Robert E. Mullane put together all the jigsaw pieces and believed he had a complete and recognizable picture of a top leisure entertainment
conglomerate in Bally Manufacturing Corp. But Wall Street had trouble working out the puzzle.
Analysts and investors seemed to have trouble fitting health clubs and theme amusement parks in the Bally picture alongside casino gaming, slot machines and other gaming equipment, lottery supplies and amusement arcades. As a result, the price of Bally`s stock languished.
So a year ago, Mullane, Bally`s chairman, president and chief executive, began considering a restructuring that would make the Chicago company`s underlying value obvious to more than just a sharp-eyed corporate raider.
”In gaming, we had already paid our dues,” Mullane said in an interview last week in Bally`s offices. ”We were a large factor in numerous parts of the gaming industry. So we began to think that maybe we should look at being the biggest gaming company in the world, while owning a few other
businesses.”
Since last April, Bally, which owned one casino-hotel in Atlantic City, N.J., bought two casino-hotels in Nevada and another in Atlantic City, in deals valued at about $1 billion.
Bally thus accomplished part of what it set out to do–become the industry`s top card, with gaming revenue in excess of $1 billion. But, along the way, it had to strap on a heavy debt load–about $1.6 billion or 2.7 times its $600 million equity. It also had to stoop to buy out at a premium price of $68.6 million most of the holdings of a troublesome shareholder, New York developer and rival casino operator Donald Trump.
Now, Bally needs to reduce that debt and lift the value of its stock. The stock`s price has become a particularly sensitive issue. The company has been accused by shareholders of paying ”greenmail” to Trump and, by next year, it may have to pay another $15.1 million to buy back the last bit of its stock held by Trump.
As disclosed Friday by The Tribune, Bally is readying its next restructuring moves, aimed at reducing its debt and raising its stock value.
According to sources close to the company, Bally is expected to file as early as Monday a prospectus with the Securities and Exchange Commission for a public offering of perhaps 20 to 30 percent of the stock in its Health & Tennis fitness club subsidiary.
The sources say that Bally also is considering a sale of its large Six Flags theme amusement park chain, including the Great America park in north suburban Gurnee, in the next three to six months.
The sources, who asked not to be identified, said Health & Tennis, which operates the nation`s largest chain of health clubs, could have a public market value of $300 million to $350 million. Depending on howwell Health & Tennis fares as a public company, Bally might consider reducing its stake to a minority position or selling all Health & Tennis holdings in a year or so.
The sources said that Bally has been approached by some prospective buyers of Six Flags and that it may try to sell the chain for about $300 million, net of any Six Flags debt.
Asked about the spinoff of Health & Tennis and the possible Six Flags sale, Mullane would say only that ”those are certainly things that are under consideration.”
However, he spoke openly about the need to reduce the company`s debt and to restore its financial flexibility. He also took issue with some gloomy predictions about casino growth prospects in Atlantic City and with those analysts who are faulting Bally for buying the Golden Nugget Casino Hotel in that resort city.
Bally purchased the Golden Nugget property early this month from Las Vegas-based Golden Nugget Inc. for $439 million, including the assumption of a $299 million mortgage. That deal brought Bally`s long-term debt to about $1.6 billion.
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”Now, we are the most highly leveraged that I would want us to be,”
said Mullane. ”I`m not so worried about the absolute level of the debt, but it says to me, `Don`t do anything until you get more equity and less debt.` ” Mullane said that with Bally`s businesses generating so much cash, there is no problem servicing the debt. The company estimates cash flow this year of $370 million, with interest payments totaling $130 million and only a small amount of principal payments.
Those interest expenses depressed Bally`s results last year. Its operating profits, before interest expenses and taxes, climbed 39 percent to $187.3 million, but its net income fell 8 percent to $23.7 million, or 81 cents a share, from 1985 levels. Revenue rose 22 percent to $1.64 billion.
Mullane said Bally may consider more deals in the gaming area but not until it reduces its leverage. He said it isn`t likely that Bally would repurchase some of its shares, which would only add debt to the balance sheet. ”I`d rather be able to sell stock, get (the stock price) in the 30s and get some equity into the company,” he said. Bally`s stock has been stuck recently around $20 a share.
Mullane also would like to get the stock price up so he won`t have to pay any more money to Trump.
In an agreement reached last month, Bally bought back 2.6 million of its shares from Trump for $24 a share, or $62.4 million, and paid him another $6.2 million for various expenses. Bally also must buy out Trump`s remaining 457,000 Bally shares for $33 each, or $15.1 million, unless the public market price of the stock reaches that $33 level before next Feb. 21.
Mullane said that Bally bought out Trump so it could proceed with its previously conceived restructuring. He said the restructuring wasn`t forced on the company in its dealings with Trump, despite speculation to contrary.
Bally has refused to use the term ”greenmail” to describe its payments to Trump. However, the company is following the accounting procedures for
”greenmail,” and, as a result, will take a charge against earnings of $17.3 million in this year`s first quarter.
Those payments to Trump have prompted six shareholder suits against Bally. Other shareholders, including a usually vocal band of small holders from the Chicago area, probably are preparing to express their ire at Bally`s annual meeting May 12. They may be surprised to learn that Bally has chosen to meet in its casino-hotel in Reno, Nev., rather than at its customary location here.
In November, Trump began acquiring what would become a 9.9 percent stake in Bally and said he might seek to gain control of the company.
Bally tried to buy out Trump last year, but he spurned the offer of $28.50 a share in cash and securities. Bally and Trump each sued the other, with Trump claiming that Bally management and directors were seeking to block a takeover of the company to entrench and enrich themselves. On several occasions, Trump alluded to the million-dollar salaries of top Bally officers. Mullane said he took Trump`s charges in stride, but his wife was exercised on one point.
”Every time Donny Trump opened his mouth, he kept raising my damn salary. My wife kept saying to me, `I didn`t realize you made that much,`
” said Mullane. Though Mullane said his salary wasn`t as high as Trump may have claimed, Mullane`s total annual compensation has been well in excess of $1 million a year.
In January, Bally agreed to acquire the Golden Nugget in Atlantic City, which, along with Bally`s Park Place, gave it two casino-hotels there. Because Trump then owned two casinos and New Jersey laws bar any one party from owning more than three Atlantic City casinos, the Golden Nugget deal was widely seen as Bally`s move to block a takeover by Trump.
Asked if the acquisition was defensive, Mullane said, ”Absolutely not.” However, he believes that the deal did have an impact on Trump.
”We forced him back to the bargaining table,” said Mullane, referring to the talks that led to Trump selling Bally most of his stock.
Fresh from his profitable investments in Bally and another gaming company, Holiday Corp., Trump agreed last week to pay $101 million for a controlling interest in Resorts International Inc., which has casinos in Atlantic City and the Bahamas. That deal should put Trump in second place behind Bally in casino revenue.
Mullane was philosophical about Bally`s money being used by Trump to acquire Resorts.
”I don`t like what happened. It is inimical to our shareholders,”
Mullane said. ”But this is a free country with a free enterprise system. As the law reads today, Trump didn`t break any laws.”
Some analysts say that Bally may have trouble retaining the customer base at the Golden Nugget, a small but high-grossing property that attracts a larger share of high-stake gamblers than most other Atlantic City casinos, including Bally`s Park Place.
The analysts claim that Bally`s credit and entertainment policies won`t keep the Nugget`s high-rollers happy, especially with Stephen Wynn, Golden Nugget Inc.`s flamboyant chairman, no longer associated with the Atlantic City casino.
Mullane said Bally will do what it can to keep high-rollers happy. But he thinks analysts are mistaken in fixing on the Nugget as a casino for just high-rollers.
”The Golden Nugget has 11,000 slot machines. What are they sitting there for, as dust catchers?” he said.
Mullane said he isn`t alarmed by predictions that gaming-revenue growth is slowing while competition is intensifying in Atlantic City. The city`s 12th casino, the Showboat, is slated to open this week.
”I heard the doomsayers before. Park Place was the third casino there, and when we opened, we heard people say, `Oh, oh, that`s too many.` When the eighth and ninth casinos opened, we heard, `That`s finito.`
”My feeling is there are still plenty of growth possibilities there,”
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Mullane said.