Las Vegas Review Journal

Matching mind-sets yield deal

By Dave Berns
January 26, 1998

Shared philosophies seal a sale for Station Casinos and Crescent Real Estate Equities.

One was looking for a casino operation with a critical mass and a healthy upside. 

The other was seeking a suitor that would retire debt while pursuing growth. 

The result: Crescent Real Estate Equities Co. purchased Station Casinos Inc. for $1.7 billion.
"There was a lot of similar thinking and the cultures were similar," said Station Casinos President Frank Fertitta III. 

The genesis of the deal lay in the early days of December after Fertitta's company announced plans to transform itself into a real estate investment trust. 

So-called REITs possess a trendy financial structure that requires them to pay 95 percent of their net income to shareholders as dividends, exempting them from corporate income taxes. 

Meanwhile, Crescent Chief Executive Officer Gerald Haddock had been studying the Las Vegas gaming market for six months, seeking a healthy real estate investment along the Strip.
Knowledgeable sources said Crescent officials were eyeing Circus Circus Enterprises Inc. Haddock declined to respond. 

"As a good businessman I'm not going to disclose what we looked at," he said, "but there were a number." 

Haddock knew there were concerns that Las Vegas Boulevard was overbuilt with new hotel rooms -- more than 12,000 in the past 18 months -- driving down room rates and the stock prices of publicly traded companies. 
So, Haddock looked elsewhere. 

He and Crescent Chairman Richard Rainwater were seeking a gaming operation that was insulated from both the Strip building boom and the volatility of the high-end gaming market. 

The pair eyed Station Casinos. 

Their matchmaker was Salomon Smith Barney, a Wall Street investment firm that was overseeing Station Casinos corporate restructuring. Less than a year earlier, the firm's casino investment team had coordinated Crescent's reorganization into a REIT. 

So, executives of both companies were put together in the same room. 

"Our core business is in the office sector and we have a critical mass in submarkets -- Dallas and Houston," Haddock said. "Our approach fit with what Frank has been able to do ... creating a critical mass in a niche market." 

In its portfolio, the publicly traded Crescent owns 83 office properties, seven retail properties, a 40 percent interest in 79 warehouse facilities, 90 mental health care facilities, two health and fitness resorts and an interest in five residential development companies. 

Executives from both companies spoke of Station's corporate philosophy -- target locals rather than Strip visitors.
They spoke of Station's plans to expand: Boulder Station, Palace Station, Sunset Station and Texas Station all have aggressive master plans for room and casino additions. 

They discussed the plight of Station's Missouri casinos in Kansas City and St. Louis, which have been plagued by the same loss limits and time limits for casinogoers that have affected the bottom lines of other casino operators. 

"The common theme is what I focused on, creating critical mass in a capital intensive business that has high barriers," Haddock said. 

They met throughout the Christmas holidays, spoke throughout New Year's. 

"It's hard to say at what point in time we had a deal," Haddock said. "This is a relationship, and like in any relationship, at some point Frank and I were committed that we would give it our best-faith effort."

They announced the deal Jan. 16. 

Station Casinos stockholders will receive 0.466 shares of Crescent shares for each share of Station's stock. Crescent also will assume Station's debt of $919 million, and will issue $104 million in convertible preferred stock to Station's preferred stockholders. 

Fertitta; his brother, Lorenzo, who is president of Fertitta Enterprises; and Station Casinos Executive Vice President Blake Sartini will hold the second greatest number of shares of Crescent stock to Rainwater. 

The deal awaits the approval of gaming regulators in Nevada and Missouri. Regulators will investigate the personal and financial backgrounds of Crescent's top managers before considering whether to OK the transaction. 

The process could take as long as nine months. 

Fertitta, Sartini and the rest of Station Casinos' management team along with its 13,000 employees will remain at the company. 

"We have people that have been with us 20 years, and their loyalty is to the Fertitta family," Frank Fertitta said. "It means everybody is staying. From an employee and customer view, nobody is leaving. Nothing is change." 

As for the future, the new ownership team will likely: 
  • Move ahead with plans to add towers at Palace Station and Boulder Station. 
    • "Frankly, we're going to review every opportunity we have ... and where that capital is going to be best put to work," Fertitta said. 
  • Continue to work for the elimination of loss limits and time limits for casino players in Missouri. 
    • "I think Missouri is somewhat of a containment strategy," Haddock said. "At some point in time their regulatory environment gets relaxed." 
  • Consider whether to make a move onto the Strip. 
    • "I would never rule out looking at the Strip," Haddock said, "but I don't know. It may be 50-50 what happens with potential overbuilding."