Doubts Are Cast on Value of Las Vegas's Fontainebleau
Bankrupt Project Could Need an Additional $2 Billion, Potential Bidder Says, and Pay-Off Is Long Way Off
By Alexandra Berzon
The Wall Street Journal
October 12, 2009
The Fontainebleau the luxury hotel and casino development at the northern end of the Las Vegas Strip, sits more than half-finished after falling into bankruptcy in June.
But as potential suitors consider rescuing the project, they are facing a grim reality: It may not be worth the money it would cost to complete it. More than $2 billion has already been poured into construction.
"It is going to take $1.2 billion to $2 billion to finish Fontainebleau, and it's not worth that much," Penn National Gaming Chief Operating Officer Tim Wilmott said. Penn is currently negotiating to take it over from the project's creditors. The project's developer says other parties have shown interest in the project as well.
Penn, based in Wyomissing, Pa., operates 12 casinos in states around the country and Canada but none in Las Vegas.
When the 4,000-room Fontainebleau project was first mapped out four years ago, gambling revenues were soaring and Las Vegas barely had enough hotel rooms to accommodate a flood of visitors. The city embarked on a massive building boom. But just as many of those projects were set to open, the gambling business withered under the recession.
Now, Las Vegas has a surfeit of luxury rooms. Occupancy rates in August fell to 83% from 94.9% two years earlier, and room rates have fallen sharply.
For the Fontainebleau, "it's hard to see how it pencils out," said Rich Moriarty, an analyst for Union Gaming Group, a casino consulting firm.
The Fontainebleau, designed to be a western outpost of the well known Miami Beach hotel, is just one of the big casualties of the Las Vegas building boom. Boyd Gaming Corp. indefinitely shelved its $4 billion Echelon Resort a year ago. Now, the Echelon is comprised of several partly finished low-rise concrete structures on 87 acres .
Deutsche Bank AG foreclosed on the $3 billion Cosmopolitan in Las Vegas last year. Construction has slowed but the project is scheduled to open late 2010.
An outside analysis contracted by some of the Fontainebleau lenders last spring found that Fontainebleau would be worth $1.76 billion if it were completed in May 2010, according to a court filing, far less than its $3 billion total cost.
Lenders and bond holders sunk $1.6 billion into Fontainebleau. When creditors pulled the plug on the project it had $675 million in unpaid construction claims from a general contractor owned by the project's developer. Its location has also become less desirable because so many expensive projects around it folded.
Penn National has offered to provide $25 million to $30 million of debtor-in-possession financing to help cover costs incurred during in bankruptcy. Penn hopes that will give it an advantage in bidding for the property.
A lawyer for Fontainebleau's developer said on Friday it expects to come to an agreement with Penn to set a starting bid this week. The developer said in court last week it expects the starting bid to be well under $300 million. In an interview earlier in the week, Penn's Mr. Wilmott indicated the company was considering a very low bid to take over the project.
Scott Baena, the attorney Bilzin Sumberg Baena Price & Axelrod LLP based in Miami, Fla., for Fontainebleau, said it's not surprising that Penn's starting bid would be low. He said several other parties are looking at the property, though he declined to name them.
"There's active interest in this asset," Mr. Baena said. "Until the gavel falls we ought not be talking about what the value of this property is."
Mr. Wilmott said he believes Penn may be able to lower some of the anticipated costs of finishing it to make the project worthwhile. Penn is talking to potential lenders, as well as to parties that might be interested in partnering to help finish construction on the project, he said.
At a hearing Thursday, a bankruptcy judge in Miami said he would appoint an examiner to oversee the sales process.
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