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twitterUnpaid bills may deter a bid for Fontainebleau
The bills amount to more than likely offer; Penn National exec says building worth ‘about zero’
Steve Marcus
The stalled Fontainebleau, the 3,800-plus-room project on the Strip, would require an estimated $1.5 billion to complete.
Tuesday, Oct. 13, 2009 | 2 a.m.
Sun Archives
- Fontainebleau a symbol of bad timing, not the only victim (10-12-2009)
- Judge to appoint examiner for Fontainebleau sale (10-8-2009)
- Penn National Gaming on Fontainebleau: 'We're looking' (10-7-2009)
- Penn to offer less than $300 million for Fontainebleau (10-5-2009)
- Fontainebleau judge wants quick sale of bankrupt project (10-2-2009)
- In reversal, Fontainebleau lenders suggest liquidation (9-25-2009)
- Fontainebleau: Bank no longer ‘seeking to destroy’ project (9-17-2009)
- Potential buyer in negotiations for stalled Fontainebleau project (9-15-2009)
- Fontainebleau contractors seek lien claims in state court (9-14-2009)
- Fontainebleau suit against lenders moved from bankruptcy court (8-5-2009)
- Another lawsuit alleges unpaid work at Fontainebleau (7-14-2009)
- Fontainebleau builder says it’s protected from paying severance (7-14-2009)
- Fontainebleau fires back, outlines bank dispute (7-8-2009)
Beyond the Sun
Whether front-running bidder Penn National Gaming buys the unfinished Fontainebleau Las Vegas resort out of bankruptcy in coming weeks may turn on the success of recent negotiations with attorneys representing the resort’s subcontractors. They are owed about $375 million for work completed in the months leading up to the end of work on the resort.
Penn wants to use the Fontainebleau as the flagship destination for customers who patronize its nationwide network of smaller casinos, much as Harrah’s Entertainment does with its Las Vegas properties.
Subcontractors might accept less money if Penn can finish the building, putting people back to work and generating revenue in the future to pay bills. That would allow Penn to whittle down the estimated $1.5 billion needed to complete the resort — which remains the biggest hurdle for any interested buyer in this economy.
At a bankruptcy court hearing in Miami last week, Fontainebleau attorney Scott Baena said Penn was expected to offer “substantially less” than $300 million to acquire the property.
Even though Penn’s purchase price would be less than contractors’ claims against the property, the company’s investment would put it in control of the project.
Penn’s offer would include money for day-to-day operations, cash to pay back lenders who have funded day-to-day operations since Fontainebleau declared bankruptcy in June and money to protect the structure from the elements, including a roof to seal off the 63-story tower and more than 3,800 rooms.
That would be less than 15 cents on the dollar for a building that has already cost about $2 billion. Penn National Chief Financial Officer Bill Clifford said at an analyst conference last month that the building’s relative worth was “about zero” given the cash needed to finish it.
“It’s not worth anything until you finish it,” he said.
Penn believes it could justify spending the cash to finish the building if, by one of the company’s own estimates, the resort generates annual earnings of at least $150 million.
The $1.5 billion to complete the project would cover more than construction costs; it would include overhead, interest expenses, architectural bills, marketing and training leading up to opening, information technology, interior furnishings and fixtures, as well as gambling devices and equipment.
Penn is working with a construction consultant that is analyzing how the company could trim construction expenses by outfitting certain spaces, such as restaurants, less expensively.
Clifford told analysts the company is crunching numbers on how a Las Vegas resort could draw customers to its network of smaller casinos, including gambling halls attached to racetracks, across the country.
Harrah’s Entertainment pioneered a strategy of luring gamblers to rack up loyalty points at its smaller casinos that can be redeemed in Las Vegas. Other companies are smitten with that model and have for years scouted resort properties in Las Vegas for that purpose. They include Pinnacle Entertainment, a Las Vegas-based casino company with no Vegas casinos and mostly smaller properties in the Midwest and South. (Four companies including Pinnacle fought to acquire the Aztar casino chain during the real estate boom in 2006, hoping to pick up Tropicana-brand resorts in Las Vegas and Atlantic City that could be used to attract regional customers. Columbia Sussex, whose gaming arm declared bankruptcy in 2008 after being forced to give up its New Jersey casino license and its Atlantic City resort, outbid Pinnacle for Aztar and the Tropicana.)
If Penn were to buy the unfinished property, it would have fewer hotel rooms in Las Vegas than Harrah’s current 18,000, as well as a smaller ratio of rooms to regional customers in its database, Clifford told analysts last month.
Increased profit projections for Penn’s regional casinos could help the Pennsylvania company justify buying Fontainebleau and spending the money needed to finish the building, analysts say.
While other potential buyers have toured the Fontainebleau and may bid in an upcoming bankruptcy auction, Penn — cash-rich after a failed private equity deal in 2008 yielded a breakup fee of $1.5 billion — has done the most homework on Fontainebleau, initiating its investigation about a couple of months ago.
An offer could emerge from Penn in a matter of days, as U.S. Bankruptcy Court Judge A. Jay Cristol wants to expedite a purchase so the building doesn’t languish, losing value by the day and delaying payments to creditors. Cristol is appointing an examiner to negotiate the sale of the property but is giving Penn some lead time to make the first bid.
No firm offer has emerged for Fontainebleau in the four months since the project sought bankruptcy protection, while lenders have forked over $16 million for expenses, including fees for securing the site and attorneys. Contractors remain furloughed and Fontainebleau has laid off all but a skeleton crew of managers.
“There are not many people or entities with a few hundred million dollars and ... a billion or more in their back pocket to complete the project,” Cristol said at the hearing.
And yet, Baena said Fontainebleau is negotiating nondisclosure agreements with other potential bidders and arranging tours of the property.
“We are going to have a lively auction,” he said at last week’s hearing.
Penn, which declined to comment on the negotiations, has several other irons in the fire, including plans to build casinos in Kansas, Ohio and Maryland. Not wanting to drain its valuable hoard, Penn won’t be able to pursue all of these opportunities unless it attracts a business partner or significant financing, which could be a challenge in this economy, analysts say.
Discussion: 22 comments so far…
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No way are they going to finish the project. There is no need for Penn to go into this nightmare. They can get a turnkey project (Mirage, Bellagio, Paris) with out the headaches. Where is Penn getting the projected income figures? Probably from the same people that say the recession is over!
Agree with Chazbeen.Penn could buy any other property just like Phil Ruffin did! They may not quite understand what they are getting into!!
Having been to the pitiful Penn National racetrack in Harrisburg, Pa., I would be surprised if PNG would want to take over such a massive disaster in Vegas. They are much better off running here and there slot parlors. FB is such a joke that there is no way anyone would invest beaucoup bucks to finish it. Subs have thrown everything, including the kitchen sink, into their claims. Who would be stupid enough to want to run a casino/tower in a rotten location across from a failed Echelon? Oh well, there's a sucker born every minute...
2 billion to build? on the block for 300 million? Worth basically zero now? if this isn't ever an example of how absolutely screwed up and corrupt the building boom and everyone who had anything to do with giving and accepting loans for these now defunct projects. This makes the deeds of the famed and feared Mob from the past look like the antics of Captain Kangaroo in comparison! These people should be investigated and brought to justice, and put in the Black Book!!!
bdover, what makes the Hollywood Casino at Penn National so pitiful? Because it doesn't have table games? For a state that just legalized slots, and speaking from experience, Hollywood was a welcome sight and is a very nice "slots only" establishment. I think you are just sorely mistaken and too used to Vegas.
.
..
...I think that Governor Potato Head Gibbons should explore spending tax dollars and take over the Fountainbleu, leave it as it is and introducing two or three Desert Tortoises and make it a state refuge for the poor endangered species.
"The bills amount to more than likely offer; Penn National exec says building worth 'about zero'"
That's priceless. It's not worth what they've spent & when it's done it probably won't be worth what it cost to build.
Anyone have a bulldozer?
This building should remain on the strip and remind people of greed and mismanagement. Especially to those who plan to hire inexperienced execs from 'AC' to open a mega property in Vegas. These execs come into town with their half baked ideas, shady practices and often poor management skills (if any) thus bringing down everything! This property lost all chances of ever being successful when they let go Schaeffer and his MB team!
What Penn is really shooting for in their bid is to get the building for basically "Zero" and cram down the creditors to 15 cents on the dollar of debt. All for the "promise" to complete the project and hopefully run it for a profit. The last piece of the puzzle is the wild card! Will the economy in Vegas recover enough to support this project, plus City Center, et al? If not, then it all goes down in flames and ruin. But, if the gamble, which it is really, goes positive, then they win big time for getting the infrastucture for "free"! That is the only way it penciled out for any investor.
how is this going to work?
City Center will add approx. 6,000 rooms
Fountain Bleau adds 3,800 rooms
Planet Hollywoods New Tower Adds approx. 2000 rooms
Golden Nuggets new tower adds 500 rooms
Hard Rock has two new towers adding 900 roooms.
Cosmo adds 2,700 rooms
Ceasars Octavious Tower (finished on the outside but not on the inside) will add 665 rooms.
Assuming all this gets done with the exception of Ceasars Tower (they have said officially they will not finish the rooms) Las Vegas is going to add almost 16,000 new rooms in the next 12 months. That is an increase to the inventory of over 10% while visitors are down 6%.
I do not get it.
Kevjan, I've often wondered that myself. It flat out doesn't add up.
Ah! where are those critics that use to quote us that quote from the 40's that said that Vegas was overbuilt and that we could not fill the hotel rooms back then.....Where are they now?
The Cubs just declared bankruptcy in order to strip off possible encumberances that would cause the buyer to have a headache down the road. It's a smart move. These guys should do the same.
Boyd gaming should finance the completion...rename it the Stardust, sell the property accross the street (the barely started and stalled Echelon) and call it a day.
Boyd could use a strip presence, and the Stardust has a brand name that could be marketed to middle market vacationers, something very lacking on the strip.
Stuart & Robert Wyman-Cahall
Las Vegas, NV 89142
I wish that those in charge of the casino/hotels would read the ideas on these posts, however I'm afraid that they are so scared right now, they're like a deer caught in the headlights, frozen and unable to function. Even Steve Wynn is choking, divorcing Elaine and all, and putting all his attention on China operations. This town currently stands at the precipice of a major fumble. I they don't come out of their shock, this place is gonna become a grave yard...
It appears the denial phase of this project's worth is finally concluding, perhaps action will soon focus upon the next step, the alternative -- current scrap pricing?
: )
Here's are lines right out of the story that get me, every time:
"Increased profit projections for Penn's regional casinos could help the Pennsylvania company justify buying Fontainebleau and spending the money needed to finish the building..."
and
"That would be less than 15 cents on the dollar for a building that has already cost about $2 billion..."
Boiled down into kitchen table language:
"...they HOPE they will make enough money ELSEWHERE in this current economy to pay the worker's paychecks who are going to be working HERE...",
and
"...they want to buy what they SAY is a teeming worthless hulk for a SONG (and a very lively dance)...."
And they expect the Judge to believe them.
Sounds to me just like what the LAST GROUP OF LOSERS did who tried the same thing.
No talk of putting CASH or a BOND up front to cover worker's salaries and wages, operating expenses, construction costs, taxes and fees, and the money to cover any required gambling payouts, etc..
Only just "THEIR APPRAISAL" and "THEIR PROJECTIONS".
No wonder we (and South Florida) are in such a (Real Estate) mess.
If the subs do not get paid, they need to get some kind of stock offering for the difference. Sure a stock offering is of little value now, but may eventually have some value. Better than nothing. Kevjan is right about the saturation of rooms becoming worse before it gets better. As a tourist who visits LV 2 or 3 times a year, I'll just take advantage of the deals.
I love reading all the experts opinions on this page and find it even funnier that you believe Boyd is your answer. LV is going to be a better place in about 2-3 when you have more players than your typical MGM, Harrah's and Boyd which will only be good for the city. I find it funny that people don't think PNG has any money or a game plan when all I read is that they have the strongest balance sheet in the industry. Such tunnel vision people.
Regardless of what Penn would pay for it, this is still a $4 billion property. By that I mean the occupancy, upkeep and marketing demands will be massive. Imagine if Harrah's had gone straight from regional Casinos to buying Caesars with nothing on the Strip in between. They would be instantly in over their head and their customer base has nowhere near that high end a need. I think Penns answer is across the street to the South. They could probably get the Riviera for $300 million, spiff it up for a couple hundred mil more, and establish a Las Vegas base that would function well for at least 15 years and let them expand logically elswhere on the Strip.
Carl Icahn learn to sell off his casinos before the economy went sour. He then bought the bankrupt Tropicana for pennies. Goes to show you that it would be better to get Penn to buy something like the Excalibur or Circus Circus and make it their own.
Icahn bought the Trops in Atlantic City and Laughlin only, he doesn't have any interest in the Las Vegas Tropicana. Penn should have struck earlier in 2009 instead of kicking tires. MGM might have sold something else beside Treasure Island, but now they don't have to. Harrah's is probably out of the woods as well, leaving only some independents possibly available.