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Best of Howard Stutz

Gaming Guru

Howard Stutz
 

Key Proxy Vote on Tap

9 August 2006

Most stockholder proxy votes are relatively routine.

Tuesday's Riviera Holdings Corp. shareholder meeting, however, will be anything but ordinary.

Riviera Holdings, which operates the 51-year-old Riviera and a slot machine casino in Black Hawk, Colo., has asked company shareholders to approve a $426.5 million buyout by Riv Acquisition Holdings, a well-financed investment group that includes Starwoods Hotel chain founder Barry Sternlicht, Las Vegas developer Brett Torino and Chicago developer Neil Bluhm.

The group wants to operate the 2,070-room Riviera, believing some capital expenditures into areas of the property can help reinvigorate one of the Strip's oldest casinos.

But some of Riviera's largest shareholders aren't happy with Riv Acquisition's offer of $17 a share.

Regardless that the company's stock is trading above that benchmark, closing last week at $19.90, the shareholders believe there is much more value to be found.

It's been speculated by some that the 26 acres of Strip property housing the Riviera is worth well above the current purchase price alone, valued at $10 million an acre. Some analysts and shareholders have speculated the land is worth twice that value.

Riviera Holdings executives, however, have said the company has been on the market for more than a year and the offer from Riv Acquisition was the best price available.

"Riviera's board of directors concluded that $17 per share was the best price we could obtain for the company and continues to be the best price we can obtain for the company," Chairman Bill Westerman said during the Riviera's July 28 second-quarter conference call.

Westerman also said it was unfair to compare Riviera's purchase price with those for other Strip acquisitions, including Harrah's buyout of the Imperial Palace last year for roughly $20 million an acre.

Riviera Holdings needs approval from 60 percent of its outstanding shareholders for the deal to be approved. If a shareholder doesn't participate, that will have the same effect as if he voted against the buyout.

Westerman used the company's quarterly conference call to lobby shareholders to support the transaction.

Riv Acquisition President Scott Butera said the investment group will be a "long-term" player in Riviera Holdings, whatever the outcome. Last week, Riv Acquisition completed its purchase of Westerman's 2.1 million shares for $15 a share. The group now controls more than 18 percent of Riviera.

"We're still working toward ensuring a successful outcome (at the shareholders meeting)," Butera said. "We like the investment and we believe in Riviera."

Morgan Joseph gaming analyst Adam Steinberg, however, predicted the buyout will be rejected by shareholders and Riviera could fetch a much higher price on the open market.

"We take issue with the company's rationale for approving the merger," Steinberg said in a note to investors last week. "We believe the company is basing its valuation on an incomplete and/or inappropriate peer group, and excluding more recent, and relevant, transactions."

Steinberg told investors Riviera Holdings could see a better offer.

"In essence, we view this as a flawed merger analysis," he added. "Using more comparable land transactions, we believe fair value is in the $22-$24 (per share) range."

Several shareholder groups plan to cast votes to reject the buyout, including New York investment bank D.E. Shaw Group, which controls 1.2 million shares.

Mark Sole, senior vice president for D.E. Shaw, said the $17 price is just too low. Since Shaw has been the most public of Riviera's shareholders to oppose the buyout, other shareholders have contacted the investment bank.

However, Sole said Shaw has not launched a costly proxy fight.

"We've issued two press releases about the transaction and we'll let them speak for themselves," said Sole, who plans to attend the shareholders meeting.

One gaming analyst estimated that at least 30 percent of Riviera's outstanding shares are already opposed to the merger. In addition to Shaw, Triple Five Investco, a subsidiary of Canadian mall developer Triple Five Group, has said it will vote its 1 million shares against the deal.

Analysts expect that other large shareholders will follow those leads, including Plainfield Asset Management of Connecticut which owns 9.6 percent of Riviera, according to Thomson First Call.

A spokesman for Plainfield did not return phone calls last week.

"A no vote from Plainfield would put the final nail in the coffin," Steinberg said.