4.9 percent, or $5.1 million, premium to the liquidation value (plus accrued dividends) on March 15, 1999.

"Station plans to discuss with the holders of the Station preferred the nature of their concerns with the terms of the proposed merger and is exploring ways to address those concerns as well as other options," the company's statement said.

"If a satisfactory resolution of the issues can not be obtained, Station could, with the consent of Crescent, redeem the Station preferred on March 15, 1999, prior to the closing of the merger, which would then be expected to be on or before March 31, 1999."

Crescent Chief Executive Officer Gerald Haddock and Frank Fertitta III, his counterpart at Station, said, "We remain very excited by the prospects of the merger of Crescent and Station.

"The common shareholders are voting overwhelmingly for the merger with 63 percent of the shares voted to date. We hope to resolve the concerns of the holders of the Station preferred soon to be able to close promptly."

Crescent, controlled by Texas billionaire Richard Rainwater, is a real estate investment trust that owns 99 office properties and seven retail properties totaling 35.3 million square feet, a 38 percent interest in 94 refrigerated warehouse facilities, 89 behavioral healthcare facilities, six full-service hotel properties totaling 2,276 rooms, two destination health and fitness resorts and economic interests in five residential development corporations.