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November 18, 2018

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Offer spotlights issues facing Riviera Holdings

News of an unsolicited bid for the Riviera Las Vegas this week has once again turned the spotlight on a money-losing casino in a prime Strip location.

Italian investor Fabrizio Boccardi, known for his failed bid for the Desert Inn that was trumped by Steve Wynn in 2000, Thursday announced an offer to buy Riviera's parent Riviera Holdings Corp. for $30 million in cash and the assumption of the company's roughly $220 million in debt. Boccardi, who has been scouting to buy a casino in Las Vegas for at least the past five years, alternatively is pitching a $135 million cash offer on the Las Vegas property alone.

Imploding the 2,100-room hotel and building a billion-dollar megaresort would be cost-prohibitive, said Boccardi, who instead has plans to squeeze more cash flow out of the property through upgrades and a new theme.

The Riviera sits just north of the Desert Inn, the site of Wynn's $2.4 billion Le Reve Resort opening in 2005. That project has raised the profile of the Riviera, an aging property that lacks prominence in a city where the smart money is flowing to newer, luxury resorts.

The company isn't sitting idle.

In an annual report issued last month, Riviera said it was exploring the possibility of building a 60,000-square-foot entertainment complex atop its Las Vegas casino and featuring "specialty-themed entertainment" appealing to the property's main target audience of adults aged 45 to 65. The company has issued a letter of intent with a potential partner to finance and develop the project and is in the process of negotiating a formal agreement, the filing said.

It also is considering pursuing a joint venture with a partner to develop timeshares or financing for an additional hotel tower and parking garage on its 26-acre site in Las Vegas. The company said it hasn't yet identified a partner or financing for the projects.

Additional rooms near the Las Vegas Convention Center could draw business customers and provide a base for new gamblers, the company said.

The company has filed an application in Missouri to develop a casino hotel about 20 miles south of St. Louis. It expects the state to make a decision by summer and, if approved, could begin construction this year to debut in 2005.

It also has its sights on New Mexico, where it hopes to be selected by regulators to develop a "racino" -- a racetrack featuring slot machines. The state is expected to award a license this year.

And the company said it is eyeing other states for expansion opportunities, including California, Iowa, Mississippi and Pennsylvania, as well as distressed properties.

For all its potential on the Strip and beyond, Riviera remains a small company burdened with debt -- the biggest hurdle for any investor willing to roll the dice. It reported a loss of $24.7 million in 2002 compared to a loss of $6.4 million in 2001. On a per-share basis, it lost $7.17 per share last year versus a loss of $1.79 for the previous year. The losses triggered a delisting proceeding by the American Stock Exchange in February. Chief Financial Officer Duane Krohn said Thursday the company is negotiating with AMEX to maintain its listing, a process that could take up to 18 months.

More importantly, the company was saddled with about $220 million in long-term debt last year and has struggled under similar burdens in recent years.

The Las Vegas casino produced about $24 million in cash flow last year on revenue of $139.2 million, yielding a cash flow margin of about 17.2 percent.

It's a respectable return but lower than bigger competitors. And given the company's interest payments of $26.8 million on debt last year, it hasn't been enough to turn a profit.

Cash flow -- defined as earnings before interest, taxes, depreciation and amortization -- is a key indicator of casino performance.

Riviera Holdings is among the most highly leveraged of the major casino companies, a function of the relative risk in owning only two casino properties that aren't as profitable as their flashier counterparts, analysts say. In addition to the Riviera in Las Vegas, the company owns a second Riviera casino in Black Hawk, Colo., and has a stake in the company that owns the Four Queens casino hotel in downtown Las Vegas.

The company's debt load is at least six times what both Riviera properties produce in cash flow each year, analysts say. Better-capitalized companies on the Strip have debt levels that are about three to four times cash flows, they say.

Like many other casino companies, Riviera completed junk bond refinancing last June to take advantage of low interest rates. The company offered $215 million in bonds priced at around 11 percent to refinance offerings priced from 10 percent to 13 percent.

Bond rating agency Standard & Poor's placed a B+ rating on the debt offering and reiterated a "negative" outlook on the company. The rating is considered in the mid-level range for junk bonds, notes considered below "investment grade" because of their relative risk to investors.

"Ratings could be lowered if the company's overall financial profile does not strengthen, as expected, from current levels to provide a cushion to fund possible investment opportunities," S&P credit analyst Michael Scerbo had said.

Boccardi's offer could be a boon for stockholders, some analysts say.

His $8.50 per share bid compares to the company's pre-bid price of $3.95 per share. Riveria stock charged up $1.56 Thursday after news of the offer.

The bonds present a major sticking point, however, they say.

Should Riviera change ownership, bondholders would have the right to sell their bonds for 1 percent above their face value. The company's bonds now trade below their issue price, at around 85 cents to the dollar.

Boccardi aims to finance the purchase with backing from a Groupe Partouche, a publicly traded casino operator based in Paris and one of France's three largest gaming empires. He intends to capitalize the company with more cash, which he hopes would raise the company's bond ratings and convince bondholders to waive the change of control provision.

"If the Riviera doesn't listen to the offer, they're probably not doing their shareholders any good," said one analyst who requested anonymity. "If they get the deal done it would be a huge coup for investors."

Others say the offer may be too risky.

"I don't see why anyone would buy at these (debt) levels," said one analyst who requested anonymity.

"In a weak economy I want to be able to pick off an old property on the cheap," the analyst said. "I don't think this is cheap. This could be the right time at the wrong price."

Las Vegas casino developer Mark Advent, who also bid on the Desert Inn against Wynn, said he passed on the Riviera five years ago.

"The best approach with the Riviera would be to tear it down and start over," he said. "As new properties come on line, the older properties suffer the hardest."

Boccardi said he lacks MGM MIRAGE's resources and Wynn's track record to go that route. But he is willing to prove that the Las Vegas resort can make more money than it does today.

"Management is already doing a terrific job," he said. "But they're not doing a job, in my humble opinion, with a vision. They're not really focusing on their potential in Las Vegas."

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