Morgans between a Hard Rock and a Golden goose
BY DAVID MCKEE
BUSINESS PRESS
A local slot-route operator may hold in its hands the fate of Morgans Hotel Group's purchase of the Hard Rock Hotel & Casino. Currently, based on Morgans' own public utterances and Wall Street analyst reports, the boutique-hotel operator will be stretched to the maximum in order to realize an ambitious Las Vegas acquisition-and-development slate.
According to a July 12 Citigroup research report, Morgans has committed $900 million to Vegas, between its $770 million Hard Rock purchase and its two-hotel share of Boyd Gaming's Echelon Place megaresort. "Current borrowing capacity is just $825 million," wrote Citigroup analyst Joshua Attie.
Morgans could close that gap by tapping its $94 million cash reserve, but that raises additional questions as to where the company intends to derive operating capital for the Hard Rock, let alone fund its contemplated 114,000 square feet-plus of casino-resort expansion. There are also near-term upgrades to finance. "They're planning to make it a little more upscale, and improve the food and beverage amenities" forecast a source familiar with Morgans, who said it was too soon to discuss financing and operating capital.
In investor presentations over the past 10 weeks, Morgans has emphasized as a key part of its business plan that it "intend(s) to bring in equity partners for up to two-thirds of the equity before closing, which is expected to occur in five to eight months." So far, such partners have been slow to materialize. "Equity partners will be interested," the source insisted, "because the property is so valuable."
Enter Golden Gaming, which owns Nevada slot routes comprising 2,500 machines, as well as three Black Hawk, Colo., casinos with an aggregate of approximately 1,250 slot machines and 21 table games. It is also awaiting approval of its purchase of the Pahrump Nugget Hotel & Gambling Hall. "This announcement should help ease (investors') concerns," wrote Thomas Weisel Partners analyst Jake Fuller.
TWO-YEAR PACT
On July 13, Morgans announced it had inked a letter of intent that would put Golden Gaming at the helm of the Hard Rock's casino operations for two years. "In addition, the (agreement) provides that Golden Gaming shall have the opportunity to make an equity investment of up to $100 million," more than enough to close Morgans' apparent funding gap.
While terms of the management contract are still under negotiation, Wall Street analysts disclosed that it involved a base payment of at least $3 million per year to Golden Gaming, which would also retain most of the upside from the deal. Until Morgans obtains a Nevada gaming license, it cannot receive so much as a penny in casino revenues.
WIN-WIN PARTNERSHIP
With its 600 slots, 90 table games and 648 hotel rooms, the Hard Rock would be Golden Gaming's biggest responsibility and its first Las Vegas casino. Of the optional buy-in, one analyst said, "it works for Golden Gaming because they're interested in mainstream gaming activities" and works for Morgans because Golden Gaming is a partner that brings liquidity to the table. Added Golden Gaming CFO Rod Atamian, "I don't see this as being beyond the expertise of our management team," which includes at least two former Station Casinos property bosses.
Although Golden Gaming is in line to receive $20 million to $25 million in annual cash flow from the Hard Rock's gaming floor, it won't be all gravy. "There are just hundreds of variables that would make the deal different," said Larry Woolf, whose Navegante Group wasn't free to bid on the Hard Rock contract. These could range from: A) who is responsible for paying for capital improvements, through B) who ponies up the mandatory $7.8 million in the casino cage every day, as required by law, to C) how much rent Golden Gaming is forking over to Morgans. Referencing Morgans' $50 million annual cash flow estimate for the Hard Rock (others place it $10 million lower), Woolf said, "if your rent is $55 million, that's not a good deal." That casino cash flow, he elaborated, is not pure profit. "So if (your) margin is $10 million and rent is $10 million, you're only breaking even."
Although Morgans CEO Ed Scheetz has dismissed the Hard Rock casino in the past as an "amenity," without a gaming license, he will have to pay for the hotel-casino (representing $421 million of the total $770 million purchase price) out of a decimated revenue stream. The Morgans-familiar source was unworried. "Gaming is not the No. 1 attraction at the Hard Rock," he said. "People come for the nightlife. It's more of a party-type hotel," congruent with other Morgans brands, like the Delano on Miami's South Beach.
The privately held Hard Rock does not release earnings reports. However, if it conforms to the 50-50 gaming/non-gaming revenue split seen at leading Strip properties, Scheetz will have to eke out a 6 percent return on investment -- even less if certain other assets cannot be flipped.
Morgans stock has lost 25 percent of its value since its February IPO. It sank to a historical low of $12.20 a share in the wake of the Hard Rock purchase, eventually stabilizing in the vicinity of $15 per share. "We believe the sell off was largely because Morgans did not announce equity partners," wrote Morgan Stanley analyst Celeste Mellet Brown on May 15. The Morgans source replied that this was because the Hard Rock deal came together so rapidly that Morgans had no time to enlist joint-venture investors.
"Execution risk and balance sheet leverage remain uncomfortably high," wrote Attie about Morgans, who noted that the company obtains a third of its cash flow from one hotel (The Hudson) in New York City and almost half its total cash flow from Gotham alone. Attie added that he sensed Morgans' brass would be open to selling off a majority stake in The Hudson or Delano.
LAND PRICE
Weisel's Fuller chimed in that he had detected "legitimate interest in the 18-acre parcel" on which Hard Rock owner Peter Morton had once dreamt of building condos. The bad news is that analyst consensus was that Morgans could expect a baseline sale price of $8 million per acre on land for which it paid almost $11 million an acre. Wall Street's target is predicated on the highly secretive transfer of the adjacent "Las Ramblas" acreage to Edge Group, not the more hotly contested Hard Rock sale. However, in May, Morgans told Mellet Brown it believed it could re-sell the surplus acreage for $230 million, a $29 million loss.
"My perspective is that Morgans is not that far off in the value they assigned to that property," said Carlton Geer, director of CB Richard Ellis' gaming practice. "I see the value of the acreage as $12 million or higher, given the proper marketing approach." Geer also suggested that Morgans could restructure its exposure more favorably by assigning a higher dollar value to the hotel-casino and less to the raw land.
Whether or not Morgans loses money in the process of unloading that acreage, there is a rough consensus it has chosen an expert casino partner in Golden Gaming CEO Blake Sartini. "People who have been recently licensed, that's the key," said one analyst. "Sartini has been in big operations for decades." That includes 15 years at Station Casinos, where he opened Station St. Charles, in Missouri (now owned by Ameristar Casinos), was president of Nevada operations and COO, among other responsibilities.
"This guy is highly successful," a source familiar with Morgans said of Sartini. "They (Morgans) know him and he has been recommended by other people. He's worth hundreds of millions (and) very successful at what he does."
Sartini cut his casino-operating teeth working for Jackie Gaughan at the downtown El Cortez Hotel & Casino and on the Strip at the Barbary Coast Hotel & Casino. Since leaving Station in 2001, the exec has concentrated on expanding Golden Gaming's slot routes, partly through a variety of tavern brands, including Sierra Gold, JJ'S Casino and PT's Entertainment.
KUDOS FOR SARTINI
"He's a great motivator," reported Sartini's former Station colleague, Bart Pestrichello. "He gets people to run through walls for him. He's fair, comes down to your level, inspires people. Couldn't ask for a better guy to steer you in the right direction." Pestrichello is now the Hard Rock's vice president of casino operations and may be one of the current staffers to whom Atamian was alluding when he said, "I expect that we would rely heavily on the existing team members there."
As for the brief, two-year lifespan of the Golden Gaming contract, Atamian disclosed, "Morgans' intent is to ultimately receive their own license. There may not need be a need for a manager two years down the road." Added the Morgans source, "maybe they want to see how strong the gaming business will be at the Hard Rock."
One possible reason that Morgans has deferred its decision on whether to seek a Nevada gaming license may involve company founder -- and convicted felon -- Ian Schrager. The former Studio 54 impresario did federal time on perjury and tax-evasion charges, and owns 7 percent of Morgans. That puts him well below Nevada's mandatory-licensing threshold of 10 percent. However, Nevada Gaming Control Board member Mark Clayton said, the NGCB has the discretion to require any shareholder whatsoever to undergo a suitability investigation. But, Clayton added, a felony conviction would not automatically rule out someone for Nevada licensure.[/color] |
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