Big loss pushes Aladdin closer to the edge

David Strow

Wednesday, May 16, 2001 | 10:54 a.m.

The Aladdin hotel-casino reported a huge quarterly loss Tuesday, blaming unusually lucky gamblers. The $1.2 billion megaresort on the Las Vegas Strip now needs an $8.7 million cash infusion within two weeks in order to pay its bills.

If owners the Sommer Trust and London Clubs International are unable to come up with this cash, the property could be headed for Chapter 11 bankruptcy very soon, perhaps by month's end, one gaming analyst said.

"It appears, based on their cash flow, that the company will have to go through some kind of restructuring," said Andrew Zarnett, gaming analyst with Deutsche Bank Alex. Brown. "I think (bankruptcy) is increasingly likely. The only way they could be saved is for the company to receive a significant amount of capital."

"I think it's really the banks' call at this point," said Jason Kroll, gaming analyst with Bear Stearns. "Certainly (the first quarter's results) puts them closer to the brink, and the banks will have to make that decision. It's really the bank's call whether they want to cut (the Aladdin) any slack."

The Aladdin's growing financial predicament was outlined in the property's first-quarter financial report issued Wednesday. The report indicated the Aladdin recorded $8.3 million in cash flow for the quarter ended March 31 -- a 42 percent decline from the fourth quarter of 2000, and well below the $20 million in cash flow the Aladdin must produce each quarter to meet its fixed debt and lease payments.

The property reported net revenues of $73.7 million -- and a staggering net loss of $47.2 million.

"The operating metrics they'd released with (their annual report) showed really low hold and slot play, so we kind of assumed (cash flow) would be in the high single digit range (below $10 million)," said Kroll. "Nevertheless, when you get the numbers, it's definitely a cold slap."

The Aladdin said revenues were hurt by low table game hold -- 14.5 percent for the quarter, compared to an expected hold of 17.5 percent. Normally, low hold is a temporary issue that a gaming company simply rides out -- but in the Aladdin's case, cash is so tight that it becomes a serious issue.

"Clearly it is very tight, and if we have another poor table hold quarter, that could definitely impact results further," Kroll said.

London Clubs, however, said it expects casino revenues will improve during the second quarter thanks to a redesigned slot floor and improvements in marketing and advertising.

LCI said hotel occupancy should continue in the respectable 95 percent range -- up dramatically from the mediocre 78 percent reported in January. Hotel occupancy ran at 89.5 percent for the quarter, while average daily room rates were $139.

Average slot win per machine was just $86 per day for the first quarter, though the Aladdin said this improved to $101 per unit per day in March.

Because of these disappointing results, the Aladdin said the Sommer Trust and LCI will need to pump $13.3 million into the Aladdin under their "keep-well agreement" with the Aladdin's lenders. The partners have already paid $4.6 million of this requirement -- $1.9 million from the Sommer Trust, $1.5 million from LCI, and $1.2 million "pre-paid" jointly by the companies on March 30.

But that leaves $8.7 million that must be paid by May 29, the Aladdin said.

That would help shore up the Aladdin's balance sheet. As of May 7, the property had cash on hand of $9 million -- and faces debt and lease payments of $8.9 million in June alone.

"Operating as a going concern is going to be difficult unless LCI and Sommer make the keep-well payments, and even with that, they may need some relief (from the banks) pretty soon," Kroll said. "This (quarter) could weaken (the banks') confidence in their ability to achieve the normalized run rate ($80 million in annual cash flow) they need to achieve."

Zarnett also believes the confidence of the property's two equity owners could be weakening as well.

"Given the financial performance of this property so far, I don't understand why they (Sommer and LCI) would throw good money after bad," Zarnett said.

In a statement, LCI pointed out that Sommer was required to put up 75 percent of the Aladdin's capital needs under the keep-well agreement.

"LCI is reviewing its financing options and in this respect discussions are on-going with relevant parties in respect (to) the Aladdin's capital structure," LCI said but did not elaborate.