Aladdin eyeing refinancing, recapitalization plans

David Strow

Friday, Feb. 16, 2001 | 11:07 a.m.

Construction lawsuits

Two lawsuits were filed this week by subcontractors seeking restitution from Aladdin Gaming LLC for work done at the Aladdin hotel-casino and its attached Desert Passage Mall.

F.R. Inc. doing business as Bombard Electric sued Aladdin Gaming LLC; TrizecHahn Development Corp., the owner of Desert Passage Mall; at least seven of its shops and restaurants and two general contractors, alleging they failed to pay on more than $880,000 for work done to install electrical systems.

The defendants could not be reached for comment.

Separately, a Las Vegas stair unit installation company sued Aladdin Gaming LLC and its contractors, Fluor Daniel Inc. and American Stair Corp., and two insurance companies, alleging they defaulted on $336,372 for work done to install stair units and landings at the Aladdin hotel-casino.

The defendants could not be reached for comment.

Burdened by a heavy debt load, the $1.2 billion Aladdin resort on the Las Vegas Strip needs additional cash as it makes its way through a tough start-up period.

Over the past several years, its source for more cash has been its London-based minority owner, London Clubs International. But LCI, hit hard by the Aladdin's heavy opening losses, is now itself looking for cash to save both itself and the Las Vegas Strip resort.

Speculation has swirled on both sides of the Atlantic over how LCI proposes to accomplish both tasks. The British press often mentions an LCI stock sale as one possibility, a sale of part of the Aladdin's stock to a new company as another. Still other reports indicate that LCI is a prime takeover target, and say a number of prominent British gaming companies are considering a bid -- but only if LCI's holdings in the Aladdin are jettisoned first.

But the Las Vegas Sun has learned LCI may be trying to engineer a complex deal that would not only inject more cash into both companies, but would end up giving LCI a larger stake in the Aladdin than ever before.

Several well-placed sources say that the first stage of the proposal would involve a stock swap with the Sommer Trust, owner of 57 percent of the Aladdin shares. Though LCI controls only 40 percent of the stock now, its preferred shares entitle it to the first $30 million in profits produced each year.

That would change under the proposed new equity structure. LCI would control a huge majority of the Aladdin shares -- perhaps as much as 90 percent -- and the Sommer Trust would fall to around 10 percent. But the Sommer Trust also would be entitled to begin receiving dividends immediately, a selling point LCI is using in the talks, sources say.

If successful, sources say, LCI would then try to sell about one-half of its position to a new equity partner -- raising funds to strengthen its own balance sheet and to prop up the Aladdin's cash position. One source said LCI hoped to inject an additional $60 million into the Aladdin.

Selling equity in the Aladdin has been one of the moves under consideration by LCI as it tries to raise cash. The other move on the drawing board is a "rights offering" -- the sale of rights to shareholders to purchase additional shares of LCI stock, probably at a discount to market.

The Sunday Times of London reported Sunday that LCI had approached investors to measure support for a rights offering that could raise 30 million to 40 million pounds ($43.3 million to $57.8 million).

Asked about the speculation, LCI Chairman Alan Goodenough said his company hasn't yet committed to a strategy.

"We haven't really resolved to do either of those things (a rights offering or a sale of Aladdin stock), and both are still under consideration," Goodenough said. "We clearly need to raise additional capital, but we're working on a number of things, and none have come to fruition yet. It would be wrong to say we'll do any particular thing, and wrong to say we won't do any particular thing."

LCI needs cash not only to reduce leverage on its balance sheet but to provide additional capital to the Aladdin, Goodenough said.

"We're raising it for both," he said. "We're not just doing the Aladdin. We have projects in the Bahamas, three regional casinos in the U.K., and we're finishing the second phase of our South African project. We're ensuring we have enough (capital) to do all those things, and trying to reduce some of the leverage.

"What we want to be is sure that we're in a strong position, if the Aladdin needs (cash) in the future, to stand behind our obligations and responsibilities."

Goodenough declined comment on details of the plans being considered.

However, it's clear both options will be difficult. It could be tough to find buyers for the Aladdin's equity, since it's worth far less than the resort's debt load.

As of Sept. 30, the Aladdin's equity was valued at about $148 million, compared to total liabilities of just under $700 million. LCI's preferred stock was valued at $141.2 million, compared to just $6.4 million for the Sommer Trust's common stock.

The alternative fund-raising method, a huge rights offering by LCI, would severely dilute the value of that company's shares. That possibility has triggered heavy selling in LCI shares in recent days. LCI traded down as much as 20 percent this week, and the Times reported Wednesday that one institutional investor unloaded 3 million shares "while other investors remain spooked by the prospect of an eventual rescue rights issue."

LCI closed today at 41.25 pence, down 8 percent on the week. It has been hammered down more than 50 percent by British investors after reporting that its profits were drastically reduced by its share of operating losses and pre-opening costs from the Aladdin.

In its only financial report as an operating property, the Aladdin reported a net loss of $40.2 million on gross revenues of $40.6 million for the three months ending Sept. 30. It recorded negative cash flow of $3.2 million.

That isn't unusual for newly opened resorts on the Strip. Indeed, the Venetian, hit hard by construction delays, had a rocky opening year before rebounding to become one of the Strip's biggest producers of cash flow.

"One quarter of performance does not a story make," said Jason Kroll, high-yield gaming analyst for Bear Stearns. "We saw that with the Venetian. They're a totally different story now."

The difficulty with the Aladdin is that it has little margin for error during its start-up period, due to its high debt load and low cash reserves. In November, the resort said it might not be able to make debt payments or capital improvements unless it received more investment dollars.

The Aladdin did, however, pass its first danger date on Feb. 1, when it successfully made an $11.7 million interest payment. There had been concerns the resort would not be able to make this payment.

But that's only one of many hurdles remaining. Kroll estimates the Aladdin's fixed costs at $80 million per year, almost entirely in payments on its debt. That doesn't include its bonds, which don't require cash payments until March 2003.

That means that cash flow -- the Aladdin's earnings before interest, taxes and non-cash charges like depreciation and amortization -- is far more critical than net income. To meet its debt obligations, the resort must produce at least $80 million a year in cash flow. Annual cash flow in the $100 million per year range would be needed to start building cash reserves and creating returns for the property's owners.

That's in the neighborhood of such casinos as the Treasure Island, Excalibur, Monte Carlo and Mandalay Bay, Kroll said.

"That ($100 million) in cash flow is when they start getting a comfort level, not a huge comfort level, but some breathing room," Kroll said. "They clearly have to get closer to that $100 million number to get a little cushion on the cash side to maintain the normal ebb and flow of business."

But is the resort capable of reaching that number? Investors will get a better idea of the answer in March, when the Aladdin reports earnings for the quarter ending Dec. 31.

"That's the $64 question right now," Kroll said. "Everyone's original expectations were, given its location and given the potential attraction of the (Desert Passage) mall, that $100 million was an achieveable number, recognizing that there might be some early ramp-up period in the property's performance.

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