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Best of Liz Benston

Gaming Guru

Liz Benston

Many Factors Behind Casino Stock Sales

15 August 2003

LAS VEGAS -- Executives at major casino companies have unloaded tens of millions of their companies' shares over the past couple of months as stocks have soared on news of new company dividends and strong earnings reports.

Company insiders at MGM Mirage, Mandalay Resort Group, Harrah's Entertainment Inc., Boyd Gaming Corp., Station Casinos Inc. and International Game Technology sold stock they obtained through stock options at prices that were 1.5 to 7 times higher than what they paid for the securities, according to recent documents filed with the Securities and Exchange Commission.

In some cases, executives have also sold shares of stock they bought without the involvement of options. Some company bosses receive share grants as a form of compensation. More common are grants of stock options that are tied to company performance and enable them to buy stock at a pre-determined price and immediately sell it for a profit in the market. Executives can only profit if the sale price exceeds the stock's market value.

The exception to the wave of executive selling was Park Place Entertainment Corp. and Alliance Gaming Corp., whose top executives held on to their shares over the past couple of months through last week.

Major shareholders aren't required to disclose why they sell shares. Stock options have expiration dates after which executives forfeit their money, while federally mandated "blackout" periods prevent insiders from selling shares until after quarterly earnings announcements, restricting sales to other times of the year.

Many insiders avoid potential regulatory problems by automatically selling shares through a broker at a predetermined point in the future, making their motives difficult to determine, experts say. Some executives also are allowed to sell a predetermined amount of shares each month, regardless of blackout periods, because they have notified the SEC beforehand, they say.

Healthy share prices in recent months, as well as a regulatory green light to sell shares after recent earnings reports, are likely factors behind the heavy selling, some analysts say.

"(Gaming) stocks have done pretty well this year," said Joe Greff, an analyst with Fulcrum Global Partners.

Shares of companies with major insider sales have jumped more than 30 percent in the past six months compared to a roughly 20 percent increase for the Standard & Poor's 500 Index.

For most companies, share prices have risen more dramatically in the last six months than they have over the past year. Some significant increases have occurred in the past couple of months.

Since early June, when International Game Technology and Mandalay Resort Group announced cash dividends, prices for most of the group have risen from around 3 percent to nearly 16 percent. Since then, Harrah's, Boyd and Station also have announced dividend policies. Harrah's shares have remained flat, Boyd's have fallen about 5 percent and Station has risen about 15 percent over the two-month period. MGM MIRAGE, which did not announce a dividend, rose about 4 percent during the period.

Insider sales are often thought to signal lessening confidence in a company, while purchases are believed to show added confidence in future performance.

Trading activity isn't often a reliable indicator of future performance, however, said Graef Crystal, an executive compensation expert and columnist for Bloomberg News.

And with increases in many gaming stocks over the past several months, many executives may simply be prudent investors, Crystal said.

"In the last six months there's been a real surge," he said. "(Executives) are saying, 'All I've got is the equity in my house and this stock. The stock is going up and I'm getting nervous. Maybe I'll put some of that into something safer, like municipal bonds. I don't want to put all my eggs in one basket.' "

Concerns may be heightened with companies such as Mandalay Resort Group stock trading at 17 times annual earnings and MGM MIRAGE trading at 24 times earnings, he added.

Station Casinos Chief Financial Officer Glenn Christenson, who has exercised more than 200,000 options so far this month, said he and the company's controlling family have chosen to go against conventional wisdom by keeping virtually all of their net worth tied up in company stock.

"We've still got more than a rooting interest in the future of Station Casinos," he said.

For liquidity purposes, he and other executives sell shares from time to time, he said.

"There's only about four months out of the year" when executives may sell shares without running afoul of insider trading rules, he said. "And it's hard to gauge what's going on in the market."

The Fertittas -- including Chief Executive Frank Fertitta III and President Lorenzo Fertitta -- have sold more than 700,000 shares of stock over the past two months.

The family still owns between 75 percent and 80 percent of the shares they were granted when the company went public more than a decade ago, Christenson said.

The two top insider sellers over the past couple of months were Mandalay Resort Group Chief Executive Michael Ensign and Vice Chairman William Richardson. Each reduced their holdings by about half over the period, to 2.5 million shares each.

In other cases, the sales represented a smaller fraction of the shares still owned by key executives, records show.

Harrah's Chairman Phil Satre, for example, sold about 2.8 percent of his roughly 1.6 million shares during the two-month period. Those shares include roughly 1.1 million in options remaining to be exercised.

Satre has been with the company for more than 20 years, Harrah's spokesman Gary Thompson said. Executives are granted shares and options as part of performance-based compensation plans, he said.

Chief Financial Officer Chuck Atwood, who has also been with the company for more than 20 years, sold 3.4 percent of the 162,800 shares he owns and has 74,607 remaining options.

Park Place General Counsel Bernard DeLury was the only top executive who acquired shares during the period, buying 422 shares at a cost of $3,646.

While other directors at other companies sold shares, eight directors at Harrah's acquired shares during the period. The directors each purchased from about 190 to about 380 shares at $43.50 per share.

The other sales were as follows:

-- From July 9 to July 10, Mandalay's Ensign exercised 765,000 options for about $24.9 million. From June 17 through July 8, Ensign sold 2.5 million shares for about $82.1 million.

On July 10, Mandalay's Richardson exercised 365,000 options for about $11.9 million. On July 9, Richardson exercised another 400,000 options for about $13.1 million. From July 1 through July 8, Richardson sold about 1.1 million shares for $35.4 million. And from June 27 through June 25, Richardson sold about 1.4 million shares for about $46.7 million.

On July 15, Mandalay Resort Group Secretary Yvette Landau exercised 116,000 options worth about $3.9 million.

-- From July 22 to July 25, MGM MIRAGE Chief Executive Terry Lanni exercised 350,000 options for about $11.7 million.

On July 25, John Redmond, chief executive of MGM MIRAGE's MGM Grand Resorts, exercised 20,000 options for about $697,000. From July 29 through Aug. 7, Redmond exercised another 60,000 shares for about $2.1 million.

-- Boyd Gaming Corp. President Don Snyder exercised 60,000 options Aug. 6 for about $904,200.

Bob Boughner, chief executive of Boyd Gaming's Borgata resort in Atlantic City, reaped about $2.2 million when he exercised 145,001 options Aug. 5.

-- On June 18, Harrah's Satre sold 45,000 shares for about $1.9 million.

On June 17, Atwood exercised 5,589 options for $242,335.

-- On July 24, International Game Technology Chief Executive Tom Baker exercised 357,900 options for about $9.5 million. On July 23, Baker exercised another 242,000 options for about $6.4 million.

Also on July 24, IGT Executive Vice President Richard Pennington exercised 100,000 options for about $2.7 million.

IGT Chief Operating Officer Thomas J. Matthews sold 80,000 shares on July 23 for about $2.1 million.

On July 22, IGT Chief Financial Officer Maureen Mullarkey exercised 240,548 options for about $6.2 million.

-- Station Casinos' Fertitta III exercised 197,500 options from July 29 to July 31 for $5.7 million. He exercised another 149,040 options on Aug. 4 for $4.3 million.

Station CFO Christenson exercised 109,592 options from July 25 to July 31 for about $3.2 million. He exercised another 266,687 options between Aug. 4 and Aug. 7 for about $7.6 million.

Company director Blake Sartini exercised 197,500 options from July 29 to July 31 for about $5.7 million. Sartini exercised another 91,844 options on Aug. 4 for about $2.7 million.

And President Lorenzo Fertitta exercised a total of 90,000 options between July 31 and Aug. 4 for $2.6 million.