Missouri turmoil rocks Station Casinos stock

Gary Thompson

Friday, Dec. 17, 1999 | 11:48 a.m.

Station Casinos Inc. stock rebounded slightly today after a four-day battering by investors worried about the deepening mystery over events surrounding the activities of the company's outside lawyer in Missouri.

Station stock was quoted at $17.25 a share, up 25 cents, in early afternoon trading today after losing 25 percent of its value in the past four trading sessions.

Today's gain was fueled in part by analysts' reactions to a flurry of announcements Thursday in which Station said it had terminated its agreement to buy a Kansas City riverboat, predicted higher-than-expected fourth-quarter earnings and disclosed its board has authorized the buyback of 6.3 million shares.

The announcements didn't specifically address investor unease over the abrupt resignation of Station's Missouri attorney from his law firm and the company's surprise termination of its bid to buy the Flamingo Hilton Riverboat Casino from Hilton Hotels Corp.

The big selloff in Station stock was prompted by fears the company, which generates 26 percent of its cash flow from Missouri operations, might face penalties if that state's regulators find any improprieties by Station executives.

But analysts from Prudential Securities and Schroder & Co. upgraded their ratings on Station's stock to "strong buy" and "outperform significantly" and another said Thursday's developments bode well for the company.

Station stock closed Thursday at $17 a share, down $2.375 or 12.3 percent for the day. Since closing at $22.625 last Friday, the stock had fallen sharply, costing Station $237 million of market capitalization.

The stock price had plummeted even though there have been no allegations of wrongdoing by Station executives in the expanding probe by Missouri gaming regulators into the activities of prominent St. Louis lawyer Michael Lazaroff.

Lazaroff resigned a week ago as a partner of Thompson Coburn, one of Missouri's largest law firms, after nearly two decades with the company. While no charges have been filed against him, the Missouri Gaming Commission is investigating information uncovered during the agency's study of Station's bid to buy the Flamingo Hilton riverboat in Kansas City.

While some reports have indicated the probe involves what happened to money Lazaroff was paid by Station and other clients, Missouri officials and Lazaroff's attorney have declined to disclose the nature of the investigation. A top Station Casinos executive said he doesn't know any details.

"I've heard a number of different allegations, but we aren't privy to the depth or extent of the probe," said Glenn Christenson, Station's executive vice president. "I really don't know what they're looking at.

"As part of their investigation into our bid to buy the Flamingo riverboat, they learned about some apparent problems with Lazaroff, and that slowed the whole process."

That delay proved deadly to the purchase of the riverboat, because Missouri eased boarding restrictions that had limited the time gamblers could play. As a result, gaming revenues have risen sharply.

"During our negotiations, we determined we wanted to put a very short time frame on the transaction," Christenson said. "We wanted to buy and begin operating the property as quickly as possible."

While a licensing investigation typically takes six to eight months, Station -- with four gaming licenses in Missouri already -- thought the process could be expedited.

"Because the Lazaroff investigation couldn't be completed in time, we asked Park Place for an extension," Christenson said. But Park Place wanted something in return -- a higher number than the $22.5 million already agreed upon.

Hilton Hotels Corp. owns the riverboat facility and pays $3 million a year to service public improvement bonds. But Park Place Entertainment Corp., the gaming enterprise spun off by Hilton Jan. 1, would receive proceeds from a sale of the property.

"Given the improved operating performance of the riverboat due to the removal of the cruising requirement in Missouri, we believe that Hilton-Park Place was seeking an increased purchase for the asset," Bear Stearns & Co. analyst Jason Ader said.

"We take a favorable view of Station's termination of the agreement, as it frees up capital to pursue other growth-enhancing opportunities and debt reduction," he said. Station remains Ader's "top pick" among gaming stocks.

Christenson confirmed that Park Place had demanded a "substantially" higher price for the riverboat.

"The Kansas City market has improved considerably since the cruise requirements were lifted," he said. "We terminated the agreement because we were concerned about our ability to get a fair return on investment."

Station said it is "unaware of any improprieties on its part," and Ader said he believes that, "in the long run, Station will be exonerated."

Christenson said Station retained Lazaroff as its Missouri counsel in 1992. The lawyer has also represented Aztar Corp., President Riverboats, Davis Gaming and the Missouri Riverboat Gaming Association. Lazaroff is reportedly hospitalized in St. Louis after being rushed to an emergency room last weekend.

This isn't the first time a deal to buy the Flamingo riverboat has collapsed. Donald Trump withdrew a $15 million offer earlier this year.

In other developments Thursday, Station said its directors authorized a plan to buy back up to 6.3 million of its 42.1 million outstanding shares.

The company also said it expects fourth-quarter earnings to range between $13.5 million, or 32 cents a share, and $14.3 million, or 34 cents a share. That would be sharply higher than the 5 cents a share earned in the 1998 fourth quarter and above analysts' consensus estimates of 30 cents a share.

The fourth-quarter numbers will exclude $21 million to $23 million of non-recurring charges related primarily to construction disruptions at the Station Casino St. Charles. The company is moving its gaming operations from a riverboat to an "entertainment barge" and expects to complete the work early next year.

Christenson said the improved operating results should result in a 20 percent increase in cash flow.

"Business fundamentals continue to improve across all areas of our business," he said. "We are particularly pleased with the continued growth in our Las Vegas operations, as we prepare to report another record quarter of cash flow."