Aztar extends Tropicana purchase option

Gary Thompson

Tuesday, Feb. 2, 1999 | 10:38 a.m.

Aztar Corp. said today it negotiated an extension of its option to buy the 50 percent stake it doesn't own in the Las Vegas Tropicana, giving the company more time to assess development options for the resort.

A year ago, Aztar said it had obtained an option to buy the partnership interest owned by the Jaffe family of Chicago for $120 million. That option was due to expire in August.

The new option runs through Feb. 1, 2002, Aztar said today.

Exercising the option would give Phoenix-based Aztar full ownership of the 1,900-room hotel-casino sitting on 34 acres at the southeast corner of Las Vegas Boulevard and Tropicana Avenue.

The resort, opened in 1957, has recently been unable to compete successfully with the newer hotel-casinos in the vicinity. Despite a total investment of $200 million, including expansions and renovations, analysts expect it generated less than $5 million in cash flow last year -- an amount below the costs of servicing the partnership agreement.

Aztar is scheduled to release December quarter earnings Wednesday. For the first nine months of 1998, the Las Vegas Tropicana reported an operating loss of $8.1 million.

"Our goal is to generate operating cash flow that will cover our annual carrying costs of approximately $13 million," Aztar Chairman Paul Rubeli said in a statement.

"These costs consist of third-party rent, and principal and interest servicing partnership debt of $60 million," he said. "On Aztar's balance sheet, excluding current assets, the Tropicana represents under $50 million of invested capital. Accordingly, Aztar has limited exposure in the Las Vegas market while the current wave of new megaresorts comes on line."

Aztar has retained Goldman Sachs & Co. as its investment banking advisor to help explore options for making the resort site more competitive. Aztar Vice President Joe Cole declined to comment on the options under consideration, but analysts said they include eventually razing the existing hotel and building a new themed resort, possibly as a joint venture.

Aztar has also been mentioned frequently as a potential takeover candidate, with its Atlantic City, Missouri and Indiana casinos performing well in key casino markets.

Companies said to be interested in Aztar include MGM Grand Inc., which already owns hotel-casinos on two of the four corners at the Strip and Tropicana Avenue, and Circus Circus Enterprises Inc., whose new Mandalay Bay resort opening next month will join its Luxor and Excalibur holdings south of Tropicana Avenue.

Unlike Aztar, neither MGM nor Circus has a hotel-casino in Atlantic City, the second-largest gaming market in the United States. MGM's plans for developing there have been stymied by recalcitrant landowners, while Circus' deal to participate in a casino complex on Mirage Resorts-controlled land there fell apart last year.

Meanwhile, the Las Vegas Tropicana "offers a magnificent opportunity for the eventual development of a major new casino resort" in Southern Nevada, Rubeli said.

"This revised option agreement gives us great flexibility in determining how and when to capitalize on this unique asset, without requiring a major capital investment up front. By having an option available until 2002, Aztar has up to three years to assess how well the new capacity in Las Vegas is absorbed before making the commitments necessary to redevelop the Tropicana site."

The new agreement calls for Aztar to pay the Jaffe family $2 million through Aug. 1, 2000. If the company doesn't exercise the option by then, it can pay another $1 million to extend the option through Feb. 1, 2002.

Late last year, the Jaffe family waived a requirement that Aztar make a $21 million security deposit due if the Las Vegas Tropicana's financial performance fell below certain thresholds. And today's announcement revealed that the family was willing to extend the option at the same purchase price of the earlier option agreement.

Some observers speculate that the two developments signal an acceptance by the family that the dual-ownership provision of the existing partnership has hindered Aztar's ability to raise the funds needed to make the resort more competitive.

Aztar shares were up 18.75 cents, to $5.1875, in early afternoon trading today. They were trading as low as $2.875 three months ago, but began a slow climb higher on merger speculation and anticipation that the opening of Bellagio might benefit other Strip resort stocks.