Another day, another casino in the sights of the Starwood Capital Group.

What’s going on here?

It’s interesting to watch how Starwood Capital has shown so much interest in Las Vegas casinos over the past month or so – the past few years even if you consider their initial bid for the Riveria on the strip.

Although its all rumors at this point, Bloomberg Business Week has a story about Starwood Capital’s (and Colony Capital’s) interest in purchasing the Rio casino from Harrahs. Harrahs has been looking to divest the property since they purchased the Planet Hollywood and is looking for interested bidders. Harrahs purcahsed the Rio in 1998 for $888 million, and according to the Business Week article – the property is only worth $500 million now.  

So why are all these private equity firms looking to get into the casino business? Its interesting to watch Carl Icahn place a bid on almost every project in Atlantic City & Las Vegas that is having financial difficulty, Starwood Capital’s interest in the Riveria and now apparently the Rio, along with Colony Capital’s current ownership of the Hilton Las Vegas and Atlantic City. Why?

I’d think that it would be too much trouble to go through the gambling licensing procedures for a private equity firm to even consider dabbling in this, but if you look at the history of these three firms – they have gambling in their blood.

Colony Capital has owned the Hilton in Las Vegas since 2004, the Atlantic City Hilton since 2005 and Resorts International since 2000.

Carl Icahn purchased the Sands casino in Atlantic City in the early 2000′s but quickly sold it to Pinnacle Gaming, but now he owns the unfinished Fontainebleau and the Tropicana in Atlantic City

Barry Sternlicht, from the Starwood Capital Group was probably the first out of these three to get into the casino business with his purchase of ITT-Sheraton which included Caesars World in I believe 1998.

Its interesting to see what everyones intention will be – its known that casinos are great for their free cash flow – something a Private Equity firm loves, but its obvious that some people look at the purchase of a casino as just a passing investment – similar to how Carl Icahn has looked at his investment in the Sands in Atlantic City and possibly how he will look at the Fontainebleau once the economy picks up.

andrew@alconic-inc.com

Yesterday the top news story coming from Atlantic City OR Las Vegas was Colony Capital & Resorts International’s bid on the Tropicana Hotel & Casino in Atlantic City. As everyone knows the owners of the Tropicana, Columbia Sussex, lost their gaming license back in December and according to Gaming Board Rules, must sell the casino in 120 days. (Here’s my previous article on the Tropicana).

This bid is the first firm bid put in writing that has been made for the casino. There have been numerous companies who have said they are interested in the property (Cordish Companies – Owner’s of Atlantic City’s “The Walk”, and failed potential buyer of Trumps three AC properties, Pinnacle Gaming, and the Mohegan Sun Tribe who runs the Mohegan Sun Casino in CT.)

This is a unique sale for a number of reasons:

1. This is only the second time a gaming license has not been renewed in Atlantic City, forcing a casino sale.
2. Columbia Sussex can only sell the casino for the price they originally paid for it, or its current market value – which ever is lowest. Assuring Columbia Sussex of receiving little or no profit from the sale.
3. There is a very strict time limit on how fast the casino must be sold – 120 Days from the day of license renewal being denied, although I am unaware as to what would happen if a viable bid is not received and accepted within 120 days.

Colony Capital and its subsidiary Resorts International, which owns and operates the Atlantic City Hilton and Resorts Casino in Atlantic City sent a written offer for the Tropicana to both the Casino Control Commission and the Trustee who is currently overseeing the casino. The bid was reportedly $850 million, including a $50 million good faith deposit and a request for no more bids to be accepted for 30 days in order for Colony Capital to do its due diligence. In addition, Colony said they will give the property a $100 million dollar renovation as well (impressive since the Tropicana just finished a major renovation, built a new hotel tower and retail addition in 2006). Since Columbia Sussex purchased the Tropicana in a package deal with a few other casinos throughout America, it is unclear how much they paid for the Tropicana itself, so its unclear if the $850 million is its current market value or what Columbia Sussex purchased it for.

There are a few interesting tidbits which came to light with this turn of events that I wasn’t previously aware of..

1. I didn’t even know that Resorts was still in business in Atlantic City (and I frequent Atlantic City often – I guess its just a small casino!)
2. The Trustee’s sole job is to oversee the sale of the casino – obviously he is not running its day to day operations – that’s being done by the current management team, which was in place before Columbia Sussex purchased it, but I wasn’t aware that the only thing the Trustee is responsible for is its sale.

Before I come to any conclusions as to if Colony is the best bidder on the development, I’d like to see some other offers from other players in Atlantic City. Colony does have a good track record – plus they already have their Casino License, which can make the transaction smoother, but the Tropicana is definitely a higher profile property than both the Atlantic City Hilton & the Resorts property – not that they would have difficulty running it, but it would instantly put them into another league in Atlantic City. Resort’s International is not the only gaming experience which Colony has, they are also the owners of the Las Vegas Hilton (which – ironically, suffers almost the same problems as the Atlantic City Hilton – far away from most action, old and not too exciting), as well as Kerzner International – the company which build The Atlantis Resort in the Bahamas, as well as numerous other first-class resorts throughout the world.

Colony Capital is not very well known – although many of its properties are very well known – for example, as I briefly stated above, Colony Capital owns Kerzner International, Resorts International, plus numerous smaller Gaming Hotels and Resorts throughout America and the World, Colony also owns Fairmont/Raffles hotels, and numerous single hotel locations throughout the world, hundreds of residential developments and numerous office buildings throughout the world. Colony Capital is a huge company, but since its a private investment firm, it usually stays under the radar and lets its owned companies take the limelight. It’s interesting to note that Colony Capital was one of the initial bidders for Aztar Corporation, the company which sold the Tropicana in Las Vegas & Atlantic City to Columbia Sussex.

I hope to see more bids on the Tropicana, because even though Colony is a good purchaser – they have the money, experience, and ability – I’d still like to see something with a little more spice.. Say, Planet Hollywood expanding to Atlantic City, or Pinnacle purchasing the property and having their second Atlantic City casino – before the first one even opened, and lastly, I’m interested in what the Cordish Companies have up their sleeve – they are not known as a gaming operator, so I think they would like to shake up AC to show they are serious.

andrew@alconic-inc.com