Nugget was more Golden after all

By Liz Benston

Thursday, Nov. 17, 2005 | 7:37 a.m.

Landry's Restaurants ended up paying more for the Golden Nugget properties than the company initially announced, yielding more money for the previous owners than first believed, financial documents show.

Before closing the deal in late September, the Houston-based restaurant chain said it paid $295 million for the Golden Nuggets, including $140 million in cash and $155 million in debt.

The final cost was closer to $345 million and includes $163 million in cash, $155 million in bond debt and $27 million in bank debt, according to a recent quarterly financial statement that Landry's filed with the Securities and Exchange Commission.

The final price tag is about $130 million more than the $215 million, including debt, that Poster Financial Group paid to acquire the properties in January 2004.

Tim Poster, Tom Breitling and three business partners received $163 million in cash in the deal.

Their initial cash contribution was $50 million -- meaning they received a return of 226 percent on their less than two-year investment.

The partners included former International Game Technology Chairman Chuck Matthewson, tennis star Andre Agassi and Perry Rogers, Agassi's business manager. Rogers is the son of broadcast magnate Jim Rogers, who is also chancellor of the Nevada System of Higher Education.

Put another way, Landry's paid more than 12 times the $28 million in operating cash flow generated by the properties in the 12 months leading up to the February sales agreement with Poster. Operating cash flow is a key performance indicator for casinos that is generally defined as earnings before interest, taxes, depreciation and amortization.

The 12-times multiple is significantly more than the cash-flow multiple paid for almost all other casino holdings during the past 10 years.

During a conference call this month to discuss the company's third-quarter earnings, Landry's Chief Executive Tilman Fertitta called the Golden Nugget a "poorly run business" and said many Golden Nugget managers didn't know what (operating cash flow) was."

One former Golden Nugget official disagrees with that assessment.

Ed Borgato is a financial adviser to Poster and Breitling who negotiated the sale of the properties to Landry's.

Borgato said Landry's is reaping the rewards from Poster's business strategy, which involved spending money on marketing campaigns and other investments that generated more customer traffic at the Las Vegas casino.

"If you believe that the property there was poorly run and value was impaired there in the time that Tim and Tom were there, you'd also have to believe that Tilman was the worst businessman in the world because the price he paid suggests otherwise," said Borgato, a former board member of Poster Financial Group, the company that sold the casinos to Landry's. Borgato also was chairman of Poster Financial Group's audit committee.

The cost of the casinos is roughly half of the entire market capitalization of Landry's -- a company with more than 300 restaurants nationwide and more than $1 billion in revenue.

"Tilman has the capital to build dozens of additional restaurants. Instead, he bought a casino," Borgato said. "He is making a statement about where he feels the better return is."

Before consummating the deal, a separate agreement to sell the Golden Nugget in Laughlin to downtown Las Vegas casino operator Barrick Gaming Corp. fell through. The Laughlin property ended up packaged with the Las Vegas property.

Landry's ended up assuming additional bank debt that Poster Financial would have paid off with proceeds from Barrick had the initial deal gone through, Borgato said. Fertitta initially approached Poster and Breitling about buying the Laughlin property, he said.

While Landry's was an interested party, Poster ended up accepting a better offer from Barrick, he said.

"(Fertitta) really wanted in the gaming industry," and was attracted to the Golden Nugget brand in particular, said Borgato, who called Fertitta a tough negotiator.

"Twice the process came to a halt and we were prepared to not sell it and continue running the property," he said."Both times (Landry's) had an interest in changing key elements of the deal.

"The entire process was motivated by their desire to buy, not ours to sell," Borgato said."(Fertitta) thought that he could dangle a lot of money in front of some young guys and they would be eager to sell, but the opposite was true."

There was never a plan to sell the property, Borgato said. Poster"had a plan to invest in the property to drive revenue that would yield higher returns in years two, three and four," he said."Almost immediately after taking over, Tom and Tim expanded payroll and made other investments in the property, which is further evidence that there was never a strategy in place to flip the casino."

During his relatively brief tenure at the Golden Nugget in Las Vegas, Poster caught plenty of flak for an unflattering profile of his casino on a Fox network reality show as well as declining profits. Some also questioned his strategy of luring high rollers from the Strip, calling it risky and naive.

Others accused Poster and Breitling of running away from the business after profit fell.

Borgato said the business plan was working as intended. While profit suffered in the interim, revenue rose dramatically from the time that MGM Mirage owned the property. The TV show drove customer traffic along with a new high-limit pit, multimillion-dollar marketing campaign and appearances by singer Tony Bennett, he said.

"If there was poor performance, revenue would have been down," he said."If people aren't coming to the property and spending money, there's a problem. But that wasn't the case.

"We could have only done this as a private company," Borgato said."We didn't have to meet Wall Street expectations of earnings. Therefore Tim could make the investments today that would pay dividends down the road."

In response, Fertitta credits Poster Financial with doing a"great job in increasing revenue with a careful strategy focused on high-end gaming."

"However, they also saw an increase in costs, another important component of the financial equation," Fertitta said."As a publicly traded company, we have a responsibility to our shareholders to focus on producing profits. To this end, we have been making changes to the operations of the Golden Nugget properties that will decrease costs and, we think improve the bottom line."

Landry's, like other companies in the restaurant business, survives on thin profit margins and it improves profit by cutting costs, Borgato said.

The Las Vegas property is laying off about 100 full- and part-time employees. The property had about 2,600 employees at the time of the transaction.

"They wanted to show more profits off the bat," Borgato said of the layoffs. "They think they can cut staff without sacrificing service. That wasn't how Tim operated, but I respect their right to take the strategy of their choosing. "In the end, I hope they do well because it's good for Las Vegas. There are a lot of employees there that Tom and Tim care about and want to see prosper."

Poster has a"generous" personality and also operated differently from other executives who work for public companies, Borgato said.

"Tim doesn't sweat the small stuff," he said."He believes in paying a little bit more and expecting a little bit more."

Poster decided to sell after weighing the risk of his multiyear business plan against the potential reward, Borgato said.

"We'll never know whether Tim's strategy would have worked exactly as planned because we were able to realize the value immediately from the sale to Landry's," he said.

Liz Benston can be reached at 259-4077 or at [email protected].