Station stock drops with merger dead in the water

Insisting "the stock market is wrong," Station Casinos Inc.'s chairman Tuesday downplayed the loss of more than half the company's stock market value this year.

"I personally have never been more pleased or more optimistic about the business prospects for Station going forward," Frank Fertitta III said during a conference call for investors and analysts.

But some listeners seized on the phrase "...Station going forward" as evidence Station's planned $1.5 billion merger with Crescent Real Estate Equities Co. is doomed.

They also expressed doubts about Station's future as a go-it-alone concern, citing the company's high debt load.

They noted Station had been relying on a planned issue of new preferred stock to Crescent to help finance $96 million of expansions under way at Sunset and Texas Stations. And they expressed concern over a potential $54 million penalty Station faces if the Crescent deal falls through.

Station common stock has dropped sharply since July 24, one trading day before it disclosed holders of its preferred shares were balking at terms of the merger with Crescent, a real estate investment trust.

Since closing at 13 1/16 on July 24, Station common has dropped steadily. It was down another 5/8 to 8 a share on Monday. That represents a market capitalization of $282.4 million, down $178.8 million -- or 38.8 percent -- from the value just six trading days ago.

Indeed, since peaking at 16 5/8 a share shortly after the Crescent deal was announced in January, Station common has plunged $304.5 million, or 51.9 percent.

Station common had jumped sharply after announcement of the merger deal, which initially called for conversion of each Station common share into $18 of Crescent common.

Crescent shares themselves fell more than 18 percent as investors questioned the entry of the REIT, controlled by Texas billionaire Richard Rainwater, into what many believe is an overcrowded Las Vegas gaming market.

Station common's own precipitous drop accelerated last week after the company announced it had postponed a scheduled shareholder vote on the merger because holders of its convertible preferred stock were threatening to veto the deal.

The preferred owners -- primarily hedge funds and institutional investors -- believed the ratio for converting their Station holdings into Crescent preferred was less favorable than the ratio offered Station common stock.

Crescent was offering holders of Station common a 9 percent premium, while preferred holders would get only 6 percent more. And the REIT, which must pay out at least 95 percent of its earnings to shareholders, promised a much higher dividend on its common stock than on its preferred.

This didn't sit well with holders of Station's $103.5 million of 7 percent convertible preferred, which over the past year has traded as high as $57.

As late as last Thursday, Station preferred was quoted at $48, but plunged $6 that day and closed Monday at $39.75, off another $1.50.

The drop in Station's stock prices speeded up when the company said it was suing Crescent and had asked state and federal courts to rule the REIT can't back out of the merger.

Crescent, though, said that by postponing the shareholder vote -- which the REIT claimed it hadn't agreed to -- Station had violated the merger agreement and was subject to a $54 million break-up fee.

Crescent also hasn't complied with Station's request to buy $20 million of new preferred to help pay for the expansions at Texas and Sunset Stations. The merger agreement called for Station to sell Crescent up to $115 million of convertible preferred to help fund capital-spending programs.

Those developments have raised Wall Street's skepticism over the merger's future, and Monday's conference call did little to assuage it.

"You don't sue your fiance and expect to get married," said one hedge fund investor who has sold Station's common short, anticipating it could fall to as low as $5 to $6 a share. Short sellers borrow stock to sell and hope to buy it back later at a lower price, profiting from a drop.

A further decline wouldn't help Station's financial stability, analysts said. Station debt, including the preferred stock and a working capital deficit, exceeds $1.1 billion and is several times its equity.

In its conference call Monday, the company attempted to placate investors' concerns over its highly leveraged position. In the process, its executives clearly tried to convey confidence that Station will succeed even if the Crescent deal falls through.

Fertitta and Glenn Christenson, Station's chief financial officer, said the company's four major Las Vegas properties are generating a 30 percent cash flow margin, with 80 percent of that from its slot machines.

"The Las Vegas 'locals' market is the third-largest gaming market in the country and continues to gain momentum," Fertitta said. "We control over 40 percent of the market revenues and have the dominant franchise in catering to that market."

He said proposals to limit the expansion of "neighborhood gaming" would help Station and that Ameristar's new Reserve hotel-casino in Henderson has had no impact on Sunset Station. "The Reserve has yet to generate positive cash flows," he said.

Analysts expect Station as a whole to record cash flow, or earnings before interest, taxes, depreciation and amortization, of about $175 million this year.

A $45 million expansion at Sunset Station and a $51 million growth project at Texas Station should completed by year-end, Christenson said. He also predicted Station "will ultimately dominate the Kansas City market."

The executives said damage from a July 20 storm at Palace Station should cost $7 million to $15 million to repair and that business interruption insurance will cover losses there.

But on the conference call, Fertitta and Christenson had little to say about the stalled Crescent merger, other than to disclose that the declaratory judgment they're seeking "will take several months, at least, to obtain."

The two declined to elaborate and didn't take questions, citing "pending negotiations with preferred shareholders" as the reason.

Later, though, Christenson disclosed that, "There are no negotiations going on with respect to the merger."

Instead, he said, both Station and Crescent are "going forward under terms of the merger agreement."

"Does that mean both companies are looking at covenants in the merger agreement to protect their own positions?" he was asked.

"I think that's a very fair characterization of the situation," he replied.

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