Company president Nicholas Ribis took victory laps when he announced the deal on Jan. 20, proclaiming that it valued the casino at far more than the company paid Trump for it in October. Wall Street and the news media greeted this boast with, shall we say, a lack of healthy skepticism. The company’s stock price rose more than 10 percent. TRUMP TRUMPS TRUMP, trumpeted NEWSWEEK’S rival, Time magazine.
Oops. When you read the documents describing the deal, which were filed two days after the announcement, you see that the deal valued the casino at far less than the company paid Trump for it.
Let me explain. Colony Capital, a Los Angeles firm run by shrewd real-estate dealsters, will invest $125 million in the Castle. The Castle will split off from Trump Hotels and will use the money to finance a big expansion designed to make it more competitive. Trump Hotels’ Ribis, who is regarded on Wall Street as a pretty good operator, told all and sundry that the Colony investment vindicated the company’s deal with Trump. “The purchase price based upon the purchase of $125 million is approximately $565 million,” Ribis said in a Jan. 20 interview on CNBC. The company paid Trump $490 million for the Castle.
But Ribis’s math is more than a tad fishy. Here’s why. Ribis says that Colony is paying $125 million for 51 percent of Trump’s Castle. If 51 percent is worth $125 million, the entire ownership is worth $249 million. Add that to the $314 million in debt the Castle will assume and–voilA!–the whole shebang is worth $563 million. (Think of this as paying $50,000 to a guy who owns a house, and also assuming a $100,000 mortgage that’s alreadyon the property. You’re paying $150,000–the $50,000 you paid the owner, plus the $100,000 mortgage you’re responsible for.)
But Colony isn’t paying $125 million for just a 51 percent stake in the Castle. In addition, Colony is getting $125 million of newly issued Trump’s Castle preferred stock, paying 15 percent a year, as well as warrants to purchase Trump Hotels stock. Given the preferred stock’s high dividend and stiff terms, it’s probably worth about $125 million. The warrants, giving Colony the right to buy 2 million Trump Hotels shares at $15 for seven years, are worth about $10 million. So how much is Colony actually paying for the 51 percent ownership stake in Trump’s Castle? By my count, zero. Back to the math. If 51 percent of the Castle’s ownership is valued at zero, the entire ownership stake is worth zero. So to me, this deal, scheduled to close by April 15, values Trump’s Castle at $314 million. That, remember, is the debt on the Castle. And also remember that Trump Hotels paid Donald Trump $490 million.
Hmm. Doesn’t look too good, does it? I would love to tell you Ribis’s explanation of why I’m wrong, but I can’t. Ribis, who put the Colony deal together, listened politely to my analysis but wouldn’t answer my questions. “You’re going to write what you’re going to write,” he said. Colony wouldn’t talk to me, either.
To be fair, this is probably an OK deal for the Castle, which can pay dividends to Colony with new preferred stock rather than with cash. But this deal doesn’t value the Castle at anything like the $490 million the company paid Trump.
Also to be fair, Trump Hotels stockholders voted in September to approve the Castle purchase from Trump; Ribis said that 82 percent of the non-Trump shares voted in favor. So I think that Trump acted tackily–that’s a shock!–but not illegally. And public holders, who own 47 percent of the company, were dummies to approve the deal, which had already driven down the stock.
I’m not saying Trump Hotels or Ribis did anything illegal in January, either. The company issued a revised news release on Jan. 22, mentioning the preferred stock. But except for a one-paragraph item in USA Today, the media seemed to ignore it.
There are two lessons here. First, that shareholders and bondholders have to be total fools ever to think that Donald Trump will put their interests ahead of his own. And second, that when something looks too good to be true, it usually is.
