Penn National makes offer for bankrupt resort but not much more expected

Last Thursday, U.S. Bankruptcy Judge A. Jay Cristol announced his plans to appoint an examiner to organize the sale of Fontainebleau Las Vegas. He will not appoint the examiner until later this week, giving Fontainebleau officials time to discuss selling the property to Penn National Gaming. The gaming company bid on the resort last week, but reports indicate that the offer was for less than $300 million. Fontainebleau is valued at around $3 billion.

"The court believes it is more expeditious to proceed with any potential sale as soon as possible rather than to wait until October 28, when a trustee, if appointed, would be required to expend a significant amount of time to obtain counsel, familiarize himself or herself with this case and effectuate a sale," Cristol said in an order earlier this month. "It also appears more economical to immediately appoint an examiner than to appoint a trustee whose fees and expenses would likely far exceed the costs and expenses of an examiner. The court therefore believes it is in the best interest of the estate and all parties to appoint an examiner at this time to examine, negotiate and supervise a sale of debtors' assets."

Penn National is considered the stalking horse bidder in the potential sale, meaning that the company has set the minimum price. Other companies can offer more, but the fact that the project still requires approximately $1.5 billion to complete construction must be taken into consideration.

"There's a lot of money left to spend, and I think anyone's price would reflect that," Penn National lawyer Richard Mason told the Miami Herald.

In its bid, Penn National said it would provide $16 million to finance the costs of Fontainebleau's bankruptcy. By choosing to appoint an examiner in the case, Judge Cristol decided to reject lenders' bids to move the case from Chapter 11 to Chapter 7.

In a Chapter 7 bankruptcy, Cristol would have to appoint a trustee to oversee liquidation. Cristol said appointing an examiner would be more cost-effective, and would also clear up the conflict between Fontainebleau and its creditors, who have been unable to reach a compromise over financing for the property.

Penn National is interested in purchasing Fontainebleau because the gaming company has no presence in Las Vegas, and has the capital to purchase a property, but wants to limit its exposure in the costs to complete the property.

"Penn would have the management contract for Fontainebleau, perhaps along with fees for lending its database and programming to the property," Union Gaming Group analyst Bill Lerner told investors earlier this month. "In such a structure Penn can offer Las Vegas to its player database with relatively minimal capital risk yet a favorable return on investment capital."

Lerner said it seemed likely that Penn would take on a partner to complete construction of Fontainebleau.

If Penn National's bid is successful, Fontainebleau developer Jeffrey Sofer could expect to lose $500 million on the project.

By Staff