Are TPG and Leonard Green Selling the Palms Casino Short?

Home , Palms Casino Resort, Station Casinos

June 2016

A Report by Ken Liu, Culinary Workers Union Contact: Alyssa Giachino, UNITE HERE [email protected]

The timing and price of the announced sale of the Palms Casino in Las Vegas — owned by private equity firms TPG and Leonard Green — raises questions, given recent optimism around the rebounding Las Vegas market and a recent comparable casino’s sale price.

Key Points:

•• The announced $312.5 million sale price of the Palms implies a value to EBITDA multiple of 8.9x. By comparison, the sale of the Aliante Casino announced weeks earlier was a 9.5x EV/ EBITDA. •• Las Vegas continues to rebound, yet the Palms sale earned TPG and Leonard Green an estimated 12.4% return on investment, or annualized growth of 2.37% over five years (if we assume they bought Palms’ distressed debt at about 60 cents on the dollar overall). Over the past five years, the S&P 500 grew over 50%. •• Over the past year, workers at the Palms have called for a fair process to choose whether to unionize. TPG and Leonard Green have not committed to labor peace. After the sale was announced, workers are also calling for a pledge of worker retention.

Questions around the announced Palms Casino sale

On May 10, Red Rock Resorts (NASDAQ: RRR; locally known as Station Casinos) announced it was buying the Palms Casino Resort in Las Vegas for $312.5 million. The deal is expected to close in the third quarter of this year, pending regulatory approvals.1

•• Why are TPG and LGP selling the Palms now? •• Could TPG and LGP have gotten a better price and higher return on investment by holding on to the Palms? •• What does the sale by TPG and LGP do to the existing Palms workers? •• Does the sale by TPG and LGP relate to the escalating labor dispute?

The Palms investment

TPG and LGP officially took control of the Palms in November 2011, after having purchased the company’s outstanding debt at distressed levels over the previous two years.2 In 2010, the company had $380 million of debt from its full-drawn revolver.3 In February 2010, Financial Times’ Debtwire reported that TPG “started buying bank debt [of the Palms] in the 40s and kept buying all the way to the present level in the 70s.”4 In August 2010, Debtwire reported that Leonard Green bought a significant block of debt in the range of 68-73.5 We estimate the overall discount at which TPG and LGP bought the distressed debt to range between 50 to 70 cents on the dollar.

Based on an assumed debt purchase discount in the aggregate, we can estimate TPG and LGP’s cash investment to acquire the Palms. We estimate they spent between $190 million to $266 million to acquire Palms’ debt and then take control of the company.

Debt purchase Total debt Cash investment discount 50% $190 million $380 million 60% $228 million 70% $266 million

After acquiring control, at least $50 million was spent on renovations at the Palms.6 Adding in that amount, we estimate that TPG and LGP’s total investment in the Palms was between $240 million and $316 million.

Total ROI based on Compound Debt Cash investment the $312.5 Annual Total debt purchase investment (incl. $50 million sale Growth Rate, discount million capex) price 2011-2016 50% $190 million $240 million 30.2% 5.42% $380 million 60% $228 million $278 million 12.4% 2.37% 70% $266 million $316 million -1.1% -0.22%

If we assume that the overall discount was at 60%, TPG and LGP would have spent approximately $278 million on the Palms. The $312.5-million sale price would represent only a 12.4% return on investment after five years or 2.37% on an annualized basis. In comparison, from the start of 2011 to the start of 2016, the S&P 500 index rose 58.7% for a compound annual rate of nearly 9.66%.7

If we assume even that the overall discount was at 50%, TPG and LGP would have spent about $240 million to on the Palms. The announced sale price would then represent a better return (30.2% over five years, or 5.42% on an annualized basis), but it would still lag behind the performance of the S&P 500 index over the last five years.

2 The Las Vegas growth potential

A week before the Palms’ sale was announced, Boyd Gaming had announced two separate purchases for casino assets in the Las Vegas area. Its $380 million purchase of the upscale Aliante Casino in North Las Vegas – built at a cost of $660 million – was based on an EV/EBITDA valuation of 9.5 times, with Boyd expecting the company to generate EBITDA north of $40 million at the property in three years.8

The Aliante Casino is located 15 miles north of the Las Vegas Strip. By comparison, the Palms is about one mile from Las Vegas Boulevard near Strip casinos like the Rio, the Bellagio and Caesar’s Palace.

Red Rock has stated that it expects to be able to make the Palms generate $35 million in EBITDA.9 That would mean it purchased – and TPG and LGP sold – the property at an 8.9x EV/EBITDA multiple.

Why did TPG and LGP sell the Palms at a discount to what Boyd paid for Aliante?

Moreover, several indicators signal Las Vegas is poised for further growth, including record- breaking tourism in 2014 and again in 2015.10 Another example is MGM Resorts, the Strip’s largest operator, reported 24% EBITDA growth for the first quarter of 2016 compared to a year earlier.11

In addition, Red Rock management has stated that the Palms’ current EBITDA is 60% off the peak.12 This means that, as Las Vegas continues to recover, there should be significant headroom for the Palms to grow into.

Why would TPG and LGP sell when there is this potential upside on their investment?

Why are TPG and LGP selling the Palms now?

Workers at the Palms launched a public campaign calling for a fair process to choose whether to unionize in June 2015. A majority of those employees in classifications which are typically represented by the Culinary Local 226 and Bartenders Local 165 have signed a public petition for a fair process so they can decide whether to unionize without management interference, harassment and litigation.

Over the past year, TPG, Leonard Green, and Palms local management have not agreed to honor the workers’ demand. Instead, there has been an escalating labor dispute at the property. The Palms has faced allegations of unlawful worker intimidation, threats and coercion including a complaint issued by the National Labor Relations Board general counsel and two settlements over such charges.13

3 Now TPG and Leonard Green have agreed to sell the Palms to the worst labor-law violator in Nevada gaming history. Station Casinos also has a history of firing workers and requiring them to reapply for their jobs after it bought their casinos. See the following statements by Station Casinos executives, who are still with the company:

•• “When we entered into the agreement [to buy the Fiesta], we said we would buy all the assets. Employees are not assets.” (“Fiesta layoffs: Station calls layoff notices necessary,” Las Vegas Review-Journal, Sept. 9, 2000) •• “We believe in America all people have choices. We believe if you invest $185 million in an asset [the Fiesta], you have the right to choose those people you want to have in those properties.” (“Station Casinos’ hiring policies rapped,” Las Vegas Sun, Dec. 13, 2000)

Boyd Gaming, after announcing its purchase of the Aliante, has made a commitment to retain workers without asking them to reapply. Boyd has also committed that Aliante workers will not be displaced and to honor workers’ wage rates, vacations and vacation accruals among other things.14

Workers at the Palms continue to call for a fair process and a guarantee that workers will not have to reapply for their jobs in the ownership transition.

4 APPENDIX – Boyd Gaming’s welcome to Aliante employees welcometoboydgamingaliante.com

More information available at: welcometoboydgamingaliante.com 5 Endnotes

1 Red Rock Resorts, Inc. press release, “Red Rock Resorts announces agreement to acquire Palms casino resort,” 5/10/16, at http://www.businesswire.com/news/home/20160510006951/en/Red-Rock-Resorts-Announces-Agree- ment-Acquire-Palms. 2 Chris Sieroty, “Palms ownership arrangement OK’d”, Las Vegas Review-Journal, at http://www.reviewjournal.com/ business/casinos-gaming/palms-ownership-arrangement-okd. 3 We used the original $380 million value of the revolving debt reported by Debtwire, 2/24/2010. The Wall Street Journal valued the debt around $400 million in June 2011 (http://www.wsj.com/articles/SB1000142405270230466 5904576386374038490868) while in November 2011 the Las Vegas Review Journal reported the outstanding loan was originally worth $459 million (http://www.reviewjournal.com/business/casinos-gaming/regulators-recom- mend-sale-palms-majority-stake). 4 Jon Berke and Andrew Ragsly, “TPG buys up Palms loans,” Financial Times Debtwire, 2/24/2010, at http://www. ft.com/intl/cms/s/2/d84a0ba0-2184-11df-830e-00144feab49a.html. 5 Jon Berke, “Leonard Green enters Fiesta Palms revolving door as debt talks continue,” Financial Times Debtwire, August 24, 2010 http://www.ft.com/intl/cms/s/2/1f5b2bf4af7f11dfa17200144feabdc0. 6 Chris Sieroty, “Palms kicks off new phase of $50 million upgrade,”reviewjournal.com , 6/6/12, at http://www.reviewjournal.com/business/casinos-gaming/palms-kicks-new-phase-50-million-upgrade. 7 S&P 500 Jan. 3, 2011 (1271.87) – Jan. 4, 2016 (2016.71) 8 SA Transcripts, “Boyd Gaming Corporation (BYD) CEO Keith Smith on Q1 2016 results -- earnings call transcript,” Seeking Alpha, 4/27/16, at http://seekingalpha.com/article/3968340-boyd-gaming-corporation-byd-ceo- keith-smith-q1-2016-results-earnings-call-transcript. 9 Red Rock Resorts, Inc. press release, “Red Rock Resorts announces agreement to acquire Palms casino resort,” 5/10/16, at http://www.businesswire.com/news/home/20160510006951/en/Red-Rock-Resorts-Announces-Agree- ment-Acquire-Palms. 10 Richard N. Velotta, “Las Vegas smashes tourism record”, Las Vegas Review-Journal, 12/30/15, at http://www.reviewjournal.com/business/tourism/las-vegas-smashes-tourism-record. 11 Matthew Crowley, “MGM Resorts earnings fall but top estimates,” Las Vegas Review-Journal, 5/5/16, at http://www. reviewjournal.com/business/casinos-gaming/mgm-resorts-earnings-fall-top-estimates. 12 Thomson Reuters Street Events, “Edited transcript of RRR earnings conference call or presentation 12-May-16 8:30 pm GMT”, Yahoo Finance, 5/20/2016, at http://finance.yahoo.com/news/edited-transcript-rrr-earnings-conference-184151668.html. 13 PE Closer Look, “NLRB general counsel issues complaint at TPG Capital, Leonard Green & Partners-owned casino,” 1/4/16, at http://www.pecloserlook.org/nlrb-general-counsel-issues-complaint-at-tpg-capital-leonard-green-partners-owned-casino/. 14 http://www.welcometoboydgamingaliante.com/faq