Boyd redoes hotel deal

26 September 2008

LAS VEGAS, Nevada -- Boyd Gaming Corp. and New York-based Morgans Hotel Group have reworked an agreement to develop two boutique hotels on the stalled Echelon project on the Strip.

Both sides said they remain committed to opening Delano and Mondrian hotels as part of the $4.8 billion development, whenever that opening may be.

"(The amended agreement) preserves the original intent of Echelon as a development with five hotels, two of them Delano and Mondrian," Boyd Gaming spokesman Rob Stillwell said, adding that the gaming company has no plans to seek another partner to replace Morgans.

Both companies said Thursday the deadline for Morgans to obtain construction financing for the hotels has been extended through 2009.

The agreement could be terminated by either company at any time before Dec. 31, 2009.

Boyd will return a $30 million deposit, plus interest. The new agreement also frees about $41 million in future funding obligations for Morgans.

Morgans is also no longer obligated to provide a construction loan guarantee and will have sole control over the use of the Delano and Mondrian brands in relation to the development.

"The financial markets simply would not support the capitalization of what we envisioned for that venture," Stillwell said.

In January 2006, the companies announced a 50-50 joint-venture partnership to develop the two boutique hotels at Echelon.

Then the credit markets tightened, making it difficult for both parties to obtain financing at cost-effective rates.

Boyd announced Aug. 1 it was delaying construction on Echelon for up to a year, raising speculation about the future of Morgans' involvement in the project.

Construction on the hotels, estimated to cost $1 billion, was to have begun this summer.

Both companies are seeking to decrease their equity stake in the joint venture, which could include bringing in a third party to help pay for the boutique hotels.

"We believe the amended agreement provides substantial flexibility and represents a reasonable framework for (Morgans) to move forward ... on the basis of a vastly reduced capital commitment," Morgans Chief Executive Officer and President Fred Kleisner said in a statement.

Morgans followed a similar ownership model at the Hard Rock Hotel, which it bought in partnership with private-equity investor DLJ Merchant Bank for $770 million.

However, Morgans' stake in the property has diminished from 33 percent in February 2007, when the deal closed, to 20 percent as Morgans has decreased its equity contributions in the $760 million expansion, which is fully financed.

The amended Echelon deal restricts the amount the companies must put toward predevelopment and related costs to about $420,000 each.

Boyd is also in discussions to amend its deal with mall developer General Growth Properties Inc., Stillwell said.

General Growth was slated to develop the $500 million, 300,000-square-foot retail center for Echelon.

JP Morgan gaming analyst Joseph Greff said earlier this month that Boyd Gaming management suggested Echelon's delay "is likely to be extended" beyond the year time frame.

"While management is still committed to the project and still believes it is the right decision long term for the company, we see no way the project is started again prior to 2010," Greff wrote in an investors report.

Stillwell said the size of the development -- 5,000 hotel rooms and suites, including three boutique hotels, a 140,000-square-foot casino, 750,000 square feet of meeting space, 30 restaurants and two theaters and retail on 87 acres -- won't change.

"That is what we hope to preserve over the course of the delay," Stillwell said. "We went about this in a very methodical, careful manner with the idea that it is a delay. We want the project to delay in an orderly fashion so when the delay is over, we can resume progress."

Boyd Gaming shares rose 0.61 percent, or 6 cents, Thursday to close at $9.84 on the New York Stock Exchange.

Morgans Hotel Group's stock slid 32 cents, or 2.53 percent, to close at $12.33 on the Nasdaq National Market.


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