Aladdin partners in rift

David Strow

Tuesday, Sept. 4, 2001 | 11:01 a.m.

The financial situation of the Las Vegas Strip's $1.2 billion Aladdin hotel-casino took a serious turn for the worse over the holiday weekend, when its majority owner yanked its support for a critical deal with the hotel-casino's banks.

What is not clear is whether the move is simply a hard-ball negotiating tactic that could be quickly resolved -- or a signal the property could soon be in bankruptcy.

On Monday, Aladdin minority shareholder London Clubs International announced that the Sommer Trust -- holder of 57 percent of the Aladdin's stock -- had rescinded its support for a renegotiated financing package with the banks.

Because this new package did not go into effect by last week's deadline, the Aladdin is currently in default on more than $700 million in debt.

"What this means, simply, is London Clubs will continue talking to the banks without the Sommer Trust," said LCI spokesman Luke Morton. "London Clubs is committed to the project, and will continue talking to the banks."

A potential agreement that would give LCI majority control of the Aladdin's stock is a separate issue, Morton said, and those talks are still on-going.

Sommer Trust principal Jack Sommer declined comment. Aladdin spokesman Lynn Holt said this morning that negotiations are continuing, but had no further information.

"There's very little communication between Sommer and London Clubs today," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "We're one step closer to a formal restructuring. They only had a year if the (renegotiated bank agreement) was agreed on. Now it's likely we may not even have a year.

"Given that the economic climate is getting more difficult for second-tier properties, the road to restructuring is getting shorter."

Several sources said the banks have been willing to give the Aladdin more time, and the Aladdin's bank debt has been trading higher since a meeting between the Aladdin, the Sommer Trust, LCI and the Aladdin's bankers last week. One source said the Aladdin has won approval for the deal from its lease financiers -- a condition that had been holding up the new financing package before.

"Evidently, people got a positive vibe on the way out (of last week's meeting), because that's when the bids started coming up on the bank debt," the source said. "Now it becomes a real question of whether the thing can be made effective, and I don't believe it can, because Sommer still holds a majority of the equity. Why he (Jack Sommer) would do that, I have no idea."

Under the new financing package, the Aladdin would still be required to make interest payments on its bank debt, but not principal payments, until September 2002. This would save the property nearly $18 million in the next year, giving it time to gain a more stable financial footing.

Over its first year of operations, the Aladdin hasn't produced enough cash to cover both principal and interest payments on its debt. It has been forced to rely on cash infusions from Sommer and LCI, though LCI has been the company supplying almost all of the needed cash.

As part of the new credit agreement, the obligation of LCI and Sommer to provide these payments in the future would have been significantly reduced. This would be important to LCI, as the company has been financially drained by its Aladdin investment.

With Sommer's pullout, an $8 million payment is now due from Sommer and LCI. But Sommer has said it can't supply any more cash because of liquidity problems, and LCI has said its banks won't let it invest any more into the Aladdin unless the renegotiated agreement with the banks goes into effect.

One Wall Street observer said it appeared Sommer was simply making an 11th-hour bid to win a sweeter deal from LCI and the banks, but expressed concern the move could backfire.

"It looks purely like negotiations to me," the source said. "But tempers are so high, it would be almost as likely that anger could overcome this process, and blow it to bits. That would be very bad."