Penn seeks approval to buy Fontainebleau

Penn National Gaming asked the federal bankruptcy court in Miami on Tuesday to approve the company as the stalking horse bidder for the shuttered Fontainebleau project, setting a starting price of $50 million for the Strip development that had a construction budget of almost $3 billion.

In an interview Tuesday, executives for the Wyomissing, Pa.-based casino operator said the Fontainebleau's value has fallen significantly since construction was halted on the 3,889-room project. The Fontainebleau was nearly 70 percent completed when lenders cut off $800 million in financing.

"Obviously, this is an asset that we believe has some value," Penn National Chairman and Chief Executive Officer Peter Carlino said. "From what has happened in the marketplace, the value is not what it was once reported."

Carlino and other Penn National executives are in Las Vegas to attend the Global Gaming Expo and meet with investors. The company was making a presentation to an investment forum sponsored by Deutsche Bank when its filing with the federal Securities and Exchange Commission crossed the wire.

"We decided today would be a good day for this," said Carlino, who has toured the Fontainebleau development on five separate occasions this year.

Penn National, which applied for a Nevada gaming license in July, has been on the radar screen for more than a year as a company looking for an opportunity to break into the Las Vegas market.

The company operates 19 casinos and racetracks in regional markets and has more than $1.5 billion in cash available for a transaction, the proceeds from an aborted private equity buyout attempt.

Analysts have said it would cost at least $1.5 billion to $2 billion to complete the Fontainebleau.

"If we're successful, we're probably looking at opening at the end of 2011," Carlino said.

Wall Street doesn't want Penn National to overpay for the Fontainebleau but the price may be too good to pass up.

"Fontainebleau may seem like an out-of-character purchase for the conservative and disciplined management team at Penn, which typically does not chase after ego-driven assets with inflated multiples," Macquarie Securities gaming analyst Joel Simkins said. "However, we believe the cash offer of $50 million could allow Penn to get a toehold on the Las Vegas Strip for a relatively attractive price."

Shares of Penn closed at $28.93 on the Nasdaq National Market on Tuesday, up 22 cents, or 0.77 percent.

Carlino and other Penn National executives were reluctant to discuss plans for the Fontainebleau. The company has been exploring the possibility of an equity partner, but said those talks are confidential. Penn may also trash the Fontainebleau name.

Carlino said Penn National will not sell condominiums and would transfer those 2,000 units into the hotel inventory.

"There isn't a condominium market," Carlino said.

In its SEC filing, Penn National said it has an agreement with the debtors to purchase Fontainebleau. Creditors have not agreed to the deal. The company will ask the court in a hearing next week to name it as the stalking horse bidder, setting a date of Jan. 21 to auction the property. Penn wants a deadline of Jan. 15 for other potential bidders to submit their proposals.

Penn National agreed to a debtor-in-possession credit agreement that would establish a revolving loan facility of $51.5 million that could be used to stabilize unfinished buildings and other expenses.

"In reality, our bid is $101 million when the (credit line) is included," said Penn National Chief Financial Officer Bill Clifford.

If the court approves the motions, the auction will be set. However, it's unclear which, if any, additional bidders might be attracted to Fontainebleau. Carlino wouldn't say whether Penn National would increase its offer if it is outbid.

"This is just one aspect of what we have in the works," said Penn National Chief Operating Officer Tim Wilmott.

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871.