Las Vegas Sun

April 21, 2019

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Santa Fe reveals aborted merger talks with Station

Santa Fe Gaming Corp. has revealed that it was in unsuccessful merger talks in 1997 and 1998 with Station Casinos Inc. and a Station merger partner.

The talks eventually led to a July 1998 offer from Crescent Real Estate Equities Co. of Fort Worth, Texas, to pay $229 million in stock and debt for Santa Fe, an offer that was rejected by Santa Fe. Crescent had earlier agreed to buy Station, but that deal fell apart.

The merger talks and rejected offer were revealed in court documents filed this month by Santa Fe. The company is fighting an attempt by three bondholders to force it into bankruptcy, charging that the bondholders are really attempting a hostile takeover of Santa Fe.

Las Vegas-based Santa Fe owns the Santa Fe hotel-casino in northwest Las Vegas, the Pioneer hotel-casino in Laughlin, and prime land on the Strip and in Henderson. The company is trying to raise financing to build a casino on its Henderson land.

Station Casinos of Las Vegas is the area's largest locals-oriented casinos operator and has riverboat casinos in Missouri. Crescent, a real estate income trust, abandoned its plan to buy Station last summer. The companies are now suing each other over the failed deal.

In December, Santa Fe subsidiary Pioneer Finance Corp. missed a $60 million balloon payment that was due on bonds floated in 1988 to buy the Pioneer hotel-casino. Anticipating it would miss the payment, Santa Fe sought bondholder agreements not to demand payment, or if the company entered bankruptcy to accept new bonds due in 2006.

While nearly 77 percent of the bondholders agreed to the terms, owners of about 13 percent of the bonds did not. Last month, those bondholders filed involuntary bankruptcy petitions with the U.S. Bankruptcy Court in Las Vegas to try to force Santa Fe and Pioneer Finance into Chapter 7 bankruptcy. Chapter 7 bankruptcies generally call for a liquidation of company assets to satisfy debts.

The bondholders are led by Hudson Bay Partners LP, a New York investment firm controlled by David Lesser. Hudson Bay owns 7.9 percent of the bonds. Other bondholders trying to force Santa Fe into bankruptcy are The GMS Group LLC of Atlanta, which owns 4.7 percent of the notes, and Dr. Robert Baker of Pompano Beach, Fla., who owns four tenths of 1 percent.

Hudson Bay also bought up 24.1 percent of Santa Fe preferred stock in recent months. Preferred stock is nonvoting, but because Santa Fe has missed dividend payments on the preferred stock for two years, preferred shareholders have the right to appoint two company directors at this year's annual meeting. The meeting date has not been set.

Lesser has declined to comment on his activities or intentions, but his Securities and Exchange Commission filings show he wants the company sold, merged or placed under new management. Santa Fe is now headed by Paul Lowden, who owns 53.4 percent of the company's common -- and voting -- stock.

Santa Fe has also declined to comment on Lesser's activities. But in motions to dismiss the involuntary bankruptcy petitions filed earlier this month, the company's view of Lesser's motives becomes clear:

"The purported ... creditors have commenced this involuntary bankruptcy to further their goal of gaining control of Santa Fe. ... Lesser and his confederates were ... able to identify and target for acquisition particular fully secured debt securities, not for obtaining a return on an investment but to use the threat of an involuntary bankruptcy as a sword to wield in their battle to wrest control of Santa Fe Gaming Corp. from its shareholders."

Santa Fe wants the involuntary Chapter 7 petitions dismissed. The company has said it plans to enter Chapter 11 bankruptcy -- a form that allows companies to continue operating while restructuring their debt -- after a 90-day waiting period. The period will expire around March 1.

The company needs to wait, executives have said, or a $6.5 million payment made Nov. 30 to the bondholders who accepted the exchange offer may be declared a preference payment by a bankruptcy judge and returned to the company for distribution to all bondholders. That could prompt some of the 77 percent of bondholders who accepted the offer to change their minds.

Santa Fe says a bankruptcy filing will not affect operations at either of its casinos.

Santa Fe argues the Hudson Bay-led bankruptcy petitions were made in bad faith -- as a way to gain control of the company rather than to get payment for overdue debt. And in an attempt to prove that point, Santa Fe disclosed Lesser's involvement in merger talks that took place between Santa Fe, Station Casinos and Crescent from late 1996 until last summer.

According to the filings, the negotiations went like this:

In the fall of 1996, Station and Santa Fe started talking merger. "Simply stated, Station was interested in purchasing the Santa Fe Hotel and Henderson parcel" -- which is across the street from Station's Sunset Station.

The negotiations continued after Crescent announced it was buying Station in the fall of 1997. Both Station and Crescent entered confidentiality agreements with Santa Fe.

Lesser entered the picture about this time. In meetings and telephone conversations between January and July, 1998, Lesser -- working on behalf of Crescent -- and other Crescent executives discussed merger details with Santa Fe officials. "Santa Fe Gaming Corp. revealed intimate and nonpublic corporate details on such subjects as employee wages, plans for addressing issues related to the 1988 bonds, strategies for resolving a dispute involving the Culinary Union, and a variety of sensitive tax issues."

In other meetings over the next several months, Lesser was privy to various confidential information. In July, Crescent offered $20 million in Crescent stock for Santa Fe, and offered to assume $209 million in debt. That offer was rejected.

In August, the Station-Crescent merger fell apart. Station declined comment on the Santa Fe talks.

But Santa Fe had not seen the last of Lesser. In December, Lesser disclosed he had been buying up Santa Fe bonds, and "began making demands and threatened to commence an involuntary bankruptcy proceeding if his demands were not met. ... (Lesser made) a thinly veiled threat that in order to avoid bankruptcy, Santa Fe Gaming Corp. would be required to enter into a transaction with Hudson Bay that would require the resignation of three existing directors ... and involve the appointment by Hudson Bay of four of Santa Fe Gaming Corp.'s seven directors."

Santa Fe charges that Lesser used inside information gained while negotiating the Crescent merger to try to get control of the company. Because that attempt failed, he is now trying to force the company into bankruptcy "in hopes that other avenues of influence ... present themselves."

That, charges Santa Fe, is evidence of a bad faith filing and grounds for dismissal.

Lesser declined comment on the Santa Fe filings. However, he took issue with the Santa Fe allegation -- repeated frequently -- that Hudson Bay is an instrument of Crescent and Crescent's largest shareholder, Richard Rainwater. According to Lesser, Crescent is a non-voting owner of stock in HBCLP Inc., a company co-owned and controlled by Lesser and another investor. HBCLP is in turn a non-controlling partner in Hudson Bay. Hudson Bay is controlled entirely by Lesser, who is its general partner.

It is now up to Lesser and the other dissenting bondholders to file answers to the Santa Fe motions. The matter will be argued in a court hearing next month.