Carl Icahn offers $156 million for Fontainebleau, outbids Penn National

By Steve Green

Published Monday, Nov. 23, 2009 | 10:32 a.m.

Updated Monday, Nov. 23, 2009 | 3:43 p.m.

Investor Carl Icahn will be the stalking horse bidder for the mothballed Fontainebleau Las Vegas casino resort, offering $156 million in cash and financing Monday and outbidding Penn National Gaming.

During a hearing in Miami's bankruptcy court, Penn National Gaming initially competed with Icahn but then dropped out of the bidding after going as high as $145 million.

Penn National last week offered $101.5 million -- $50 million in cash and a loan of $51.5 million to be the stalking horse bidder. Penn National has been looking for an opportunity to enter the Las Vegas gaming market.

As the stalking horse, Penn's bid would have been the price to beat by other bidders in an auction likely to occur early next year. With loan and other fees it negotiated, Penn also stood to recover some of its investment in expenses and its executives' time working on the deal.

But Icahn, a longtime player in the gaming industry, emerged as a competing stalking horse bidder last week and negotiated his own terms with Fontainebleau.

An attorney for Fontainebleau, Scott Baena, told Bankruptcy Judge A. Jay Cristol that Icahn initially offered a bid last week exceeding Penn's bid by $25 million. He said Penn National then matched that higher bid.

Icahn then offered another $10 million Monday, bringing his bid to $136 million, Baena said.

Fontainebleau and Penn National continued the bidding during Monday's hearing, with an attorney for Icahn eventually settling at $156 million.

"We will cede to Mr. Icahn's desire to be the stalking horse bidder," an attorney for Penn National told Cristol.

The judge quipped that he hoped Penn National would return during the planned auction with a bid of a couple of hundred million dollars more.

Icahn's bid includes a $51 million debtor in possession loan, which until Fontainebleau is auctioned will provide funding to stabilize the building project on Las Vegas Boulevard, cover employees' salaries, cover previous bankruptcy costs and eliminate the need for Fontainebleau to ask the bankruptcy court each week to borrow and spend money. Penn's loan would have done the same thing.

With Fontainebleau's debts potentially topping $2 billion, the judge wasn't impressed by the extra $35 million initially on the table, saying: "This case is a total disaster."

With the competing bids offered through Monday afternoon, though, he remarked: "We seem to be having an auction."

Some $1.675 billion has been borrowed against the project and contractors have asserted liens of $424 million against it. On top of that, it's projected to cost another $1 billion to $1.5 billion to complete the resort -- all against the backdrop of declines in gaming revenue and hotel occupancy caused by the recession.

Fontainebleau, launched during the economic boom, also saw its balance sheet weaken due to a lack of condominium sales at the resort after the recession set in.

Icahn is no stranger to the Las Vegas gaming market.

Last year one of his companies booked a $700 million profit by selling American Casino and Entertainment Properties LLC to a Goldman Sachs real estate fund for $1.2 billion.

American Casino owns four hotel-casinos in Southern Nevada: The Stratosphere and two Arizona Charlie's in Las Vegas; and the Aquarius in Laughlin

Icahn also controls Tropicana Entertainment and the Atlantic City Tropicana, having acquired them out of bankruptcy.

Tropicana Entertainment includes eight casinos in Nevada, Mississippi, Louisiana and Indiana. In Nevada, it has the Tropicana and River Palms in Laughlin and MontBleu at Lake Tahoe.

The Las Vegas Tropicana was spun out of bankruptcy to a different sent of investors.

Icahn and officials at Tropicana Entertainment could not immediately be reached for comment on Icahn's bid Monday.

Greg Garman of the Las Vegas office of Gordon Silver, which represents many of the Fontainebleau contractors, asked Cristol on Monday to establish procedures to confirm the extent of the contractor liens so they could make their own credit bid for the project -- a bid that could exceed Icahn's bid.

At a point when Icahn and Penn National each had about $90 million in cash in their offers, Garman said: "We don't think that's a fair price."

But attorneys for lenders said it was premature for such an order by the judge and one argued there's a mortgage against the property for $150 million that may have priority over even the contractors' claims.

"I think it's going to be difficult to determine who's on first," Cristol said of the various claims against the casino resort, where construction was halted this summer after lenders led by Bank of America halted funding due to problems including cost overruns.

Nevertheless, Jeff Truitt, the bankruptcy case's examiner, testified that Icahn's offer compared to Penn National's offer better accommodates the desires of the contractors that the extent of their liens be quantified so they can make a credit bid.