Hurricane makes going even tougher for Landry’s

Even if Hurricane Ike hadn't wiped out electricity and air conditioning in Houston and Galveston, the folks at the Texas headquarters of Landry's Restaurants might still be sweating.

The company that owns the Golden Nugget hotel-casinos in Las Vegas and Laughlin is under a partial hiring freeze. And Chief Executive Officer Tilman Fertitta has until Feb. 1 to make good on an offer to buy the company at a price nearly 30 percent higher than current share values or face debtholders who want Landry's to renegotiate terms or pay up on $400 million it owes.

Now the bad news.

Hurricane Ike did an estimated $50 million to Landry's businesses in Galveston and Kemah, which were among the company's best-performing units.

About 14 restaurants in Houston were affected; many have reopened. The coastal properties could be out of commission 45 to 60 days.

"We're affected right now, huge," Fertitta told the Houston Chronicle. He did not respond to an interview request by the Review-Journal.

A spokesman for the Golden Nugget says the Landry's hiring freeze doesn't cover the Nevada properties, nor have the properties brought in any Texas workers who had jobs displaced by the hurricane.

Insurance is likely to cover much of the cost incurred by the hurricane. But the storm happened at a bad time, given Landry's financial obligations.

That's because the fallout could push operating results below levels Fertitta needs to hit for banks to finance his offer to buy the company for $21 per share.

Landry's is now generating enough earnings before interest, taxes, depreciation and amortization, or EBITDA, to obligate banks to fund the proposed buyout.

When Landry's reported second-quarter earnings in August, the company had earned 79 cents per share, well above analyst estimates of 57 cents. Revenue was $311 million, up from $308 million. About $133 million of revenue was from the Golden Nugget properties.

But the earnings thresholds required to trigger financing of Fertitta's proposed buyout are calculated on a trailing 12 months basis, and the banks aren't in position to close the deal.

By the time they are, fallout from the hurricane may well have pushed results below the minimum-performance level, which would let the banks off the hook from the current $21 offer and force Fertitta to give up or put together new financing. Landry's Restaurants shares rose 3 cents, or 0.2 percent, Monday to close at $14.82 on the New York Stock Exchange.

"The financing market would have to come back, which is very difficult at this juncture," KDP Investment Advisors bond analyst Barbara Cappaert said.

If Fertitta's buyout proposal evaporates, it would expose Landry's to another problem, $400 million in debt that comes due Feb. 1.

The debt has already been restructured once on terms that were unfavorable to Landry's. In February the debt owners could force another restructuring that could cost the company even more money.

Or they could call on the company to repay the debt, although Cappaert says Landry's probably wouldn't have enough cash to make good if debtholders exercised their put options.

"We think in the current environment that it may be difficult to secure any funding for the put," she wrote in a Sept. 18 note to investors.

Despite the volatile situation, it still could be better for Las Vegas and Laughlin if Fertitta's buyout proposal falls apart, Cappaert said.

Were it to go through, it would leave Fertitta with a company bogged down by debt and enduring a downturn. That wouldn't leave much room for capital investments in Las Vegas or Laughlin beyond what is already under way, she said.

The company is already in debt for investments it made upgrading Golden Nugget Las Vegas, including a 25-story, 500-room hotel tower under construction.

Cappaert says Landry's is still in position to complete the tower. But she's not sure how it will fare beyond this year's third quarter.

"They did fairly well in the second quarter in Las Vegas," she said of Landry's earnings. "My concern is maybe they delayed some expenses, some of that may come back to hurt them."

Contact reporter Benjamin Spillman at bspillman@reviewjournal.com or 702-477-3861.