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Aladdin Speculation Creates Wall Street Buzz

27 September 2002

by Jeff Simpson

NEW YORK -- Today is one year to the day since the Aladdin filed for bankruptcy protection, and the likeliest bidders for the bankrupt 2,567-room megaresort aren't talking despite Wall Street speculation that a bid for the troubled property will soon be made.

Most insiders think Strip heavyweights Park Place Entertainment, MGM Mirage, Mandalay Resort Group and Harrah's Entertainment won't bid on the $1.05 billion Aladdin.

Instead, speculation on a possible Aladdin bidder centers on Colony Capital LLC and Pinnacle Entertainment, two Southern California-based casino operators.

The two companies would combine on a "stalking horse" bid for the property, a first offer that might also include a separate hotel "flag" that would place an identifiable hotel brand on the property, insiders said.

Colony representatives declined to comment, and Pinnacle executives failed to return phone messages, but two knowledgable sources said the two companies are exploring a possible joint bid for the struggling hotel-casino.

Los Angeles-based Colony Capital owns Resorts International hotel-casino in Atlantic City but currently owns no Nevada casinos and hasn't been licensed in the state since selling Harveys to Harrah's Entertainment for $675 million.

Pinnacle Entertainment operates seven casinos in Louisiana, Mississippi, Indiana, Nevada and Argentina. The company is licensed in Nevada by virtue of operating its Boomtown Reno property.

One insider explained the two companies' interest in the Aladdin.

"These companies have been very successful in the business, and they'd like an asset on the Las Vegas Strip," said the source who spoke on condition of anonymity. "The Aladdin is the kind of an asset that could be taken over at a reasonable price, and (Colony) has turnaround experience."

The companies are expected to offer about $500 million for the property along with a commitment to invest about $100 million more to renovate the property. The sale probably wouldn't take place until next summer, at the earliest, the source said.

The new buyers would ask the Aladdin's current bankers, led by the Bank of Nova Scotia and together owed about $430 million secured by a mortgage on the property, to loan the buyers the money to buy the property over a five-year term at reduced interest rates.

"The deal would allow the banks to keep their credit current, and the new owners would be able to use the money they'll invest in remodeling to generate additional cash flow," the inside source said.

A Wall Street source said Pinnacle and Colony have already agreed to a tentative deal to join with Marriott International to make a bid for the property, a deal that would put Marriott's recognized brand on the Aladdin hotel and have Pinnacle run the casino.

"Marriott has the largest database in the hotel business, and would be able to drive a lot of bodies into the Aladdin's rooms," said the Wall Street source, who spoke on condition of anonymity.

The inside source, however, disputed the Wall Street source's assertion that the three-party bid to buy the Aladdin is a done deal.

"There's been no commitment, no deal on any flag for the hotel," the inside source said. "That decision has yet to be made. That doesn't mean that Marriott won't be involved, but they're not in yet."

Park Place Entertainment has long been considered the property's most logical buyer because of the Aladdin's proximity to the company's center-Strip constellation of properties: Paris Las Vegas, Bally's, Caesars Palace and Flamingo.

But the world's biggest casino operator apparently doesn't want to pay the price Aladdin's likely to command.

"It would be interesting at the right price," Park Place spokesman Robert Stewart said. "We haven't seen anything like the right price."

A high-level executive for a major Strip operator said he expects Park Place to end up as the Aladdin's owner, Stewart's comments notwithstanding.

"Park Place will end up buying it," the Strip source said. "It's in their backyard. If they were done with their Caesars renovation I think they'd already have bought the Aladdin."

Credit Suisse First Boston casino industry debt analyst John Leupp said he also expects one of the major operators to end up buying the Aladdin.

"It's tough to operate a standalone Strip property," Leupp said. "It's best suited to an existing Strip operator, one that could use the Aladdin as an avenue to filter customers when room demand is high."

The first thing an operator will have to do is work on its entertainment offerings, he said.

"First and foremost, the Aladdin needs a hook, a reason for people to come," Leupp said. "Right now, there isn't one."

Deutsche Banc casino industry debt analyst Andrew Zarnett said he believes Park Place and MGM Mirage don't want to buy the Aladdin and risk damaging their efforts to upgrade company debt to investment quality paper.

"Taking on a half-billion in debt with only $25 million or $50 million in cash flow would ruin their credit statistics," Zarnett said. "They're trying to delever(c.q.), to be investment grade, and buying the Aladdin would make it difficult."

The Aladdin property lost $117,768 in August after losing $2.5 million in July, $3.5 million in June and $423,369 in May.

The Aladdin owes secured creditors $540.3 million, including about $70 million to companies leasing equipment and providing slot machine loans.

Unsecured creditors are owed $85.2 million and the Aladdin owes $2.6 million in priority tax claims.

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