Tropicana looking at LV options to expand

David Strow

Wednesday, Jan. 30, 2002 | 10:58 a.m.

A Phoenix company announced today it plans to buy out its partner in the Tropicana hotel-casino on the Las Vegas Strip -- a move that could be the first step in demolishing the current Tropicana and replacing it with two mid-size casino resorts.

Aztar Corp. is a 50-50 partner with the Jaffe family of Chicago, a family-controlled investment firm, in Tropicana Enterprises. Aztar leases the Tropicana from this partnership.

Aztar, which had an option to buy out the Jaffe family, said it will pay $117.5 million for the 50 percent of Tropicana Enterprises it doesn't own. The sale is expected to close by March 31; the option was set to expire next month.

"Now we control our own destiny there," said Joe Cole, Aztar spokesman.

Aztar will also gain complete control of the "Tropicana" brand name and the right to use it on its casinos. Currently, the only other Aztar casino to have this name is the Tropicana Atlantic City.

Aztar emphasized in a statement this morning that "current operations are to be continued indefinitely" at the 45-year-old hotel-casino.

However, the company is now proceeding with plans for two interconnected new resort casinos on the southeast corner of the Strip and Tropicana. Aztar would split the Tropicana's 34-acre site into two parcels -- the north one would be developed by the company, the south one held for development, joint venture or sale. Both would have frontage on the Strip.

The company said it believes each 17-acre parcel "is capable of supporting a major casino resort property consisting of 2,000 to 3,000 hotel rooms, a 100,000- to 120,000-square-foot casino, and extensive retail, dining, entertainment, meeting and resort recreational activities." It put the potential cost of each new resort at $600 million to $700 million.

By the summer of 2003, "we will confirm our project scope, cost, timing and return assumptions; assess the strength and outlook for the Las Vegas market; and make a decision on whether or not to proceed with a redevelopment of the site," said Aztar Chairman and Chief Executive Paul Rubeli.

That could put Aztar on track to participate in what's being called the next wave of development on the Las Vegas Strip. This new wave could potentially be jumpstarted by Steve Wynn, who plans to open a new megaresort, "Le Reve," at the former site of the Desert Inn by late 2004 or early 2005.

When considering new sites for development on the Strip, the Tropicana parcel is "arguably the most valuable real estate on the Las Vegas Strip," said William Schmitt, gaming analyst with CIBC World Markets.

"While we do not believe Aztar has ruled out the development of a substantial single property, similar to MGM Grand, Bellagio or Venetian, we believe this cautiously prudent management team believes it can recognize a better risk-reward ratio with a smaller development," Schmitt wrote in a research note.

The Tropicana site is "a phenomenal site," said Larry Klatzkin, gaming analyst with Jeffries & Co.

"It's connected directly via a (pedestrian) bridge to the MGM Grand (and the Excalibur) ... they should develop it," Klatzkin said. "(With the buyout), someone can now put a value on this. If you believe in the long-term health of Las Vegas, this is a great site."

But simply assuming 100 percent control of the Tropicana will have financial benefits for Aztar as well. Aztar said it expects earnings to be boosted by 8 cents per share in the first year after the buyout.

Over the nine remaining years of its lease, Aztar said it will save about $60 million in lease payments to the partnership; Aztar's after-tax savings should be between $26 million and $28 million.

Just simplifying the ownership of the Tropicana should help investors understand the company better, Klatzkin said.

"Complications make it harder for investors ... this makes it an easier company to follow, and adds more value to the stock," Klatzkin said. "And if someone's looking to acquire it (Aztar), this is an easier structure."