Tuesday, March 24, 1998 | 10:29 a.m.
Allen Paulson wants out of an agreement to buy Riviera Holdings Corp. and Elsinore Corp., prompting analysts to speculate Paulson has simply waken up to the harsh reality of today's gaming industry.
"The industry is a whole lot more competitive than he might have imagined," said Jay Kornmayer, a gaming expert at Wells Fargo Bank.
"I think he stumbled across the reality," agreed Dave Ehlers of Las Vegas Investment Advisors.
Neither Paulson nor officials from Riviera or Elsinore would comment Monday about the defunct merger. Duane Krohn, Riviera's chief financial officer, said he could not disclose whether the company was seeking a new buyer.
"We can't have any comment until we determine the outcome of this one," he said.
Krohn said he could not comment due to "lawyer's instructions." He declined to say whether litigation was pending.
Last May, Paulson announced plans to buy Riviera for $250 million in cash and debt, and Elsinore for $54 million in cash and debt. Riviera owns and operates the Riviera Hotel & Casino on the Strip and is developing a casino in Black Hawk, Colo. The company operates the Four Queens Hotel and Casino in downtown Las Vegas, which is owned by Elsinore.
Morgens, Waterfall, Vintiadis & Co. Inc., a New York law firm, owns 94 percent of both Elsinore and Riviera. Elsinore's business operations are managed by Riviera.
The proposed deals, structured through Paulson's R&E Gaming Corp., were two parts of a three-pronged plan by Paulson to become a force in Nevada gaming. In 1996, Paulson bought the Gold River Hotel & Casino Corp. in Laughlin. In September, he won state Gaming Control Board approval to take sole control of Gold River.
Paulson is a well-known champion horse owner who worked his way up from TWA mechanic to owner of the Gulfstream corporate jet company. He is a major stockholder and former chief executive of Full House Resorts Inc., which owns casinos in South Dakota, Mississippi and Oregon.
The Riviera and Elsinore acquisitions were billed by Paulson as savvy moves to buy struggling companies at bargain-basement prices and return them to profitability.
"I've bought other companies out of bankruptcy and done well with them," he told the SUN in September.
Paulson bought Gold River while it was in bankruptcy. Both Riviera and Elsinore emerged from Chapter 11 reorganizations last year.
Despite its bankruptcy, Riviera earned $2.1 million in 1997, or 40 cents per share, on revenues of $154 million. Still, these results were significantly lower than 1996, when the company earned $8.4 million, or $1.63 per share, on revenues of $164.4 million.
Elsinore's 1997 earnings are difficult to decipher, due to the company's Chapter 11 reorganization. In the first two months of the year, Elsinore made $35.8 million on revenues of $9.8 million, a result due primarily to an extraordinary gain of $36 million on the elimination of the company's debt. Without that gain, the company would have lost $190,000. From March 1 through September 30, Elsinore lost $632,000 on revenues of $31.2 million.
In Elsinore's fiscal year 1996, which for accounting purposes began Jan. 1 and ended Sept. 30, Elsinore lost $920,000 on revenues of $45.8 million. Data for the last three months of 1996 was not available. The company did not report per-share earnings.
Late last month, both Riviera and Elsinore announced that Paulson's R&E Gaming "is reserving the right not to proceed with its acquisition of Elsinore and is demanding a return of payments previously made in respect of the acquisition agreements." At the same time, Riviera announced "R&E Gaming has also requested information to enable it to determine whether Riviera is in compliance with certain of the covenants in the Riviera merger agreement with R&E Gaming."
Then, on Monday, Riviera announced that Paulson "considers the merger agreement with Riviera 'void and unenforceable'" and said Paulson had signaled R&E's "'intention to terminate' and [to] 'demand repayment of all moneys and letters of credit.'"
In a statement, Riviera disputed Paulson's account and said it "will vigorously pursue collection of the approximately $6 million being held in escrow related to the merger."
Elsinore issued a statement saying Paulson alleged, among other things, "violations by Elsinore of its merger agreement with R&E, violations of law and misrepresentations by Elsinore's controlling shareholder and the nonsatisfaction of certain conditions to completing the merger."
"Elsinore rejects the allegations against it by R&E and is of the view that R&E is required to complete the merger, subject to approval by gaming authorities," Elsinore said.
It is difficult to determine exactly what happened. Neither side is talking -- a woman who answered Paulson's Los Angeles office phone said Paulson is simply not commenting on the terminated deal.
But analysts who follow the gaming industry believe the difficulties facing all Las Vegas casinos -- too few visitors and too many hotel rooms, air service issues and competition from casinos in other parts of the country -- played a major role in Paulson's decision.
"I would imagine that general market conditions played a prominent role," Ehlers said.
Kornmayer doesn't know what Paulson was thinking in the first place.
"I don't know what he thought he was going to do after he closed to turn that property around," Kornmayer said of the Riviera deal.
Both said Riviera is an older casino, and thus one that will bear the brunt of the price-wars that will inevitably result from the city's oversupply of hotel rooms.
But the analyst speculation remained just that -- speculation. Industry observers noted that no Wall Street analysts directly cover Riviera or Elsinore, which are too small to attract widespread investor attention.
When they weren't speculating, most analysts were echoing Tom Milanowski, of Capital Management.
"I flat out do not know," Milanowski said when asked why the merger had gone belly-up. "I'm trying to figure that out myself."
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