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Arnold M. Knightly

Casino industry: Bid for Station may hold

28 February 2007

While a private equity group involving the founding family has increased its offer to take Station Casinos private, industry analysts say a follow-up bid that might drive the price higher is unlikely to come.

The gaming company announced Monday that it had agreed to accept a buyout bid from Fertitta Colony Partners of $90 per share, or about $5.4 billion. The offer also includes the assumption or repayment of about $3.4 billion of debt, making the deal worth $8.8 billion.

A Station representative on Monday said that the company would not comment on the deal beyond what was already outlined in filings with the Securities and Exchange Commission.

Station now has 30 business days to solicit additional proposals from competing bidders, a standard practice in these types of transactions.

However, Guzman & Co. gaming analyst Jake Balzer said that, despite recent private equity activity, a higher bid was unlikely.

The current bid is being made by a private equity partnership involving Los Angeles-based Colony Capital and Station Casinos Chairman and Chief Executive Officer Frank Fertitta III, brother Lorenzo, the company president, and their sister, Delise Sartini, and her husband, Blake.

Blake Sartini was the chief operating officer at Station Casinos before leaving to form Golden Gaming.

Colony Capital now owns the Las Vegas Hilton and other gaming properties around the country. Affiliates of Deutsche Bank and JPMorgan Chase are financing debt for the transaction.

Analysts also suggested that any competing bid would probably include the Fertittas because of their understanding of the market and proven track record as casino operators.

"The Fertittas have proven very good operators and we doubt another owner could add value by running the company more efficiently," Balzer said in a note to investors. "We don't see another casino operator that could obviously drive significant synergies value by combining (Station Casinos') operations with its own."

Richard Clayton, research director for the Washington, D.C.-based CtW Investment Group, also felt that an outside bid that does not include the Fertittas is unlikely.

He added that it will be up to the special committee to the board reviewing offers to make sure the shareholders get the best value for the company.

"The gaming industry has been attracting a lot of interest from private equity lately," Clayton said. "There's the possibility they'll receive an alternative offer. It will be interesting to see how aggressively they solicit for such offers."

KeyBanc Capital Markets financial analyst Dennis Forst said that if someone outside the Fertitta family does come in with a considerably higher offer for Station, the company would have consider it seriously.

"They've opened the door," Forst said of the Fertittas. "If someone comes in with a $100 (per share) all cash deal excluding the Fertittas it would have to be taken seriously."

If the newly revised deal is accepted and Station goes private, the company will join fellow Las Vegas casino operator Harrah's Entertainment, which also agreed to a go-private deal. Harrah's recently accepted a $17.1 billion offer from a 50-50 joint venture by private equity firms Texas Pacific Group and Apollo Management.

The latest offer for Station is an increase from the initial $82 per share bid when the proposed deal was announced on Dec. 4. That bid received some criticism from some shareholders who found the offer too low.

"I think there were a lot of investors that felt $82 was insufficient," Forst speculated.

CtW's Clayton said even though the new offer is better than the first bid, it still fails to capture the company's future market value.

"This certainly confirms our initial take that the starting off offer from the management group was much to low for the company," Clayton said Monday. "We think that the current offer is still too low though, obviously, it's an improvement."

CtW is a consultant to a group of pension funds that hold 2.6 million shares of Station Casinos stock but holds no direct stock itself.

In late January, the group sent a letter to nonmanagement board members reviewing the offer arguing that the initial offer was too low and a price of $97 per share more accurately reflected the long-term investment for shareholders.

One of the key issues for CtW was its concern that the price did not accurately reflect the value Station Casinos' land holdings.

"What we are particularly interested in seeing whether the special committee obtained genuinely independent third-party valuation of the real estate portfolio," Clayton said. "In our view it is a very significant part of what ought to be the sale price of the company."

Station Casinos operates 16 properties in Southern Nevada with additional four undeveloped parcels covering 199 acres. It also has three parcels covering 192 acres in Reno.

The company owns casinos on 421 acres locally and is in another 50-50 partnership with the Greenspun Corp. on the 40-acre Green Valley Ranch Resort.

Station Casinos also entered an operating agreement in late December with New York-based Fisher Bros. combining 52 acres behind Palace Station for future master-plan development.

Some shareholders have filed class action lawsuits in District Court over the initial deal's structure. Lawyers for the shareholders who are suing did not return calls seeking comment on whether the new deal was acceptable to them.

Station Casinos shares rose $3.20, or 3.84 percent, Monday to close at $86.50. Trading volume was 6.5 million shares, more than seven times average daily volume.

Casino industry: Bid for Station may hold is republished from