Nevada takes wait-and-see approach to Station’s problems

David Strow

Thursday, Sept. 14, 2000 | 11:32 a.m.

As Station Casinos Inc. faced Nevada gaming regulators Wednesday for approval of its latest purchase, company executives faced concerns ranging from a union's fury over job security to questions about a regulatory battle the company faces in Missouri.

But in the end, at least for the Nevada Gaming Control Board, those concerns weren't enough to stop the deal.

The control board voted 3-0 Wednesday to approve Station's $205 million purchase of the Santa Fe hotel-casino in northwest Las Vegas. Assuming the Nevada Gaming Commission also approves of the deal, Station will close on the purchase Oct. 2 and immediately begin a $100 million renovation and expansion of the property.

The ambitious project, said Station general counsel Scott Nielson, will "Stationize the Santa Fe," making it equivalent in size and scope to such Station properties as Texas Station and Sunset Station.

But before approval came, Station had to answer questions about its plans to make the 900 workers of the Santa Fe reapply for their jobs once the purchase was complete. The company also went through some questioning on whether or not Station's grip on the locals market was growing too extreme.

But the one element that could have caused serious difficulty for Station -- the company's decision to snub subpoenas from the Missouri Gaming Commission last month -- appeared to cause little concern for Nevada regulators. The board made no move to discipline or reprimand Station, though board Chairman Steve DuCharme did not rule out the possibility of eventual disciplinary action.

Station attorney Frank Schreck explained to the Control Board that the company had fully complied with previous requests for documents and interviews, and had chosen not to participate because it felt its due process rights were being violated by an open hearing without the right to cross-examine witnesses. Further, Schreck said, Missouri officials openly aired documents and information that Station said were confidential.

"I believe it would be premature for us to weigh too much into this issue," said board member Dennis Neilander.

Board member Bobby Siller said he was "troubled" that the situation had deteriorated to the point where Station faces possible revocation of its Missouri licenses, but quickly added that he didn't blame Station.

"I don't think it's very healthy for gaming and makes a very hostile environment," Siller said. "It appears you're in a difficult environment, and hopefully we can get a resolution of this issue."

DuCharme pointed out that the thrust of the hearings -- the allegation that former Station attorney Michael Lazaroff had extensive contact with former Missouri commission Chairman Robert Wolfson in violation of Missouri gaming regulations -- was an issue that is entirely foreign to Nevada. In Nevada, DuCharme said, contact between regulators and companies is not only permitted, but encouraged.

"If we got that rule here in Nevada it would sure free up my day," DuCharme said. "It's hard for me to get my arms around this, and how egregious this is, because we don't have this rule, and it would be difficult for us to operate if we had this rule. But it is the Missouri rule."

DuCharme asked Station to keep the board posted on future developments in Missouri.

Following this questioning, Station faced a challenge from the Culinary Union, which wanted the board to force Station to retain the 900 employees at the property. Station has said it will make all employees reapply for their jobs once the Santa Fe acquisition is complete.

Culinary Staff Director D. Taylor told the control board he was stunned by Station's decision. He argued that such a move would badly hurt the gaming industry's reputation, since it has long argued its main benefit is job creation.

"Generally, Station has a wonderful record in this community," Taylor said. "A real injustice has been done, and it goes against the grain of what other companies have done with recent mega-mergers.

"We have about 900 people who are going to get fired. It is unbelievable ... that this sort of thing can go forward without (action) from this board protecting these workers."

But Station countered that the company was completely rebranding the Santa Fe, and needed flexibility to hire the highest-quality employees possible.

"It's absolutely imperative that we hire the best 1,200 employees we can find to run Santa Fe Station," Nielson said. "Many of these employees will be current Santa Fe employees, even though Santa Fe has experienced tremendous turnover since this announcement (that Station would buy the property).

"We will be creating more jobs than we're replacing there."

Since the buyout was announced, Nielson said 600 Santa Fe employees have quit. But of the 400 applications received at the Santa Fe employment center, 90 percent are from current employees, he said.

But board members balked at the Culinary's request to mandate that Station retain current employees, saying the board did not traditionally involve itself in labor matters.

Finally, board members briefly probed the issue of whether Station would be gaining too much market share by acquiring the Santa Fe. Overconcentration can be used as grounds to block an acquisition under Nevada regulations, but the board expressed little concern the Santa Fe buyout qualified.

Station officials told the board that the company would control 16.8 percent of all Clark County slot machines after the buyout, and 24 percent of all table games -- an analysis that excluded the Strip and downtown Las Vegas. But Station Chief Financial Officer Glenn Christenson noted the company would be responsible for just 8 percent of Clark County gaming revenues, including the Strip.

"That doesn't sounds like a very big (portion) to me," Christenson said.

Though Station will further its lead in the Las Vegas locals market, Neilander noted that the "locals market" was a difficult term to define under Nevada regulations.

"I've yet to have anyone tell me what the locals market is, and I think it would be very difficult to do," Neilander said.

If Station's buyout of the Santa Fe is approved by the commission later this month, Station plans to embark on a $100 million expansion of the property. Employment and operations at the Santa Fe will be slashed substantially the next few months during an overhaul of the property, but should be increased to 1,200 by year's end once renovations are complete.

Santa Fe's expansion, which could be complete as early as mid-2002, will give the Santa Fe 3,000 slot machines. Other key additions will include a 12-screen movie theater, two parking garages, a food court, buffet and child-care center.

Following the Station hearings, a bizarre four-hour hearing on the buyout of Universal Distributing of Nevada Inc. followed. The board ultimately decided to resume hearings on the matter in November, after ending up more confused about the deal than when hearings began.

UDN was one of the state's largest slot manufacturers in the mid-1980s, but has been virtually out of operation for the past six years. Now, Aruze Corp. -- a Tokyo gaming and entertainment company controlled by Japanese billionaire Kazuo Okada -- wants to acquire UDN for $18 million, ostensibly to allow it to penetrate the U.S. slot market.

UDN, however, is also controlled by Okada. And board members expressed great concern over a series of transactions over the past five years that saw UDN go from a balance sheet deficit of $40 million to a value of $18 million. The board attempted to determine -- unsuccessfully -- if these transactions were funnelled through UDN for the sole purpose of boosting its value for a Aruze buyout.

"These are transactions that are foreign to us ... they might smack of insider trading here," DuCharme said.

Much of the board's questioning focused on a $5 million research and development contract between a Japanese company and Pacific Gaming Ltd., an Australian subsidiary of UDN. The contract stated its purpose was for R&D activities, but Okada said the contract was for a slot theme licensed to the Japanese company, with proceeds coming from royalties.

DuCharme repeatedly said agents had no proof of any work under the contract, and grew frustrated with a lack of information.

"The agents have asked for documentation, and we've got nothing!" an angry DuCharme said. "Show us some evidence!"

The board also wasn't satisfied with Okada's explanation of $63.5 million in manufacturing revenues reported by UDN from 1995 to 1998. Much of these revenues came from sales of slot machine components to Japanese company Electro-Coin Japan, at an extraordinarily high profit margin of 80 percent. What troubled the board about these transactions was that, at some point, Aruze acquired ECJ -- but it was never made clear if the UDN sales continued while Aruze owned the company. It was also not clear if the parts were manufactured in Australia or Nevada.

Okada made no apologies for the sales, saying they were structured to allow UDN to repay his personal loans.

Finally, board members grilled Aruze executive and director Asako Oikawa, who didn't report much of her assets on her licensing application, then initially refused the board's request for that information. Oikawa attributed this refusal to Japanese customs, which discourage women from revealing their financial condition.

Oikawa, who is trying to withdraw her application, promised to comply with future requests. While sympathizing with the difference in cultures, board members weren't encouraged by their unsuccessful search for information.

"If we can't get to the truth in this environment ... what reason do we have to believe that once they're in Japan we'll ever know what's going on?" Siller said.

"If you're going to ask for our privileged license, you've got to play by our rules," DuCharme said.

If the buyout does occur, will UDN be resurrected? Once again, Okada and Aruze made that far from clear.

"If we were granted a license, we would like to participate in this market ... and present products that would vitalize the Nevada market," Okada said through a translator.

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