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Best of Liz Benston

Gaming Guru

Liz Benston

Laughlin Casino Deal on Rocks; Companies Blame Each Other

24 May 2005

Poster Financial Group Inc.'s deal to sell its Laughlin casino to competitor Barrick Gaming Corp. has apparently blown up, with sources familiar with both companies saying the transaction will likely wind up in court.

In its first-quarter earnings report released this month, the owner of the Golden Nugget casino in downtown Las Vegas said it doesn't expect to sell its sister property to Barrick. The property might instead end up in the hands of the Landry's restaurant chain, which is buying Poster Financial for its downtown casino, the report said.

Poster Financial in November announced an agreement to sell the property to Barrick for $31 million. The sale was set to close by the end of the month but the company last week received notification from Barrick to terminate the purchase agreement on the grounds that Poster Financial had allegedly breached certain provisions of the agreement, the earnings report said.

Barrick also alleges that it is entitled to $1 million it placed in an escrow account upon the execution of the agreement, the report said.

"Poster Financial vigorously disputes any assertion that it has breached any of the provisions of the Barrick purchase agreement or that Barrick is entitled to any of the funds that were placed into the escrow account," it said. "Poster Financial does not believe that Barrick has the right to terminate" the purchase agreement.

Chief Executive Tim Poster wouldn't discuss the transaction except to say that his company negotiated with Barrick "in good faith" and that "we're disappointed the deal wasn't completed."

Barrick Gaming President Stephen Crystal said his company terminated the agreement because Poster Financial misrepresented the amount of operating cash flow the Laughlin property generated last year.

"We like the Laughlin market (but) we are not a company that is going to buy assets at any multiple," Crystal said.

Operating cash flow -- a key measure of casino profit -- was more than 20 percent lower than Barrick had expected based on the purchase price, Crystal said. Instead of generating more than $4 million per year, the property only generated about $3 million.

"That's absolutely untrue," Poster said.

Poster wouldn't discuss the deal further except to say that his company negotiated with Barrick "in good faith" and that "we're disappointed the deal wasn't completed."

Sources familiar with both companies said other accusations are flying back and forth behind the scenes. Barrick is accused of money difficulties and lacking the financing to complete the deal. Poster is accused of accounting irregularities at its properties and also of using Landry's to thwart the sale of the Laughlin property to Barrick.

Crystal said any rumors that his company is having financial problems are patently false. Both profit and revenue are up at each one of Barrick Gaming's downtown casinos, he said. The company expects to refinance its debt to generate some $200 million in additional capital for future expansion projects, he added.

Poster Financial's earnings report states that if the purchase agreement terminates May 31 without a sale to Barrick, Landry's would acquire the Laughlin property. Poster Financial said it is obligated to use the sale proceeds to repay the company's outstanding debt.

The company squeezed out a small profit in the first quarter -- but it was less than one-third of what the company earned a year ago.

Poster Financial reported a profit of $930,000 for the first three months of the year compared with $3.2 million for the first quarter of 2004.

The company acquired both Golden Nugget properties in Las Vegas and Laughlin from MGM Mirage in January 2004. Its two young entrepreneurs, Poster and Tom Breitling, embarked on a strategy to lure high rollers downtown from the Strip and pitch the property as a hipster "vintage Vegas" hangout.

The strategy wasn't profitable last year.

Poster Financial reported a loss of $9.2 million last year compared to a profit of $2.9 million in 2003 when the properties were owned by MGM Mirage. Most of last year's results were generated by the downtown property.

Excluding results from the Laughlin property, Poster Financial reported a loss of $11.3 million last year compared with a $3.2 million profit in 2003.

Earnings before interest, taxes, depreciation and amortization -- a key indicator of casino performance -- rose 8 percent last year to $23.4 million.

Revenue and gambling volume rose under their watch as they spent more to advertise and market the property and raised betting limits to attract big gamblers.

Revenue in the first quarter rose 32 percent from a year ago to $65.5 million. Minus promotional expenses, revenue grew 25 percent to $54.9 million.

First-quarter casino revenue grew 18 percent to $33.7 million. But casino expenses grew faster, rising 32 percent to $20.6 million.

Last year, table game volume rose 59 percent compared with 2003 and revenue per table game rose 26 percent over the prior period.

Expenses also rose significantly last year. In particular, casino operating expenses rose 28 percent to $86.2 million, or 63 percent of casino revenue generated in 2004.

Poster again defended his performance, saying his high roller strategy was part of a longer-term process.

"We didn't operate it to maximize short-term profitability," he said. "You make an investment now for a return later. Revenue was up and that's a sign the business was growing."

Profit took a hit last year in part because of one-time investments in new slot machines and a $3 million brand campaign, Poster said.

Poster Financial appears to be backtracking from its risky high roller strategy. Its earnings report said the company is lowering table limits, odds and lines of credit at the downtown property in advance of the sale to Landry's.

The company broke with a downtown tradition of relying on slot machine volume to drive results, analysts say.

"Poster shuffled the deck and paid -- through more liberal credit, comps, betting limits and possibly discounting -- to get the high rollers to downtown," Bear, Stearns & Co. bond analyst John Mulkey said. "Unfortunately, the company got burned at the tables more often than not and didn't have the best capital structure to withstand the high roller experiment and the volatility. Poster also underestimated the costs of being a standalone company and arguably paid too much to retain existing management, in our view."