To Serve (or Sever) Station
by Nick Christenson
May 29, 2010
Judge
Gregg Zive ruled on the Station Casinos bankruptcy yesterday
[1]. Basically, he gave the green light to the plan
proposed by the folks at Station Casinos in cooperation with their largest
creditors. This plan calls for the company to be split into two parts.
The first part, which they call the "PropCo" properties but which I call
"the really good parts", consists of Red Rock, Sunset Station, Boulder Station,
Palace Station, and Wild Wild West (along with the associated real estate).
These would go to a consortium consisting of the Fertitta family and
partners Colony Capital, Deutsche Bank, and JP Morgan. The other part,
which they call "OpCo" but which I call "the crappy parts", consists of
Texas Station, both Fiestas, Santa Fe Station, the contracts with Native
American casinos, and some other small properties. The Station consortium
makes an initial bid of $772 million on these, although outside entities
may bid on them as well. It's unclear to me whether the 50% interest in
Green Valley Ranch and Aliante Station are part of "the crappy parts" or
whether they'd be dealt with separately.
Was this "the right thing" for the judge to do? Well, first we must
determine what the right thing would look like. In a bankruptcy proceeding
such as this one, the primary interests that must be satisfied first are
of those who hold the corporation's debt. This must take precedence
over other considerations. Judge Zive seems to also be motivated by
preserving the jobs of the people who work at these properties. This
is a worthy consideration, as are how the reorganization will affect
the community and, where possible, and whether any equity can be
salvaged for the shareholders. All of these interests
are important, but they're also of secondary concern. While I admit
that I don't have all the information, I'm not sure I see this prioritization
in the ruling.
I don't understand the concern about the employees. Stutz reports
that Judge Zive said that a different ruling could "jeopardize the
employment of thousands of people". I'm not sure how. No matter
who buys what piece of the property, I'd expect that the vast majority
of employees will keep their jobs no matter who is the purchaser,
as long as those pieces remain open. The new owner of the Wildfire
isn't going to cut wait staff in half. The new owner of Red Rock
isn't going to make deep cuts in the folks working the bowling alley.
The new owner of Fiesta Rancho is going to need blackjack dealers just
as much as Station did, right? Sure, there will probably be some
cuts no matter who takes control, and of course these are
regrettable, but I don't see any reason to think that any particular
owners are going to be significantly more likely to lay off large
numbers of employees than any other. If this is a real concern,
have bidders on various parts submit employment plans along with their
bids and decide who gets each property based on both factors.
Some people seem outraged that the Fertitta family could be getting
control of the properties they ran into tremendous debt. These folks
see this as the Fertittas being let off the hook. "Where's the moral
hazard?" they might say. Of course, those posting in the comments
section of the online editions of the Nevada newspapers are unlikely
to phrase their concern this way, but those that typically breathe
through their noses might. In any case, the moralist in all of us
would like to see those who have made good decisions be rewarded and
those who make bad decisions be punished. However, bankruptcy is not
about punishment, it's about making the best of a bad situation for
the creditors. If giving control of the property back to those who
ran it into the ground best fulfills these interests, then so be it.
My biggest concern with this deal is how unbalanced it is in favor
of the insiders. Again, it's not that I think they should be punished,
but the way this deal is structured it seems to me to create disincentives
for outsiders to bid on Station assets, which lowers the price they'll
sell for, which hurts the very creditors whose interests this deal is
supposed to advance.
There's no bidding on the choicest assets, and the insiders appear to get
the important parts of Station Casinos' fundamental infrastructure
(information technology, etc..) The way the deal lines up, it becomes
a lot easier and much less expensive for the company that winds up with
"the really good parts" to integrate "the crappy parts" into a cohesive
whole. What this means is that "the crappy parts" become less
valuable to an outside bidder, which may suppress bids, which is bad
for creditors. Notably, these parts whose value appears to have been
suppressed are the only parts up for auction. Again, I don't know the
whole story, but based on what I can see, if I were the judge I would
have tried to level the playing field somewhat.
Moreover, by bundling all "the crappy parts" together, it seems to me
that this increases the chance of closures and layoffs, something Judge
Zive seems to want to avoid. For example, let's assume my company,
The Very Very Big Casino Company, were to place the winning bid on "the
crappy parts". Let's also suppose that all I really wanted from this
deal was the Fiestas, Texas Station, Santa Fe Station, and some of the
vacant land. What would I do with the Lake Mead Casino, Wildfire, Gold Rush,
etc.? Well, I could bundle them up and have my own little auction
trying to spin them off to someone else. If I can't find a bidder,
though, I might just choose to shut them down, putting those employees
out on the street.
It seems to me that a better way to handle this auction is to parcel out
the pieces into several smaller units to be auctioned off individually.
Sure, one could bundle the two Fiestas together, or link everything with
the word "Wildfire" in its name, but if the Judge really wanted to make sure
as many people kept their jobs as possible, he should try to ensure as
many of the pieces stayed open as possible, which tries to ensure that
each piece goes to someone who actually wants it, right?
As if infrastructure issues weren't enough, the minimum qualifying bid
for "the crappy parts" has to be $17.5 million higher than the
stalking horse bid. I'm not sure where this number comes from. So,
for example, if one of the outsiders felt the maximum they could pay
for the casinos was $15 million more than the stalking horse bid,
they can't really bid at all. If no other outsider bids, that's $15
million the creditors don't get.
Another problem the outsiders face is the land issues. Not all of the
casinos are sitting on land owned by Station Casinos itself. For example,
Texas Station is sitting on land owned by the Fertitta brothers' mother.
Of course, one might well point out that during the time Station Casinos
was a publicly traded company this represented an enormous conflict of
interest for the company insiders, and if you would hardly be the first
to do so, but that's not really relevant here. However, this situation
adds an extra layer of complexity for an outside company to run these
properties, and since the whole lot of them are bundled together, potential
bidders don't have the option to avoid these sorts of complications. If
The Very Very Big Casino Company wants to buy Texas Station, they have
to spend the extra $75 million to purchase the land underneath it. The
insiders don't have this issue. I don't know what can be done about it,
but it's just one other way that the deck is stacked against outside
bidders.
Of course, Judge Zive is in a tough spot. These sorts of deals are
always difficult and complex, and without a look at the decision itself
it's difficult to second guess his ruling thus far. However, based on what
I do know, I don't think I would have acquiesced to Station's proposal,
at least not in its entirety. Once the bidding is all done, we'll see
how this shakes out for the creditors, but I have a funny feeling that
this deal doesn't give the ones who aren't part of the "OpCo" deal
a fair shake.
This isn't the end of this story, though. At best it's
the end of the beginning. By my reckoning there are three acts left
to this Shakespearian tragedy. When it's all said and done, I'd be
surprised if this one contained the sorts of lessons on the nature of
humanity as those penned by the great bard, but I'd also be surprised
if there weren't a plot twist or two left in this strange tale.
References:
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