Las Vegas Sun

September 18, 2019

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Troubles loom at Stratosphere

Stratosphere Corp. investors haven't needed to climb aboard the Big Shot for a thrill ride lately.

In a tumultuous Monday, Stratosphere stock plunged almost 25 percent, bond prices dropped more than 6 percent, the company reported a larger-than-expected quarterly loss and founder and Chairman Bob Stupak said, "Sayonara."

In addition, a Wall Street analyst issued a scathing report calling the company "a disaster," said majority owner Grand Casinos Inc. shouldn't bail it out and warned that "bankruptcy may prove the only option."

In response, newly elected Stratosphere Chairman Lyle Berman angrily declared during one of two long conference calls that "bankruptcy is not in our vocabulary."

Acknowledging the company underestimated the drawing power of its 1,149-foot tower, Berman vowed to institute marketing changes and refine gaming products designed to draw more gamblers to the resort's sprawling but sparsely populated casino.

Berman made a terse announcement that Stupak had resigned as chairman and a director and that talks with the Stratosphere founder over the buyback of 7,976,496 shares of stock he owns had ended.

"Although we've had discussions regarding purchasing shares from him, we are no longer negotiating with him," Berman said.

The failed negotiations and inability to exercise influence over what he perceived as a lack of understanding about the gaming business prompted Stupak's resignation.

"Dear Lyle," Stupak wrote to Berman. "You are long aware through personal conversations and formal business meetings of my continued dissatisfaction with (Grand Casinos Inc.'s) management. ..."

Grand owns 42 percent of Stratosphere stock. Stupak, who owns about 14 percent, is the company's largest individual shareholder.

"My increasing frustrations with my inability to have anything to say with regard to Grand clearly leaves me no alternative but to tender my resignation," Stupak's letter said.

Stupak indicated he would exercise his right, as owner of more than 5 percent of Stratosphere stock, to name a director at some point in the future.

While Stupak declined to comment, sources said he was particularly angry with directors for reneging on a verbal commitment Berman reportedly made July 4 to swap Stupak's Stratosphere stock for Grand Casinos shares based on the fair market values of both companies.

He was also reportedly upset with Berman for negotiating a deal to put a Rainforest Cafe in the MGM Grand in direct competition with the franchise granted by Stratosphere.

In addition to his new post as Stratosphere chairman, Berman holds similar positions at Grand Casinos, Rainforest and Innovative Gaming Corp., all publicly traded companies.

Stupak reportedly believed that Berman failed to understand the Las Vegas gaming market, even though he built Grand Casinos into an industry power by starting with Indian casinos in the Midwest.

"Stratosphere is in the gambling business," said one source familiar with the Stupak-Berman feud. "When you walk into the joint, you should see a gambling pit, not a statue. You've got to look all over for the craps tables.

"This isn't an Indian reservation with no competition. This is the big leagues. This is Las Vegas."

The resignation marked the nadir of a once-close alliance between Stupak and Berman, whose friendship blossomed at high-stakes poker tables but floundered in the boardroom.

"The pressure's off," Stupak said. "I should have done it earlier."

But the pressure isn't off for Berman and the remaining Stratosphere directors, who have the difficult task of turning around a company that Salomon Brothers gaming analyst Bruce Turner excoriated Monday.

"We make no attempt in this comment to be politically correct in our language," Turner wrote in an advisory downgrading Stratosphere stock to a "sell."

"The Stratosphere Tower, Hotel & Casino is a disaster. Drastic action appears necessary for the company to have a remote chance at salvage."

Turner said cash flow won't be sufficient to service debt during 1997 and that "bankruptcy may prove the only option."

"We find no logical reason for Grand Casinos to 'save' this company and place their shareholders at greater risk," he said.

Turner recommended selling Stratosphere stock, saying, "There are no second chances in the highly competitive Las Vegas market."

Turner's vehemence surprised other analysts, who said they found the phrasing "bizarre," "inappropriate" and "uncalled for." It annoyed a Stratosphere official who pointed out that four years ago Turner said there was no future for gaming on the Mississippi Gulf Coast.

And it clearly angered Berman, who gave terse, one-word answers to Salomon analyst Tim Kelsey's questions during conference calls Monday regarding Stratosphere and Grand Casinos quarterly reports.

Stratosphere reported it lost $11.1 million in the second quarter, while Grand said second-quarter net rose to $19.4 million from $18.3 million in the 1995 period.

Stratosphere stock dropped $1.12, closing at $3.50 on volume of 5.2 million shares Monday. The closing price was 75 percent below the $14 peak Stratosphere stock hit earlier this year.

"We subscribed to the 'build it and they will come' theory," said Berman. "So we opened it with a limited marketing campaign, especially in Las Vegas. We expected 100,000 visitors per week, but have been getting only 77,000.

"We clearly understand the need for increased marketing and are launching promotions specifically geared to visitors already in Las Vegas.

"We thought visitors to the tower would gamble at the facility, but they aren't doing so as we expected. Many are coming in groups with children and others who don't gamble. We're opening a Kids Quest facility where adults can bring their children while they enjoy the casino.

"We assumed greater demand for hotel rooms so we didn't discount rates and didn't go after the wholesale tour market," a failing he said will be addressed.

The biggest disappointment has been the low gaming volume.

"We will offer as good or better odds on table games as any place in Las Vegas," Berman said. "That will entice tower visitors, make guests stay at the hotel, make locals comfortable, provide a compelling reason for return visits and give casino hosts marketing advantage. ...

"The major challenge is to build our gaming business. The basic message is that we offer great gambling options."

He acknowledged a delay in completion of 875 additional rooms, which now should be open sometime in the first quarter of 1997, and said the much-ballyhooed gorilla ride up the tower "is on hold" due to technology problems.

Also on hold, though no one would discuss it, may be Grand Casinos' secret plan to build a Graceland-themed resort on several acres under option near the Polo Towers.

The option must be exercised within six months. Unless Stratosphere turns around, Grand may decide one Las Vegas property is more than enough.

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