A revived locals market could push Station Casinos to IPO

LAS VEGAS -- There is no debate that Station Casinos, Inc. had a strong finish to 2014, giving analysts hope that recovery in the Las Vegas locals gaming market is underway.

Now, the investment community may want a piece of the action.

During the Station Casinos’ fourth-quarter earnings conference call a week ago, an analyst asked if the privately held casino company would be publicly traded once again.

Station Casinos Chief Financial Officer Marc Falcone did his best to quiet the speculation. But the seed was planted.

Germany-based Deutsche Bank owns 25 percent of Station Casinos, a result of the company’s June 2011 emergence from a nearly two-year bankruptcy reorganization.

The process trimmed $4 billion of debt from the company’s books but also gave the bank an option to place Station Casinos into an Initial Public Offering in June 2016, the five-year anniversary of the restructuring.

Company founders Frank Fertitta III and Lorenzo Fertitta retained a 45 percent ownership stake in Station Casinos, due to a $200 million investment the brothers put into the company.

A year later, the Fertittas paid $73 million to buy out JPMorgan Chase &Co.’s ownership stake, giving the family a controlling 58 percent ownership.

Because of the debt, Station Casinos reports quarterly earnings.

Falcone told Goldman Sachs gaming analyst Kevin Coyne there hasn’t been any “material” change in the attitude of minority investors such as Deutsche Bank and the company’s former bond holders, who retained a 17 percent interest.

“The equity investors have been great partners,” Falcone said. “We’ve enjoyed being their partner, and we think they’re all happy with the performance of the company since we’ve emerged from the restructuring. I don’t really anticipate any change.”

An IPO could offer Deutsche Bank a better return on investment through the sale and purchase of stock in a resurgent Station Casinos.

Union Gaming Group analyst Chris Jones said Station Casinos fourth quarter and year-end results are the best signs of a locals gaming market recovery in recent quarters. The company said its revenue and cash flow figures were at levels unseen in almost seven years.

The company’s net income in the quarter that ended Dec. 31 was $33.5 million and $83.3 million for the year, which reversed a 2013 net loss. The company’s long-term debt was $2.1 billion, a reduction of $70.1 million from 2013.

Falcone said Station Casinos’ properties benefited from a renewed confidence by consumers, brought about by lower gasoline prices coupled with increases in taxable sales figures, job growth and the average hourly wage.

Station Casinos’ results followed the quarterly figures released by rival Boyd Gaming Corporation, in which the company said its Las Vegas properties had their strongest three-month results since before the recession.

Jones told investors Deutsche Bank has a good understanding of the locals market.

“We believe that with (Station Casinos’) recent debt recapitalization and better performance, the likelihood is that (an IPO) comes sooner,” Jones said. “This would set a comparison for Boyd in the locals market, which we believe is a positive.”

Station Casinos went public in 1993, and its shares were traded for 14 years on the New York Stock Exchange. In 2007, the Fertitta family and Colony Capital completed a $5 billion leveraged buyout that took the gaming company private.

The bankruptcy was filed two years later, after the company had difficulty serving its $5.9 billion debt.

Station Casinos blamed Las Vegas’s economic collapse for the bankruptcy. Many analysts cited the company’s debt and high development costs — Red Rock Casino, Resort & Spa had a $925 million price tag while Aliante Casino Hotel and Spa in North Las Vegas cost $662 million.

Those events are for the history books.

Since coming out of bankruptcy, Station Casinos has reported 15 consecutive quarters of cash flow growth. Net revenue of $1.29 billion in 2014 was the company’s highest figure since 2008.

Jones said Station Casinos “sets the high-water mark” for the locals market and the company’s success “should ultimately drive performance at Boyd’s local properties.”

Both Station and Boyd are investing into their flagship properties to improve their nongaming amenities. Station is spending $35 million to upgrade restaurants and VIP suites at Red Rock Resort and another $20 million to add restaurants, upgrade banquet space and improve the hotel rooms at Green Valley Ranch Resort, Spa and Casino.

Jones hinted Station’s spending at Green Valley could push Penn National Gaming, Inc. to move forward on a second hotel tower at the competing M Resort.

At the outset of the Station Casinos question-and-answer session, Bank of America gaming analyst James Kelleher told Falcone that his opening remarks were the most positive Station Casinos has been toward the locals market in several years.

“All of the key economic indicators are pointing to a positive outlook for 2015,” Falcone said.

That could foretell an interesting change in Station Casinos ownership structure in 2016.