Who needs M most?; Station’s glass jaw

In a shocker of a scoop, The Newspaper That Must Not Be Cited revealed yesterday that a $700 million stake in $1 billion M Resort was being shopped around by the resort’s lead banker. While this probably says more about the banking industry’s jitters toward being overexposed in Vegas than about M’s finances, it’s still a doozy.

The three leading contenders are expected to be Boyd Gaming, Station Casinos and Penn National Gaming. To take them in order, Boyd is smarting from both a fruitless (and not entirely logical) pursuit of Station’s lesser assets, as well as from the ill-considered demolition of the Stardust, leaving Boyd unrepresented on the Las Vegas Strip. Given the downward spiral of Atlantic City, Boyd might be able to get a bargain on MGM Resort International‘s half of Borgata and still have enough discretionary dough to snap up M.

While it might appear unseemly for Station (or its sugar daddy, Colony Capital) to throw $700 million at an acquisition right after taking its creditors to the barbershop, this wouldn’t be an illogical move. In retrospect, Station  made a huge mistake by building costly Aliante Station at the far north end of the valley, leaving its I-15/Cactus acreage fallow (land that lies between South Point and M). Anthony Marnell III, meanwhile, built a top-notch property in a killer location, right at the bottleneck that is the Las Vegas Valley‘s south end.

Station couldn’t erect a competitive casino-hotel for $70o million but could amortize part of the cost by taking the gaming entitlement off the Cactus land and re-selling it, especially now that its value could be on the upswing. (Station has made similar moves in the past, including flipping a triangular site opposite Sam’s Town, now a Walmart.) Of course, buying M would also magnify an intrinsic flaw in Station’s business plan (see below).

For those of us who are sick and tired of Penn National’s coquettish flirtations with the Vegas market, M is the perfect opportunity to call CEO Peter Carlino‘s bluff: It doesn’t have age, construction or legal issues encumbering it and would give Penn first crack at the California drive-in traffic (which continues to rise). Carlino, having dissed Tropicana Las Vegas and Riviera, and lowballed MGM for The Mirage, proceeded to make a batshit-crazy offer on Fontainebleau. Subsequently, he learned what any Las Vegan could have told him: It would take $1.5 billion to finish that white elephant. Penn’s good for the F’bleau completion money but it’d be a colossal risk for any operator entering the Vegas market for the first time (unlike Carl Icahn), particularly in a much weaker “neighborhood” than Cosmopolitan.

Simply put, M is as good a Vegas prospect as is ever going to come Penn’s way. It could be that Carlino is over-committed, with multiple Ohio projects, one in Kansas and another in Maryland. Even so, if he looks the gift horse that is M in the mouth, we’ll know that his much vaunted move on Las Vegas is just so much empty rhetoric.

Ker-pow! In one sense, CEO Frank J. Fertitta III‘s victory in bankruptcy court was Pyhrric. He still, after all, has to stem the arterial bleeding of Station’s balance sheet, as revenue slid 13% last quarter and losses widened. An amateur pugilist, Fertitta presumably knows better than to lead with his jaw but that’s precisely what Station did by exponentially increasing its debt back when it went the LBO route.

Station’s jaw turned out to be glass. It shattered under the one-two punch of internal cash-flow projections that didn’t come close (and EBITDA is now a fraction of what is used to be) and, later, the near-collapse of the Vegas economy. With all its assets concentrated in one geographic area, Station was the least-equipped of any major casino company to weather a recession and all the king’s tribal casinos and all the king’s management contracts couldn’t put that right again.

Station dared the economy to hit it and, having been clocked, will be picking its teeth up off the floor awhile yet. The company’s two Fiesta casinos have been ready for a spinoff for some time. Perhaps Station management, now that it’s back in the driver’s seat, should consider a few non-core-asset sales, both to lower its exposure and shore up the balance sheet.