Bally Manufacturing Corp. on Wednesday canceled a spinoff of its casino business after regulators objected to the participation of Drexel Burnham Lambert Inc., which is facing criminal and civil charges for fraud.
Drexel was to underwrite $400 million in debt as part of the spinoff, but the New Jersey Division of Gaming Enforcement voted 4-0 Wednesday to bar the investment banking firm from involvement in the casino industry in the state.
Drexel has tentatively agreed to plead guilty to six felonies and pay $650 million as part of the government's case into illegal insider trading on Wall Street.
Bally said it decided to drop the spinoff when the Division of Gaming Enforcement had indicated that it would oppose the plan when formally presented. The company said it would instead pursue other possibilities as part of its restructuring.
The spinoff was an integral part of Bally's restructuring plan announced last August. The plan proposed creating a new firm from its four casino hotels and distributing shares in the new company to its existing stockholders.
Pressure on Stock
The restructuring also called for Bally to refinance its $400 million in debt. The company said it still is contemplating proceeding with that part of the program. It declined comment on what alternative corporate transactions Bally would consider to increase shareholder value.
Two of Bally's hotel casinos are located in Atlantic City, N.J., one is in Reno and the fourth is in Las Vegas.
Bally's other units include its Health and Tennis fitness club chain, a fitness equipment manufacturer, Aladdin's Castle amusement arcades, and the lottery supplies and equipment unit Scientific Games.
Wall Street analysts said the surprise decision will likely put pressure on the stock's price.
"I thought the stock was ahead of itself on the assumption the spinoff plan would succeed," said Mark Manson at DLJ Securities. Bally closed at $23.125, down 37.5 cents.
Without the spinoff, which Bally said was intended to enhance its stock price, the leisure and entertainment company's stock will reflect its earnings, which are weak, analysts said.
Bally posted 1988 earnings from continuing operations of $38 million, contrasted with a loss of $6.36 million in 1987.
"The bottom-line number was weak," Manson said.
Bally launched the restructuring after receiving takeover overtures from real estate developer Donald J. Trump, who has since made other purchases in Atlantic City casinos.