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Study: Move to take Station Casinos private was fair

Palace Station

Justin M. Bowen

The Palace Station resort in Las Vegas.

Updated Wednesday, Sept. 23, 2009 | 2:43 p.m.

Related Document (.pdf)

A study commissioned by Station Casinos Inc. has found the company's $5.7 billion going-private transaction in 2007 was fair and reasonable at the time and didn't include fraudulent or inequitable provisions.

The report, filed in Station's bankruptcy case Tuesday, will likely be used by the company to fend off requests by certain creditors that the deal be further examined to see whether it involved circumstances that may now benefit certain lenders and creditors at the expense of others.

The report will also likely be scrutinized by lenders critical of the company.

Among other things, they have been asking why Station doesn't sell some of its assets so it can satisfy some creditors' claims.

They are also asking why Station hasn't asked the bankruptcy court to modify a deal in which the company essentially pays $250 million per year to lease from itself four of its most valuable hotel-casinos: Red Rock Resort, Sunset Station, Boulder Station and Palace Station.

With much of the rental money earmarked for payments on a $2.475 billion mortgage, the dissenting lenders say the rental payment should be revised downward to reflect today's economic environment that has reduced the value of the mortgage's hotel-casino collateral.

The Special Litigation Committee of the Station board of directors said in its report that:

--The company was not insolvent at the time of the 2007 transaction and did not become insolvent because of the deal, the company was not left with unreasonably small capital and Station did not intend or expect to take on debt beyond its ability to pay.

--It found no evidence or indication that any party intended to defraud any creditor or that any party engaged in inequitable conduct.

--Its hired experts specifically investigated whether financial projections concerning the deal were aggressive or unduly optimistic and found they were not.

The Special Litigation Committee was formed March 31 in anticipation of questions and potential litigation concerning the 2007 buyout. The committee was authorized to investigate potential fraudulent transfer claims and other potential claims related to the going-private deal. The committee is represented by independent legal counsel and an independent financial advisor.

The committee said it and its advisors reviewed thousands of pages of documents and e-mails and interviewed 19 people including Station executives, investors and third parties including auditors, legal advisors and financial advisors.

The committee found Station's founding Fertitta family, its partner in the buyout, Colony Capital; and other participants in the deal "had a good faith belief that the transaction would succeed and that the company would enjoy continued growth."

"Unfortunately for the many parties affected, the transaction was not successful," the committee said.

"Rather than any misconduct or inherent problem with the transaction or the company's business, the committee believes that the ultimate failure of the transaction can most directly be explained by the severe, rapid and unanticipated deterioration of the local, national and global economies following the closing of the transaction," the committee said.

The committee said Station, in discussing the proposed buyout, had forecast earnings before interest, taxes, depreciation and amortization of $664.6 million in 2007 and $749.6 million in 2008. But as the recession got under way and results were trending about 10 percent below its forecast, it reduced its projection by a corresponding amount.

The company did not meet the revised projections, but the special litigation committee concluded they were reasonable when made.

The bulk of the 88-page report analyzes whether the buyout involved fraudulent transfers, including transactions that can be voided or challenged "as constructively fraudulent because the company received less than reasonably equivalent value in exchange."

In analyzing whether fraudulent transfers were made, the report noted the buyout resulted in today's Station Casinos: a complex maze of corporate entities with various financial obligations. The report stated that based on case law, the formalities of the corporate structure would likely be disregarded in buyout lawsuits and that it would instead be analyzed based on its total economic effect.

The bottom line, using that analysis, is that the deal encumbered the company with an additional $1.6 billion in debt and those funds were part of the $4.2 billion paid to shareholders, the report found.

Under this analysis, the committee reported some findings that critics may try to capitalize on.

"The net effect of the transaction was that the company incurred approximately $1.6 billion of additional interest-bearing debt without the company receiving a corresponding direct economic benefit," the report said.

"While this might seem like an over-simplification of the many separate events that made up the transaction, the committee believes that it reflects a prudent approach to the consideration of potential claims concerning a challenged LBO (leveraged buyout) transaction.

"The committee concluded that Station Casinos cannot be considered to have received reasonably equivalent value for the approximately $3.7 billion of transfers by or on behalf of Station Casinos to ... (certain) shareholders because Station Casinos itself received no value from the redemption of its stock. The committee did not conclude that the redemption of stock in connection with the transaction was inherently improper, only that Station Casinos did not receive reasonably equivalent value from it."

While not addressed in the report, Station financial records show that part of the value of the transaction was reflected in an increase in the value of its goodwill and intangible assets from $155 million to $3.9 billion.

But after the takeover and the recession set in, during the fourth quarter of 2008, the company took $3.34 billion in non-cash impairment charges to write down certain portions of its goodwill, intangible assets, investments in joint ventures and land held for development to their fair value.

Goodwill and other intangible assets are accounting measures that enable companies to reflect the value of their brands and businesses in terms of producing future cash flow.

Despite its reasonably equivalent value findings, the committee suggested potential fraudulent transfer claims would involve "fact-intensive inquiries" that would significantly add to the time and expense of any litigation.

"In this case, while some claims challenging the transaction might require resolution of issues of fact and may survive a motion to dismiss, the committee does not believe the claims have a meaningful likelihood of success on the merits," the report said.

"The committee believes that it is appropriate to state the committee’s conclusion that litigation challenging the transaction would be protracted, extremely costly and could significantly delay or disrupt the reorganization process," the report said.

The committee recommended that the company not bring litigation on its behalf against anyone over the going-private deal and that it "oppose any request by creditors or others that they be authorized to bring the claims on behalf of the company’s bankruptcy estate."

Station has previously disclosed the committee was investigating potential "derivative claims," in which a company sues -- or is forced to sue -- its own directors and officers for mismanagement. Three such shareholder lawsuits proposing that Las Vegas Sands Corp. sue its directors are pending in Clark County District Court.

The report noted Deutsche Bank, a key Station lender, declined a request that a participant in the going-private deal be interviewed by the committee's experts for the study.

The litigation committee's report reviewed the circumstances of the going-private transaction:

--Shareholders were paid $4.2 billion under the deal at $90 per share. That included nearly $294 million paid to members of the Fertitta family for some of their shares and options.

--Some $1.4 billion in debt was paid off.

--Some $130 million in buyout fees were paid.

--The Fertittas contributed more than $720 million in equity in the form of stock.

--Colony Capital contributed $2.7 billion in cash and equity.

--The deal left Station with $5.285 billion in debt, including old debt of $2.3 billion. The new debt included $510 million from a senior secured credit facility and the $2.475 billion mortgage encumbering the four hotel-casinos.

Counsel for the litigation committee have asked Station's bankruptcy judge to allow them to brief the court on the report during a Sept. 30 status hearing.

With the economic downturn sharply reducing revenue at its locals casinos, Station defaulted on debt obligations earlier this year and on July 28 filed for bankruptcy reorganization. Its hotels and casinos remain open.

For the quarter ended June 30, it said revenue of $267.2 million was down from $339.1 million one year ago; and that it lost $65.3 million vs. a profit of $18.6 million one year earlier.

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