Market favors new capitalization plan for Station Casinos

John Wilen

Tuesday, June 16, 1998 | 11:14 a.m.

The Texas company buying Station Casinos Inc., Crescent Real Estate Equities Inc., pulled out all the stops Monday in announcing a series of measures designed to address investor concerns about the merger.

Crescent officials announced a significant increase in the company's stock dividend, from 38 cents per share to 63 cents. Crescent also announced that shareholders would have the right to purchase one share of Crescent stock at $31.13 for every five shares they currently own.

But most significantly, the company said it will form a new gaming-focused company to hold Station's current assets, and that the new company's shares will eventually trade separately from those of Crescent.

All three events will be triggered by the Station acquisition, which is expected to close in October.

In the short term at least, the moves appear to be a hit with investors. Crescent shares rose $1 to $32.13 on heavy volume of 1.16 million shares, while Station rose 47 cents to $14 on light volume of 226,300 shares.

Crescent officials said they were offering the higher dividend to reflect the company's cash flow growth. The rights offering and gaming spin-off, they said, is simply a better way to structure the business.

"Because of the opportunity we have to expand the Station gaming franchise, a separately capitalized and focused gaming entity in which Crescent retains control and the majority of the ownership is the ideal structure to execute our game plan," said Gerald Haddock, Crescent's president and chief executive in announcing the spin-off.

But the move was clearly more than an attempt to clarify Crescent's diverse businesses for investors. Crescent officials, concerned with a precipitous drop in its share price since the beginning of the year, were trying to address investor concerns that the company is becoming too diverse, analysts said.

"I think they may have been a little surprised at the sentiment in the marketplace upon the acquisition announcement," said David Wolfe, an analyst at CIBC Oppenheimer in New York.

Crescent is a real estate investment trust (REIT), with investments in office properties, refrigerated warehouse facilities, behavioral healthcare facilities and residential development.

In January, Crescent said it would acquire Station for $1.7 billion, or $18 per share. At the time, Station was trading at $11.38.

When Crescent announced the acquisition, its stock was trading near $38, down from a high of $40.91 on December 31. By Friday, it had dipped to $31.13.

As Crescent shares fell, analysts speculated investors were worried Crescent had paid too high of a premium for Station.

In a conference call Monday afternoon, Crescent officials said investors simply misunderstood their intentions with the Station acquisition.

"I think people don't fully appreciate and understand the power and the nature of what we bought yet," said Richard Rainwater, Crescent's chairman and largest shareholder.

Richard Holt, an analyst who called in from Luther King Capital, agreed, calling Crescent's low trading price a "complexity discount."

Haddock took pains to educate analysts listening to the call about the difference between the locals gaming market represented by Station, and the Strip gaming market represented by companies analysts may be more familiar with.

"The market in our belief has failed to distinguish between these two businesses," Haddock said.

Factors negatively affecting Strip casinos -- transportation problems, room oversupply and downturns in Asian economies -- simply do not apply to locals casinos, Haddock said.

"This is a different play from the Strip activity," Haddock explained. "Only 7 percent of our revenues come from rooms. We're not impacted by the Asian bubble. ... The returns from this business are outstanding."

Still, the Crescent officials seemed to be tacitly acknowledging investor concerns about the new, strange turn their company is taking by giving Crescent shareholders, in essence, an out.

"We're giving capital markets the ability to choose, really," Haddock said.

After the Station acquisition is complete, Crescent will sell 40 to 50 percent of Station's current assets to public investors, Haddock said. Crescent will continue to control the new company, and its stock price will reflect the portion of the new company it still owns, but Crescent investors will have an opportunity to bow out of direct Station ownership.

More importantly, capital generated by the two businesses will remain within those businesses, Haddock said.

"Gaming capital will go to gaming," Haddock said. "Crescent capital will go to the types of businesses that are there today."

Money raised by selling equity in the new company will be immediately available to be, "put to work really quickly in really smart transactions," Haddock said.

Is it a smart move?

"It is if they plan to do more expansions and acquisitions," Wolfe said.

But it may also attract investors to the companies by painting shareholders a clearer picture of Crescent's operations, he added.

"It's more accountability to the specific sector," Wolfe said.