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  • detroit1051 detroit1051 Oct 13, 2009 7:50 AM Flag


    Don Soffer must be wondering what the hell he has done, letting his son Jeffrey destroy the company.

    Unpaid bills may deter a bid for Fontainebleau
    The bills amount to more than likely offer; Penn National exec says building worth ‘about zero’

    By Liz Benston (contact)

    Tuesday, Oct. 13, 2009 | 2 a.m.

    Whether front-running bidder Penn National Gaming buys the unfinished Fontainebleau Las Vegas resort out of bankruptcy in coming weeks may turn on the success of recent negotiations with attorneys representing the resort’s subcontractors. They are owed about $375 million for work completed in the months leading up to the end of work on the resort.

    Penn wants to use the Fontainebleau as the flagship destination for customers who patronize its nationwide network of smaller casinos, much as Harrah’s Entertainment does with its Las Vegas properties.

    Subcontractors might accept less money if Penn can finish the building, putting people back to work and generating revenue in the future to pay bills. That would allow Penn to whittle down the estimated $1.5 billion needed to complete the resort — which remains the biggest hurdle for any interested buyer in this economy.

    At a bankruptcy court hearing in Miami last week, Fontainebleau attorney Scott Baena said Penn was expected to offer “substantially less” than $300 million to acquire the property.

    Even though Penn’s purchase price would be less than contractors’ claims against the property, the company’s investment would put it in control of the project.

    Penn’s offer would include money for day-to-day operations, cash to pay back lenders who have funded day-to-day operations since Fontainebleau declared bankruptcy in June and money to protect the structure from the elements, including a roof to seal off the 63-story tower and more than 3,800 rooms.

    That would be less than 15 cents on the dollar for a building that has already cost about $2 billion. Penn National Chief Financial Officer Bill Clifford said at an analyst conference last month that the building’s relative worth was “about zero” given the cash needed to finish it.

    “It’s not worth anything until you finish it,” he said.

    Penn believes it could justify spending the cash to finish the building if, by one of the company’s own estimates, the resort generates annual earnings of at least $150 million.

    The $1.5 billion to complete the project would cover more than construction costs; it would include overhead, interest expenses, architectural bills, marketing and training leading up to opening, information technology, interior furnishings and fixtures, as well as gambling devices and equipment.

    Penn is working with a construction consultant that is analyzing how the company could trim construction expenses by outfitting certain spaces, such as restaurants, less expensively.

    Clifford told analysts the company is crunching numbers on how a Las Vegas resort could draw customers to its network of smaller casinos, including gambling halls attached to racetracks, across the country.

    Harrah’s Entertainment pioneered a strategy of luring gamblers to rack up loyalty points at its smaller casinos that can be redeemed in Las Vegas. Other companies are smitten with that model and have for years scouted resort properties in Las Vegas for that purpose. They include Pinnacle Entertainment, a Las Vegas-based casino company with no Vegas casinos and mostly smaller properties in the Midwest and South. (Four companies including Pinnacle fought to acquire the Aztar casino chain during the real estate boom in 2006, hoping to pick up Tropicana-brand resorts in Las Vegas and Atlantic City that could be used to attract regional customers. Columbia Sussex, whose gaming arm declared bankruptcy in 2008 after being forced to give up its New Jersey casino license and its Atlantic City resort, outbid Pinnacle for Aztar and the Tropicana.)

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