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October 21, 2014

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DAILY MEMO: GAMING:

Tropicana buyer gambled big on ’06 buy, fell hard

Credit crunch ruined intent to renovate Vegas property

Beyond the Sun

A year and a half after Bill Yung paid $2.8 billion for Aztar Corp. and its Tropicana casinos in Las Vegas and Atlantic City, his casino company filed for Chapter 11 bankruptcy protection and he was forced out of his job.

Yung isn’t the first executive to stumble in the deceptively profitable casino business. But his fall from grace has been faster and uglier than most and serves as a cautionary tale for swaggering chief executives from other industries who think success is simple in gaming.

Many competitors conclude he was doomed from the start.

In the insular, oh-so-polite world of gaming, executives rarely trade barbs for the good of the industry, which benefits from the success of their neighbors along the Strip. Publicly, they called Yung’s deal expensive, reserving more revealing commentary for private conversations. And it wasn’t pretty.

They called Yung a sucker — the kind that bought property at the peak of the real estate boom hoping for big bucks down the road. In that sense, the purchase, after a months-long bidding war, is comparable to those in the residential real estate bubble.

Aztar was a respectable company with five casinos and retirement-age executives interested in selling. After receiving little interest over the years, something changed. Banks had cheap money and investment bankers started pushing deals, which came fast and furious.

A Bloomberg reporter in June 2006 quoted a banker during the height of this frenzy, when prospective buyers were battling for deals, and brokers, egging them on, were reaping a windfall: “We’re living in a special time, which reminds me of the mid-1980s in New York when everything was possible and there was a bid every day and a counterbid every day.”

Yung, a successful operator of nongaming, business-traveler hotels, with an ego sized to fit, fought off three competitors to win Aztar.

Like many homebuyers who purchased more home than they could afford, Yung borrowed more money than his operations could support. Some of the loans were made based on the expectation that his casino company, Tropicana Entertainment, would redevelop the aging Tropicana on the Strip and eventually make more money to pay down the debt.

Tropicana Entertainment would have a debt load of more than $3 billion. Yung’s affiliate company, Columbia Sussex, would loan about $400 million in cash to the casino entity, with seven properties used as additional equity and a revolving credit line of $180 million to provide some cushion.

Casinos are cash-rich, but expensive to build and operate. Even wealthy owners run into trouble making mortgage payments.

“Your projections are only as good as your assumptions and when your assumptions don’t come true, you have a problem,” said Mark Clayton, a member of Nevada’s Gaming Control Board, which approved the transaction in November 2006.

Nevada regulators have been reluctant to stand in the way of risky deals, especially big ones financed by Wall Street — preferring to let market forces run their course.

Tropicana Entertainment’s new chief executive, Scott Butera, denies that Yung overpaid for Aztar but acknowledges the company was highly leveraged. When the economic decline began to hurt earnings, Yung was forced to make cuts that eventually proved counterproductive, Butera said.

Columbia Sussex, one of the nation’s largest franchise hotel operators, runs a lean operation. But that can backfire in the casino business, which relies on repeat business from demanding customers.

New Jersey regulators, who accused Yung of mismanaging his company and defying gaming laws, refused to renew the license for Tropicana Atlantic City in December and are forcing the sale of the company’s financial engine.

Yung had pinned future growth on Tropicana Las Vegas, where he planned a $2 billion redevelopment. The credit crunch killed those plans, leaving him with an old property he couldn’t remodel and a boatload of debt.

His exit from the company he built into a casino giant heaped embarrassment on the self-assured chief executive. Yet he’s hardly the first person to covet a status property, pay big bucks for it and suffer the consequences.

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