MERV ROLLS THE DICE : Griffin and his debt-ridden Resorts International hotel and casino face tough odds in upcoming meetings with bondholders.
The Resorts International hotel and casino in Atlantic City, owned by Hollywood producer Merv Griffin, is booked to capacity tonight, but the packed house isn’t anything for Griffin to boast about.
Many of the guests will be company creditors--bondholders, to be exact--who are set to descend on the New Jersey city by the hundreds to hear Resorts detail how it plans to dig itself out from under an avalanche of debt.
The showdown should come Tuesday afternoon, when Griffin plans to unveil a so-called recapitalization plan to a restive group of bondholders whose interests are by no means uniform. “He’s going to say (to them): ‘Let’s Make a Deal,’ ” said Marvin B. Roffman, analyst for the Philadelphia investment firm of Janney Montgomery Scott.
Last month, money-losing Resorts announced that it had suspended interest payments on its publicly traded bonds, marking one of the largest debt moratoriums of the year. “It has become clear that Resorts is a much bigger challenge than we anticipated,” Griffin said in a letter distributed to bondholders when the payment suspension was announced.
Some experts believe that Resorts may become ensnarled in litigation and may even be forced into bankruptcy court if its problems are not settled quickly. What’s more, the outcome is being closely watched by New Jersey casino authorities who grant the casinos licenses to operate.
“The financial health of the company and Mr. Griffin’s ability to see this through are significant and vital issues,” said Anthony J. Parrillo, director of New Jersey’s division of gaming enforcement.
The problems represent a rare misstep in the show business career of Mervyn Edward Griffin, an affable figure who made his name as a television talk-show host and his fortune as creator of game shows such as “Wheel of Fortune” and “Jeopardy.”
Griffin, 64, invested $50 million in Resorts, a relatively small amount compared to his estimated net worth of more than $300 million. However, as a former colleague put it, “he has his reputation on the line.”
Even Griffin today concedes that his deal last year to buy Resorts for $365 million, following a protracted takeover battle with New York real estate developer Donald Trump, has turned out badly.
Critics say Griffin paid too much for a company whose casino in Atlantic City has been in decline for years. Most of the money for the purchase was raised through the sale of high-yield junk bonds.
“He has basically said that with the benefit of hindsight, there is no question that he would not do the same deal all over again,” said Thomas E. Gallagher, an attorney for Resorts in the New York office of Gibson, Dunn & Crutcher.
The takeover battle ended when Trump, who had been Resorts’ controlling shareholder, bought the company’s interest in the unfinished Taj Mahal, a $1-billion, onion-domed casino complex that is expected to open next year as Atlantic City’s 12th gaming house.
Griffin, meanwhile, kept the other assets, including the Resorts casino and vacant land in Atlantic City as well as three hotels and a casino on Paradise Island near Nassau in the Bahamas. “There were always questions why Merv Griffin would pay that kind of price,” said one longtime Atlantic City casino executive who asked not to be identified. “It did not seem to (make economic sense) on any basis.”
“Merv’s not a businessman,” Murray Schwartz, a former business associate, claimed. “What he is is one of the world’s great showmen.”
Griffin, who was in Atlantic City last week judging the Miss America contest and working on the reorganization plan, was not available for comment. But now he is going to need all the showmanship that he can muster to sell a new business plan to skeptical bondholders.
Though Griffin and his financial advisers at Salomon Bros. are keeping the details secret, a consensus of outside experts believe that the plan likely will include proposals to raise new capital, possibly from Griffin himself or by having Resorts sell some of its real estate.
Another likely proposal is an exchange of debt for stock that would give the bondholders an equity ownership in Resorts in return for a lessening of the long-term debt burden, which now exceeds $900 million.
Resorts International got into this mess by accumulating layers of long-term debt through a half-dozen bond issues in the past decade at interest rates ranging as high as 16.6%. Today, the company faces annual bond interest payments of $130 million, about double its estimated cash flow.
“The interest payments are too high,” said Lee S. Isgur, analyst for Paine Webber in New York. “The casino in Atlantic City is making a solid operating profit, something you and I would be very happy with. But the combination of the huge debt and the high interest rates are a killer.”
Asset sales that the firm had been counting on to help pay its bills have not materialized. Resorts owns about 100 acres of vacant land in Atlantic City, including 14 acres along the boardwalk that parallels the Atlantic Ocean, but investors are staying away because the gambling market is not expanding fast enough.
“There’s only one reason to invest in Atlantic City--to take advantage of the gambling market,” said Kaye Handley, analyst for R. D. Smith & Co. in New York, an investment firm that specializes in troubled securities.
Despite its attractive beach, Atlantic City is hardly the garden spot of the Garden State, as New Jersey bills itself. It is a racially polarized city of 36,000 bedeviled by poverty, decay and charges of municipal corruption. Despite its tourist appeal (it had 33.1 million visitors last year), Atlantic City has a woefully inadequate airport consisting of a dingy terminal and a lone commercial airline.
Analysts say that Resorts’ business has been down this summer, while the growth in gambling winnings at all casinos have not kept up with inflation this year. Other analysts, though, point out that some casinos, including those owned by Caesars World and by Trump, are doing well.
“You can’t say that everyone is having the same problem,” points out Harold Vogel, analyst for Merrill Lynch.
Resorts’ problems are compounded because its complex in Atlantic City--a renovated grand old hotel--was allowed to deteriorate while previous management poured its financial resources into building the Taj. Partially as a result, the casino’s share of winnings fell to 8.9% last year from 14.3% in 1983.
It was not long ago that Resorts International was the envy of the industry. It was the first gaming company to open in Atlantic City, ahead of better-known competitors like Caesars and Bally Manufacturing.
On May 26, 1978, the day after Resorts International received a temporary license from New Jersey gaming authorities, the casino was in chaos. Thousands of customers jammed the gambling hall, waiting hours to get in.
Formed in 1960s
“People with money in their fists pushed and shoved and fought for a chance to get at a table,” according to an account by author Ovid Demaris in “The Boardwalk Jungle.” “Before the day was out, they would lose nearly a million dollars.”
Resorts International was formed in the 1960s by James M. Crosby, who had owned a paint company in Tampa, Fla. He first bought into casino operations in the Bahamas before moving to Atlantic City.
Following Crosby’s death in 1986 at age 58, his controlling stake in Resorts was acquired by Trump, who in turn sold out to Griffin following a months-long takeover fight in which Griffin thwarted Trump’s bid to take the casino company private.
Prior to that, Griffin had enjoyed a string of show business successes, notably the sale of Merv Griffin Enterprises to Coca-Cola Co. in 1986 for $250 million.
That was a major triumph for Griffin, whose early years in show business date to the 1940s, when he was an overweight vocalist from San Mateo, Calif., billed as “America’s Romantic Singing Star.” His first show-business smash was the 1950 song “I’ve Got a Lovely Bunch of Cocoanuts.”
These days, Griffin qualifies as one of America’s best recognized businessmen by virtue of his 24-year tenure on “The Merv Griffin Show.” He stopped doing the talk show three years ago.
In addition to his work at Resorts, Griffin has been spending time creating new game shows, working on a movie and tending to the Beverly Hilton hotel, which he bought in 1987 for $100 million.
To finance the Resorts sale, Griffin sold high-yield bonds worth $325 million at interest rates of nearly 14%. The debt securities, issued by Griffin Resorts, a Resorts subsidiary, were marketed through Drexel Burnham Lambert at a time when junk bond guru Michael Milken was still in charge of the investment firm’s high-yield bond operations in Beverly Hills.
Drexel recently pleaded guilty to felony charges stemming from its junk bond trading activities, while Milken has been indicted on securities fraud charges and resigned from the company. Milken has pleaded innocent.
“His regular customers bought these issues on their faith in Milken to see the issue gets paid back,” said Richard Lehmann, editor of a newsletter in Florida known as Defaulted Bonds. “But once he is out of the picture, these houses of cards start tumbling down.”
If the bondholders cannot agree among themselves about what to do, there’s an excellent chance that Resorts will be forced into bankruptcy court via a Chapter 11 petition, while creditors debate its future, according to Handley, the R. D. Smith & Co. analyst. (A Chapter 11 petition allows a company to operate under protection of its creditors while the firm reorganizes and straightens out its debts.)
Handley said chances for sharp disagreement are high because bondholder interests are so diverse. The principal difference is that the Drexel issues are secured by Resorts assets, while the earlier bond offerings are unsecured.
“I think the consensus is there is not much the company can do that will work” and satisfy everyone, Handley said.
One West Coast bondholder, who asked not to be identified, said the unsecured holders probably will challenge the 1988 sale to Griffin in court, arguing that the deal was a fraud because it has unraveled so quickly. “It’s almost impossible to have this resolved without a lawsuit,” he said.
The unsecured bondholders are said to be angry that Trump was allowed to acquire the unfinished Taj and other assets for $273 million, about half what Resorts had invested in the project up to that point. They were said to be upset that Resorts agreed to pay Trump $63 million to terminate his contract to manage construction of the Taj.
Sources close to Resorts argue that a Chapter 11 filing, which unhappy bondholders could initiate, would prove disastrous for the Atlantic City operations because it might cause an employee exodus in a labor market that is already terribly short of workers.
It could also cause New Jersey casino regulators to suspend Resorts’ gambling permit at the firm’s license renewal hearings in February, sources said. Hearings are also scheduled next week on Griffin’s personal qualifications to operate a casino.
“One way or the other,” one official close to negotiations said, “this company has to restructure (quickly) or there won’t be any company.”