Planet Hollywood seen as weak link in bid for Aladdin

Sun Staff

Monday, May 5, 2003 | 10:53 a.m.

Gaming industry observers say the partnership bidding to turn the Aladdin into the Planet Hollywood hotel-casino is strong financially, though Planet Hollywood's checkered past is raising concerns about the group's management strength.

Experts say the partners are addressing those management issues by hiring a respected casino executive, Green Valley Ranch Station's Mike Mecca, to run the Strip property should the Planet Hollywood partnership win the bid to take it out of bankruptcy.

Although Planet Hollywood International Inc. has been in bankruptcy twice in the last four years and the 2,587-room Strip hotel would bear the Planet Hollywood name under a purchase and sale agreement filed in U.S. Bankruptcy Court in Las Vegas, analysts say the "stalking horse" bid of $635 million is solid.

Part of the reason is that Planet Hollywood International, the company, isn't key to the success of the deal.

A partnership comprised of Planet Hollywood co-founder Robert Earl, Bay Harbour Management LC, New York, and Starwood Hotels and Resorts Worldwide Inc., White Plains, N.Y., has formed OpBiz LLC as the acquiring company.

OpBiz and Aladdin Gaming LLC, the holding company for the hotel-casino, have filed documents in Bankruptcy Court asking Judge Robert C. Jones to approve a sale procedure that eventually could lead to an auction for the property. If Jones approves the procedure in a hearing Wednesday, the clock would start on a 45-day process during which rival bidders could make their own offers.

Qualified bidders would then participate in an auction to acquire the hotel-casino, which opened in 2000 with a price tag of about $1.2 billion.

One company already has indicated it would produce a rival bid to the OpBiz offer. Potential bidder Financial Capital Investment Co., Los Angeles, owner of the Omni Hotel in downtown Los Angeles, is led by managing director Richard Alter. Under Alter's plan, the Aladdin would be renamed the Asia hotel-casino and adopt a Far East-themed high-volume casino.

Alter said he would tear out the 7,000-seat Aladdin Theatre of the Performing Arts to produce a more accessible entry to the property.

Conversely, the theater would remain a key component under the OpBiz-Planet Hollywood proposal.

Earl isn't tipping his hand on all the details planned at a Planet Hollywood hotel-casino, but in various interviews he has given to several publications he has described a transformation of the Aladdin.

Earl wants Planet Hollywood to be for movies what the Hard Rock hotel-casino is for music, using memorabilia and themes throughout the property.

The theater is envisioned as a venue for big-name entertainment and celebrity appearances. Movie memorabilia would be an important part of the package and Planet Hollywood, the company, plans to contribute $20 million worth to the hotel.

The components of the $635 million bid include the assumption of $510 million of restructured Aladdin Gaming notes and liabilities and the investment of $90 million in capital. OpBiz also would pick up about $35 million in debt and liabilities associated with Northwind Aladdin LLC, the holding company for the resort's utility plant.

Under terms of the deal, Starwood -- which wants a Sheraton outlet in Las Vegas at the request of members of the company's frequent-guest program -- is paying $20 million in return for 4 percent of the hotel revenue.

Planet Hollywood International is licensing its name to the property in exchange for 1.7 percent of revenue from Planet Hollywood merchandise sold at the hotel, Earl said.

"What we hope to create is an experience that incorporates celebrity," said Doug Teitelbaum, the managing principal for Bay Harbour.

He said many Strip resorts are based on a geographic theme, like Paris-Las Vegas, New York-New York and Egypt's pyramids at Luxor. His strategy is to develop an experiential theme.

"Everyone I know who likes to gamble likes to talk about who was gambling where. All my friends say, 'So and so was playing such and such when we were in the casino,' " Teitelbaum said. "And we've found this to be true across every band of the socio-economic strata."

Teitelbaum's company specializes in acquiring and turning around companies in bankruptcy, another plus for the OpBiz group.

The third component in the partnership is Starwood, a company so large and diversified that the Aladdin deal was a footnote in a recent conference call on the company's quarterly earnings.

But analysts says it's Starwood that brings a large measure of credibility to the OpBiz offer.

"It's a group of savvy investors and part of what they have is a solid brand name in Starwood," said Marc Falcone, a gaming analyst with Bear Stearns, New York.

"The deal structure looks sound and strong and it will be interesting to see how they (the company) leverage Planet Hollywood to the asset and how well that brand will be received."

Andrew Zarnett, a gaming analyst with Deutsche Bank, New York, said Americans' healthy appetite for the movies and celebrities should help OpBiz's plan. He cited record movie ticket sales in 2002 and the popularity of movies on DVDs to make his case.

"It's the movies," Zarnett said. "It's Hollywood, not just Planet Hollywood."

Meanwhile, Falcone said Starwood is key to the deal because it will manage the hotel. Barry Sternlicht, chairman and chief executive officer of Starwood, reiterated in the company's earnings conference call on Tuesday that it would stay out of the gaming business, but run the Planet Hollywood hotel under the Sheraton banner.

A Starwood executive who addressed the Hospitality Design Exposition in Las Vegas last week added that the Aladdin "is a very compelling project for us."

Karen Rubin, vice president of development, feasibility and analysis for Starwood -- the division of the company that determines whether the company should acquire, franchise or manage a property -- confirmed that Starwood wants a Sheraton in Las Vegas for its Starwood Preferred Guests program, the company's frequent-guest club.

She said Starwood believes putting a Sheraton brand on the hotel would be compatible with the young, hip image the Planet Hollywood brand is bound to draw.

"We're appealing to a demographic and we believe it (Planet Hollywood's branding) will be a winner," Rubin said. "There's no question that the people we would draw as Planet Hollywood would be compatible with Sheraton."

Sheraton is the largest of Starwood's six brands, with more than 400 hotels and resorts of the 750 the company owns, manages or franchises. Sheraton markets to both leisure and business travelers and many of the brand's properties are located in vacation destinations in 70 countries.

Starwood also is bringing its Westin hotel brand to Las Vegas a half-mile from the Aladdin at the Maxim hotel-casino, which last year was purchased for $38 million by Fort Mitchell, Ky.-based Columbia Sussex Corp. through its C.S. Las Vegas subsidiary.

Starwood, which formerly owned the Desert Inn and Caesars Palace hotel-casinos when it acquired ITT Corp., has also branched into the time-share business and is considering spending $150 million to build a 600-unit time-share development under its Westin Vacation Resorts brand on 4.5 acres at the Aladdin property.

"We'll do it if the balance sheet allows it," Sternlicht said in Starwood's conference call.

He said time-share contract sales have climbed 14 percent for Starwood over last year with the sales price for a unit now up to $22,000 for the purchase of a one-week increment.

But will Planet Hollywood have the star power necessary to drive a hotel-casino?

For Earl, the OpBiz bid represents the third time a Planet Hollywood-related project has been on the table in Las Vegas.

Planet Hollywood first announced a bid for a hotel-casino in Las Vegas in 1996. Plans were drawn for an $830 million, 3,300-room hotel-casino on Desert Inn hotel-casino property. Former Desert Inn owner ITT Corp. was going to be a partner in the project. Then, Hilton Hotels Corp. made a hostile takeover bid for ITT and the Planet Hollywood hotel-casino bid was scrapped.

A few months later, Planet Hollywood tried again, announcing a joint venture with Aladdin Gaming to build a $250 million, 1,000-room music-themed project adjacent to the Aladdin, which was under construction at the time.

Aladdin pulled out of that deal in 1998 because of fears that Planet Hollywood would not be able to deliver on a $41 million investment as promised.

Despite those failures, Earl kept the dream of building a Planet Hollywood hotel in Las Vegas alive, keeping a foothold in the market with a Planet Hollywood restaurant in the Forum Shops at Caesars, one of the nation's most successful shopping malls.

The Planet Hollywood restaurant chain was an icon of the 1990s, sporting movie memorabilia and capitalizing on the popularity of celebrity investors Sylvester Stallone, Bruce Willis, Demi Moore and Arnold Schwarzenegger. The first Planet Hollywood restaurant opened in 1991, with the chain growing to 95 locations by 1997.

Earl also used star power to fuel another restaurant chain, the Official All Star Cafe, which had athletes Andre Agassi, Shaquille O'Neal and Wayne Gretzky among its celebrities.

Analysts said competition from other themed restaurants cut into both chains and Planet Hollywood particularly suffered from a lack of repeat business. Others say the company simply grew too quickly and collapsed under the weight of its debt.

The company filed for Chapter 11 bankruptcy protection in 1998 and was delisted from the New York Stock Exchange. It emerged from Chapter 11 in early 2000, stating it would focus on its core Planet Hollywood properties. That meant the sale or closure of the All Star Cafes and one of company's largest operations was its Las Vegas restaurant at the Showcase Mall, which closed in late 1999, putting 100 people out of work.

Then, Planet Hollywood filed for Chapter 11 a second time in the fall of 2001, citing a drop in customer traffic after the Sept. 11 terrorist attacks. Late last year, the company again emerged from bankruptcy. But not before hundreds of creditors, including dozens in Las Vegas, lost money.

"I'm part of the Planet Hollywood debris field," said Barry Fieldman, a partner in Makena Development Corp., which operates the Showcase Mall on the Las Vegas Strip, former home of the Official All Star Cafe.

"I have no personal beef with Robert (Earl)," Fieldman said, "but when his business went down, I was significantly affected."

Fieldman estimates his company lost around $10 million between lost rents, broken leases and building remodelings that occurred with both the arrival and departure of the All Star Cafe.

Fieldman said Planet Hollywood looked strong in the early days, with $200 million in cash on hand and stock selling for $25 a share. But that quickly changed.

"I think the Aladdin needs strong management (emerging from bankruptcy)," Fieldman said, "but I'm not sure Robert Earl is the one who can provide it.

"They'd (OpBiz) be getting the Aladdin for $90 million, and that's all going back into the property. It sounds to me like a pretty good deal for them."

By being installed as the "stalking horse" bidder in the process, OpBiz also would collect a $5 million break-up fee if the deal collapses and between $1.5 million and $2.5 million in expenses.

Another question that remains is the status of the Planet Hollywood restaurant at the Forum Shops.

When the partnership's plan to buy the Aladdin was first announced, Earl said the Planet Hollywood restaurant in the Forum Shops would remain open. But persons familiar with the operation said if the Aladdin deal goes through, the Forum Shops restaurant would close. Mall managers say they have not been apprised of any closure plans.

Now, Earl has altered his stance on the matter.

When asked Tuesday if the Forum Shops restaurant would close, he said, "I can't answer that question until we win (the Aladdin bid)."