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“Too-Big-To-Regulate”

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We recently sent a letter to Nevada Governor Brian Sandoval  to provide the governor with “specific examples of problems related to the approval of the Station Casinos/Red Rock Resorts IPO by the Nevada Gaming Commission on January 21, 2016 in order to illustrate the challenges Nevada faces in regulating a ‘too-big-to-regulate’ significant owner of one of the major gaming companies in Las Vegas.”

The entire letter can be viewed here.

In the letter, we discuss the rushed nature of the approval of the IPO by the Gaming Control Board and Nevada Gaming Commission, Deutsche Bank’s accountability as the parent company and affiliate of a felon, federal regulators’ reactions to the bank’s misconduct, and the relationship between the bank and its designated director at Station Casinos, Mr. Robert A. Cashell, Jr. We also ask whether Nevada’s gaming regulators are too permissive toward “too-big-to-regulator” investors.

Our letter concludes with the following:

We cannot help but worry that Nevada gaming regulators appear unwilling to confront head-on the admittedly complex issues related to a “too-big-to-regulate” investor like Deutsche Bank, which is affiliated with a felon. We are fearful that this apparent unwillingness on the part of our state regulators might invite unwelcome scrutiny from federal officials, especially as federal regulators and investigators continue to work to hold Deutsche Bank accountable for its actions. Some might even begin to question whether Nevada is capable of upholding the “gold standard” of gaming industry regulation when our regulators continue to look the other way and refuse to ask hard questions about why the affiliate of a felon continues to own and profit from casinos in our state.

The entire letter can be viewed here.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

Will Station Casinos’ Fourth-Quarter Financials Surprise Like They Did in the Third Quarter?

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At the Nevada gaming regulators’ meeting on January 21, Red Rock management “hinted that it would like to launch the IPO before it announces fourth-quarter earnings next month,” according to the Las Vegas Review Journal. But what is the rush? Will there be any surprises in the fourth-quarter numbers?

There was a surprise in the company’s third quarter financial statements with respect to cash distributions to members: Station Casinos’ third-quarter cash payouts to its owners was were approximately 118% of its EBITDA. Through the prior eight quarters, from the third quarter of 2013 through the second quarter of 2015, the company’s distributions to members had been running at an average level of about 30.9% of EBITDA per quarter.

The company made $106.4 million of distributions to members of Station Casinos LLC (excluding $3.5 million to non-controlling interests in certain subsidiaries). This amount was greater than the company’s third-quarter Adj. EBITDA of $90.0 million. This large cash distribution followed approval by the Nevada Gaming Commission to allow Station Casinos to “pay financial distributions to the company’s owners without approval from gaming regulators” on May 28, 2015.

Investors should wait until the company has released its fourth quarter results before making a decision on whether to invest in the Red Rock IPO.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

Public Comments by UNITE HERE Culinary Local 226 at Nevada Gaming Commission Meeting on December 17, 2015

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In October of this year, Station Casinos filed registration documents with the SEC to take the company public. These filings make it clear that Deutsche Bank will hold both voting and economic rights in Station Casinos following the offering. You will soon have to review and decide whether to approve the company’s application for a public offering.

We have previously communicated our concern that it is dangerous to allow a parent company of a felon to go unlicensed while profiting from Nevada casinos and have asked the Board and Commission to call Deutsche Bank forward for a suitability review. Now that Deutsche Bank is set to own voting rights, we believe this only furthers the need for a suitability review.

In May 2011, the Gaming Commission approved the restructuring of Station Casinos without requiring Deutsche Bank to go through licensing despite its 25% ownership. At the time, Robert Cashell, Jr. was appointed by Deutsche Bank to hold its voting interests in Station Casinos. The Board and Commission made it clear that Deutsche Bank could not interfere with the management or voting rights of its at-will designee, Mr. Cashell.

Station Casinos’ IPO filings appear to demonstrate possible direction from Deutsche Bank. The board of Station Casinos Corp., including Mr. Cashell, has agreed to set limitations on executive compensation based on Deutsche Bank ownership. Specifically, management salaries cannot exceed 105% in the second post-IPO year as long as Deutsche Bank owns at least 5% of Class A shares.

Now that Deutsche Bank is set to own voting rights in Station Casinos through its subsidiary and given the question as to whether the bank may have exercised control over its at-will designee and whether Mr. Cashell may have not acted independently, we believe this only underscores the need to call the bank forward for a suitability review. We believe this should be done even before you formally consider Station Casinos’ application for a public offering.

(For more details, see our Dec.23 letter to Nevada Gaming Commission on Deutsche Bank’s Ownership of voting rights and interference in the proposed Station Casinos IPO.)

See more of our analysis of the Red Rock Resorts/Station Casinos IPO: