Station Casinos to buy Santa Fe

David Strow

Tuesday, June 13, 2000 | 11:19 a.m.

Station Casinos Inc. expanded its Las Vegas casino empire today, announcing an agreement to buy the Santa Fe hotel-casino for $205 million in cash.

The agreement ends four years of an off-and-on pursuit of the property, and will give Station Casinos its seventh big Las Vegas-area property. It acquired the right of first refusal to acquire the Santa Fe in November as part of a $37 million pact to acquire Santa Fe's 40-acre land parcel in Henderson.

"After having discussions for some time with Santa Fe officials, the property became available for sale, and we were able to conclude negotiations fairly quickly," said Glenn Christenson, chief financial officer of Station Casinos. "We view the Santa Fe as an irreplaceable asset in a natural market for our company."

The deal will also help stabilize struggling Santa Fe Gaming Corp. Part of the purchase price -- up to $36 million, Santa Fe Gaming said -- will come in the form of a loan to bankrupt Santa Fe Gaming subsidiary Pioneer Hotel Inc., the owner of the Pioneer hotel-casino in Laughlin. The subsidiary had $44.4 million in notes that have been in default since December 1998.

As of March 31, Santa Fe Gaming's liabilities exceeded its assets by nearly $123 million, with $157.4 million in debt coming due this December. With the sale of the Santa Fe, the company will be able to eliminate "substantially all of the indebtedness of the company and its other subsidiaries, including (Pioneer's) obligations (in bankruptcy proceedings)."

In addition to the Pioneer, Santa Fe Gaming will retain a land parcel on the Strip "for possible future development."

However, Santa Fe Gaming also gave Station key noncompete agreements as part of today's deal. Christenson said Santa Fe Gaming agreed not to open a competing property within 5 miles of the Santa Fe in northwest Las Vegas on Rancho Road.

Santa Fe also agreed to a noncompete agreement in Summerlin. Station's earlier deal with Santa Fe Gaming includes noncompete agreements within 5 miles of Boulder and Sunset stations.

"We don't want him (Paul Lowden) to compete with Santa Fe," Christenson said.

Santa Fe executives deferred comment on the sale to Paul and Sue Lowden, majority owners of Santa Fe Gaming, who were not available for comment this morning.

Santa Fe's shares soared 70 percent this morning, to $2.13. Station declined 19 cents to $27.44.

The most prominent change in the property will come in its name -- once the deal closes, the property will be renamed "Santa Fe Station."

"We'll be bringing in some new signage, uniforms and upgrading the slot floor," Christenson said. "We'll be evaluating more plans as we get more familiar with the property.

"Our primary interest is getting the property integrated into the Station Casinos brand. We want it to be seamless when customers walk into any of our properties. While Santa Fe is a fine property, it doesn't currently meet our standards."

At first glance, many investors might believe Station Casinos paid too much for the property, Robin Farley, gaming analyst for PaineWebber, said. Station Casinos is paying more than eight times the property's current annual cash flow, she said.

"That looks like an expensive multiple, but you don't buy a property for what someone else was able to generate with it," Farley said. "You buy it for what you think you will be able to generate with it."

If Station Casinos can boost the financial performance of the Santa Fe to come in line with its other Las Vegas properties, Farley said, the deal could add 7 cents per share to its earnings by 2002.

"We believe the real acquisition multiple is far less than it appears," Christenson said. "We're looking at this from a longer-term perspective. We think there's significant synergies with marketing, advertising, purchasing power and the Boarding Pass (slot club)."

The announcement continues a string of expansion plans for Station Casinos announced in recent months. It also plans to build new casinos in North Las Vegas and Green Valley within two years.

Although the Santa Fe deal would give Station Casinos three properties in the northwest Las Vegas and North Las Vegas area, Christenson said the company remains committed to plans to develop a hotel-casino near the intersection of Craig Road and Martin Luther King Boulevard by the end of 2002.

However, Christenson said, the company is currently evaluating a proposal by North Las Vegas city officials that would move the development from its current location on Martin Luther King to a nearby site on Craig Road next to the Craig Ranch Golf Course. City officials have indicated they would be more comfortable with Station Casinos' planned hotel-casino at this site.

"We're very excited about having three properties in the North Las Vegas market ... it's one of the fastest-growing areas from a population and gaming revenue standpoint," Christenson said. "We plan to go forward with a property at MLK, but the city has brought us this proposal and we have to evaluate it."

Station Casinos may, however, face an issue with its traditional nonunion operations. To date, none of its properties has been unionized under the Culinary Union, and the union hasn't made any significant effort to organize at the company's properties.

The same, however, cannot be said for the Santa Fe, where the Culinary has waged a bitter, seven-year organizing war against the Lowdens. Santa Fe employees voted for union representation in 1992, but Santa Fe contested this vote with the National Labor Relations Board and in federal court. Santa Fe Gaming settled a complaint with the NLRB in 1998, but contract negotiations are still continuing between the Culinary and the hotel-casino.

What that means for Station is not clear at this point -- union officials said they were still investigating details of the deal this morning and could not yet comment.

When asked how Station planned to proceed with the Culinary, Christenson said one of Station's first steps would be to create a transition team to evaluate the property's operations and staff.

"Once we do that, we'll determine what course of action to take," Christenson said.