Saturday, March 25, 2006

Trumped by The Donald

On November 21, 2004, Trump Hotels & Casino Resorts, Inc. (THCR) filed for bankruptcy, buckling under the weight of trying to simultaneously service $1.8 billion in debt and overhaul aging casinos in the face of increasing Atlantic City competition from the Borgata Hotel Casino & Spa, a joint venture of Boyd Gaming (BYD-$46.27) and MGM Mirage (MGM-$41.40). This marked the second bankruptcy for Donald Trump's casino empire. In 1992, the developer's Atlantic City casinos had previously filed for Chapter 11 after collapsing under the weight of $1 billion in debt.

Effective May 20, 2005, the bankruptcy court approved THCR’s prepackaged restructuring. The Company emerged from bankruptcy, slimmed down, with $400 million less debt, a 400 basis point reduction interest costs and a more flexible capital structure

Under the restructuring plan, the company issued about 40 million shares of stock, and took a new name, Trump Entertainment Resorts Inc. (TRMP-$16.29).

Holders owning about $1.8 billion of notes exchanged them for about $74 million in cash, along with $1.25 billion of new 10-year notes and about $395 million worth of common stock. These creditors ended up owning about two-thirds of the company.

After a 1,000 for 1 reverse stock split, previous holders of common stock who were unaffiliated with the Company, saw their existing shareholder interests wiped out.

As for The Donald, after infusing the restructured company with a $55 million cash equity investment and converting $16.4 million of debt he owned into common stock, he saw his stake shrink to about 27 percent from a prior 56 percent. Although the Donald was forced to cede day-to-day control of the gaming operations to others, to the dismay of common stock shareholders, The Donald remained chairman and chief executive.

Given The Donald’s penchant for attractive women, it should not surprise our readers that the Bankruptcy Court also approved the transfer of a 25% interest in the Miss Universe Pageant to Mr. Trump.

Critics of the reorganization plan called it a "sweetheart deal" for the real estate tycoon.

“Money was never a big motivation for me, except as a way to keep score,” said Donald Trump.” The real excitement is playing the game.” [Art of the Deal]

After reviewing the Company’s recently filed Annual Proxy Statement, the 10Q believes that Trump plays the game very well.

In the DEF 14A filed with the SEC, the 10Q Detective unearthed the following material comments, listed under “Employment Agreements, Termination of Employment and Change-in-Control Arrangements:”

· Pursuant to Mr. Trump’s services agreement, Mr. Trump serves as Chairman of the Board and has agreed to participate in promotional events on the Company's behalf. The initial term of the agreement is three years, and is automatically extended so that the remaining term of the agreement is always three years, subject to the Company’s and Mr. Trump’s right to terminate the agreement in certain circumstances.

· Under the services agreement, Mr. Trump is paid an annual fee of $2 million and is eligible to receive an annual bonus at the discretion of the Compensation Committee. Mr. Trump is also entitled to reimbursement of reasonable and documented expenses incurred by him or his controlled affiliates in connection with the performance of his services. In 2005, Trump received fees and reimbursement of expenses of $1,283,000 paid under his services agreement.

· If the Company terminates the services agreement, with or without cause, at any time after the initial three-year term, Mr. Trump will be entitled to receive a lump sum cash payment of $6 million. [ed. note. When The Donald eventually leaves his new wife, 34-year old model, Melania Knauss, at least she knows there is a lump sum payment waiting for her!]

· The reorganized Company has also entered into an amended and restated partnership agreement that requires the Company to indemnify Mr. Trump up to an aggregate of $100 million for the U.S. federal income tax consequences to Mr. Trump should the Company sell or transfer any of the Company’s current properties.

· Should Mr. Trump’s services agreement be terminated by the Company other than for “cause” or if it is terminated by Mr. Trump for “good reason” and the Company does not offer terms amenable to The Donald, to continue to use Trump’s name or likeness as trademark licenses, Mr. Trump will be entitled to an annual royalty of between $100,000 and $500,000, payable quarterly—for each property [provided that the aggregate royalties will not exceed $5.0 million a year]! The 10Q Detective admits that we have never read any of The Donald’s published books, but are we missing something? Mr. Trump’s likeness and/or name on casino properties in the past did not seem to drive incremental gambling revenue or traffic through the front doors—witness the prior two bankruptcy filings!

· Mr. Trump’s private real estate organization, the Trump Organization LLC, has a three year right of first offer to serve as development manager, project manager, construction manager and/or general contractor with respect to construction and development projects with an initial budget of at least $35 million, for casinos, casino hotels and related hospitality lodging to be performed by third parties on TRMP’s existing and future properties.

TRMP currently owns and operates the Trump Taj Mahal Casino Resort, Trump Plaza Hotel and Casino and Trump Marina Hotel Casino in Atlantic City, New Jersey. On March 2, 2006, the Company reported its 4Q:05 and year-end results. For the period from May 20, 2005 (the effective date of the Company's reorganization) through December 31, 2005, the loss from continuing operations was ($36.3) million or ($1.19) per share.

The 10Q Detective decided to look at operating metrics (post-reorganization) for continuing operations for the fourth quarter of 2005 compared with the fourth quarter 2004:

  • Overall interest expense decreased by $25.0 million from $57.2 million to $32.2 million due to the decrease in debt levels and interest rates.
  • .
    The Company reported adjusted EBITDA of $27.5 million on net revenues of $234.7 million in the fourth quarter of 2005 compared to adjusted EBITDA of $41.0 million in 2004 on net revenues of $236.7 million.
  • .
    A loss from continuing operations of $(26.1) million compared to $(108.9) million last year.

The Company is now financially healthy, and is ready to begin its previously announced plans to renovate existing properties. "The sale of Trump Indiana closing in December 2005,” said James B. Perry, the new CEO and President,” gives us in excess of $228.5 million in cash and cash equivalents, and had $200 million available under the revolving credit portion of our credit facility and $150 million available under the delayed draw term loan. The first phase of our capital improvement plan is to spend some $110 million on the reinvigoration of our properties. This plan will include projects at all three of our properties, including improved restaurant and retail venues, more exciting casino floors, improved meeting and convention space and re-themed entertainment areas, as well as completing the renovation of all our rooms and suites. In addition, we plan to commence construction of a new tower at the Taj Mahal in June 2006, which should enable us to maximize operating results by taking advantage of existing capacity on the gaming floor and in our restaurant and convention facilities."

In addition to organic growth at existing properties, TRMP also looking for growth opportunities beyond Atlantic City, both domestic and internationally, that would enable the Company to leverage the Trump brand. TRMP has proposed a casino in Philadelphia and is preparing for the first set of public hearings to be held in April 2006.

The Company announced the following relating to expected financial performance in 2006:

  • 1. The Company expects to begin to see year over year gains in revenues towards the end of the first quarter as a result of the initial operational and marketing changes that have been implemented. The Company expects to see improvements in EBITDA from these changes beginning sometime in the second quarter.
    2. Interest expense for 2006 will be approximately $120 million to $125 million.
    3. In 2006, the Company expects to record a total provision for income taxes of $9 million to $11 million including non-cash charge-in-lieu of taxes of $4 million to $5 million.
    4. Capital expenditures in 2006 are estimated to be in the range of $155 to $180 million.

Analysts’ consensus estimates place 2006 EPS at $0.31 on revenues of $1.05 billion. The stock is selling at a forward P/E of 23.6 times 2007 share-net of $0.69 on revenues of $1.09 billion [witness the assumed built-in operational efficiencies going forward].

TRMP has a current market capitalization of $450.2 million, compared to $1.41 billion, $14.2 billion, and $11.8 billion of competitors Aztar Corp. (AZR-$39.38), Harrah’s Entertainment (HET$77.21), and MGM Mirage (MGM), respectively.

Is Trump Resorts undervalued? Riverboat casino operator Pinnacle Entertainment (PNK-$29.45) just announced that it will acquire Aztar, the owner of Tropicana properties on the Las Vegas Strip and in Atlantic City, in a $2.1 billion deal, including $38 per share, or $1.45 billion in cash (along with the assumption of $723 million in long-term debt and $88 million in cash on its balance sheet at the end of 2005). In choosing growth through the acquisition route, Pinnacle is paying 10 times Aztar's $212 million in 2005 EBITDA, or 21.9 times Aztars’ 2007 consensus estimate of 1.73 per share.

Trump Resorts is currently selling for 11.2 times its current enterprise value to trailing twelve-months EBITDA.

True, under performing gaming operations are a hot market—witness Harrah’s $6.8 billion deal last year for Caesars Entertainment. And according to industry analysts, consolidation and perceptions of high asset value remain themes in the gaming and lodging sector.

Our problem with Trump Resorts remains The Donald. As history has shown, Donald is out for The Donald. Despite the Company licensing Trump’s “likeness” and “brand,” we do not—at present—see any new value to the reorganized Trump Resorts gaming stock.

We would avoid Trump Resorts. If readers are insistent—put speculative monies to work in a basket of other (better-run) takeover candidates currently in play, including Ameristar Casinos Inc. (ASCA-$25.26) and riverboat and dockside casino company Isle of Capri Casinos Inc (ISLE-33.78).

As for us, since we do not plan on rolling the dice, we need not worry about rolling snake eyes!


Anonymous said...

GREAT WORK!!!!!!!!!!!!!!!!!!!!!!!

Anonymous said...