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April 17, 2014

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Penn National surfaces as possible Fontainebleau buyer

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Tiffany Brown

Though close to finished, the Fontainebleau may cost another $1.5 billion to complete, on top of $1 billion already owed to lenders.

Penn National Gaming is one of the parties interested in buying the stalled Fontainebleau Las Vegas resort, Reuters and the Wall Street Journal reported today.

But analysts are skeptical a deal will happen anytime soon, given the costs to complete the project, the need to satisfy Fontainebleau lenders and creditors and the downturn in the Las Vegas gaming market.

Analyst Bill Lerner said anyone thinking about taking over the 70-percent-complete project on the Las Vegas Strip would likely have to invest $2 billion to buy out its debt and finish construction.

Lerner, of Union Gaming Group, said the resort also must compete with other new developments that include 9,300 hotel rooms opening in the next year even as the gambling market shrinks and visits to the Strip decline.

Lawyers for Fontainebleau have told the federal bankruptcy court in Miami they're talking to a potential buyer they do not specify. Penn National has declined comment on the reports, but in the past has said it's looking for opportunities to expand to Las Vegas.

The Las Vegas Sun reported last month that Penn National and Apollo Management -- one of the companies that controls Harrah's Entertainment -- had privately expressed interest in Fontainebleau.

Besides Fontainebleau, additional Las Vegas opportunities are likely to present themselves as companies default on debt. Recent defaults or imminent defaults involve loans for the owners of Station Casinos, Herbst Gaming, Black Gaming, the Riviera, Hooters and Planet Hollywood.

Analysts have estimated that any Fontainebleau buyer would need to spend at least $1.5 billion to finish the resort, with a low return on investment for at least several years as Las Vegas recovers from the recession.

"Penn would be acquiring a property that sits in a somewhat remote location and would be adding another 4,000 hotel rooms to an already saturated market," Stifel Nicolaus analyst Steven Wieczynski wrote in a research note.

"We ascribe a low likelihood to Penn's buying Fontainebleau or buying all of its equity for construction costs," JP Morgan analyst Joe Greff said in a research note.

The Associated Press and Reuters contributed to this report.

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