Majestic Research

Bloomberg

Station Casinos Agrees to Be Bought for $8.8 Billion

By Heather Burke and Carol Wolf
Published: February 26, 2007

Station Casinos Inc., owner of 12 Las Vegas-area casinos, agreed to a sweetened $8.8 billion takeover bid from the founder’s family and a buyout firm. The shares rose to a record high.

Chairman Frank Fertitta III and President Lorenzo Fertitta, his brother, joined with private-equity firm Colony Capital LLC to offer $90 a share, 9.8 percent more than they bid in December. The buyers will assume $3.4 billion in debt, Las Vegas-based Station Casinos said today in a statement.

Colony raised its offer to join the growing number of buyout firms that have invested in casinos, attracted by their cash flow and real-estate holdings. Station’s assets include 700 acres in Reno and Las Vegas that may be worth as much as $1.5 billion.

“These companies are starting to be seen for their real- estate value,” said Dan Ahrens, president of Aherns Advisors LP in Dallas and author of “Investing in Vice.” “Most businesses that private equity looks at aren’t sitting on some of the most valuable real estate in the U.S.” His firm owns Station shares.

Station operates the Palace Station Hotel & Casino and the Santa Fe Station Hotel & Casino. The offer, valued at $5.4 billion for just the shares, is 30 percent more than the closing share price on Dec. 1, the last trading day before management and Colony made the initial offer. It’s 8 percent above the closing price on Feb. 23.

Investment Stake

Shares of Station rose $3.27, or 3.9 percent, to $86.57 at 2:56 p.m. in New York Stock Exchange composite trading. The Fertittas, along with former board member Blake Sartini, control 26 percent of Station’s stock, according to data compiled by Bloomberg.

The company’s 6.625 percent note due in 2018 rose 5.5 cents to 94.9 cents on the dollar, yielding 7.3 percent, according to Trace, the NASD’s bond price reporting service.

Colony, run by billionaire Tom Barrack and focused primarily on real estate, also owns Resorts International Atlantic City and the Las Vegas Hilton. It’s a partner in Accor Casinos in Europe.

Other private-equity firms involved in casinos include Apollo Management LP and Texas Pacific Group, which agreed two months ago to pay $17.1 billion for Harrah’s Entertainment Inc. Aztar Corp., owner of the Tropicana casinos in Vegas and Atlantic City, New Jersey, was bought by Colombia Sussex Corp. in January.

More than $25 billion in U.S. casino deals were proposed last year, exceeding the total in the previous six years combined, according to data compiled by Bloomberg.

“There’s been a lot of interest for possible acquisitions,” said Matthew Jacob, a casino analyst at Majestic Research LLC in New York.

Initial Bid

Station’s shares, which have increased more than sevenfold since the end of 2001, rose past the bid price after the first offer as investor activists urged the board to seek more money.

Station’s market value is about $4.96 billion, making it less than one-sixth the size of the world’s largest casino company, Las Vegas Sands Corp.

The company has 300 acres of developable land in Reno and 400 acres in Las Vegas worth $1 billion to $1.5 billion, according to Justin Sebastiano, an analyst with Nollenberger Capital Partners in San Francisco.

The buyers said they have arranged enough financing to complete the transaction, and plan to assume or pay back $3.4 billion in debt. Deutsche Bank AG and JPMorgan Chase & Co. affiliates have provided debt financing commitments.

Deal’s Timeline

The Fertittas expect to complete the purchase in six to nine months. The company is scheduled to report fourth-quarter and full-year results on Feb. 28.

Bear Stearns Cos. served as financial adviser to the special committee of Station’s board that approved the transaction and recommended shareholders vote for it. Deutsche Bank advised the buyout group.

Station’s management first offered to take Station private for $82 a share on Dec. 4. The union-backed CtW Investment Group, which advises shareholders, said last month the bid should be at least $97 a share.

Colony Capital has invested more than $19 billion since its founding in 1991, according to its Web site. Los Angeles-based Colony bought four casinos in 2004 from Harrah’s and Caesars Entertainment Inc. for $1.2 billion. The firm also bid for Phoenix-based Aztar last year.

Station, founded by Frank Fertitta Jr., started as a Las Vegas bingo hall in 1976. The company has focused on attracting gamblers who live and work in Clark County, Nevada, which includes Las Vegas, an area that has more than doubled in size to 1.7 million in 2005 from 741,000 residents in 1990.

Fertitta III, 45, took over as CEO in 1993 when Station went public. Lorenzo, 38, became president in 2000.

“These guys have run this company very well,” said Jake Balzer, a Miami-based analyst with Guzman & Co.

Station is the sole owner of the Red Rock Casino Resort & Spa, in the suburb of Summerlin, which opened in April and cost $925 million. It partially owns several other properties and manages an Indian casino near Sacramento, California.