London Clubs’ stock drops after problems at Aladdin

David Strow

Friday, Dec. 15, 2000 | 10:47 a.m.

British investors hammered the stock of London Clubs International today, after the company reported its financial results have been hurt badly by the struggles of the new Aladdin gambling resort on the Las Vegas Strip.

As a result, London Clubs (LCI) said it is now considering a number of options regarding its future involvement in the Aladdin, including the possible sale of some of its 40 percent stake in the Strip resort.

In a report issued today, LCI said the company's net profit over the past six months was 800,000 pounds, down from 8.69 million pounds in the year-ago period. LCI said it has absorbed 2.5 million pounds in operating losses from the Aladdin since its opening, and that the company recorded an additional 3.5 million pounds in pre-opening expenses.

Without the Aladdin, the company would have recorded an operating profit of 9.43 million pounds, up slightly from 1999.

"Aladdin's early underperformance has led to a significant deferral of cash inflows, which has affected the financial performance of the (company) as a whole," LCI said in a statement.

Investors punished LCI on the news -- today in London, LCI closed at 56.50 pence, down 44 percent on the day.

"A significant improvement in performance at the Aladdin is needed to assist London Clubs with their financial issues," said Andrew Zarnett, gaming analyst at Deutsche Banc Alex. Brown.

Because of the difficulties, LCI said it is considering a number of possible options, including the sale of more stock, a restructuring of its bank debt or even the sale of some of its stake in the Aladdin.

But Alan Goodenough, chairman of LCI, cautioned in a statement that his company did not intend to pull out entirely.

"The Aladdin's long-term value to (the company) remains significant, despite its slow start," Goodenough said. "The resort remains an exciting and important project to London Clubs."

"We expect a good performance by the Aladdin in the first quarter of 2001, a traditionally strong quarter for the Las Vegas Strip," the company said.

In an interview with a British publication "This Is London -- Business Day" posted on the Yahoo! website, Goodenough said he was considering selling up to one-third of LCI's stock in the Aladdin.

In its first quarterly report, issued in November, Aladdin parent company Aladdin Gaming Holdings reported a $40.2 million loss on gross revenues of $40.6 million for the three months ending Sept. 30. The property reported negative cash flow of $3.2 million.

Company officials said they were taking measures to contain costs, including a 20 percent reduction in hours worked by Aladdin employees.

In that report, the Aladdin reported that unrestricted cash had fallen to $10.3 million as of Nov. 9 -- and that the resort might not be able to make its annual interest payments of $55 million without additional financing. The Aladdin said it might look to LCI and the Sommer Trust, the Aladdin's majority shareholder, for this financing. But throughout the development process, it has been LCI that has put up the funds needed by the Aladdin.

LCI had initially planned to invest $50 million in the resort, but rising construction costs compelled the company to invest an additional $150 million after the Sommer Trust said it could not meet the Aladdin's financing requests. The investments increased LCI's stake in the resort from 25 percent to 40 percent, but entitled it to a much larger share of the Aladdin's profits.

But providing more capital could prove difficult for LCI. In its earnings release, LCI said that it had to negotiate a "relaxation" of certain financial covenants with its lenders because of its poor earnings. Without these negotiations, LCI said it would not have been in compliance with terms of its banking facilities.

During the Aladdin's construction, Park Place Entertainment Corp. -- operator of the Paris Las Vegas/Bally's resorts next door to the Aladdin -- took a one-third stake in the Aladdin's bonds, fueling speculation that late Park Place Chief Executive Arthur Goldberg was positioning his company for a possible takeover of the resort.

"(A Park Place takeover) is always an option, however, (new Chief Executive) Tom Gallagher has said the company's focus is now on same-store sales improvement over acquisitions," Zarnett said. "But I also believe that Park Place will be opportunistic."