Question

Looking For Some Winners Winning Big (WB, our client), a public company, operates casinos and racetracks, and produces and sells gaming machines. WB has signed an agreement to enter into a transaction with Bugsy Siegel, a shareholder owning 10 million shares of WB common stock (40% of the common stock outstanding), whereby WB will do the following: 1) Repurchase 8 million common shares of WB from Bugsy for $35 per share, financing the transaction with a combination of bank debt and publicly issued bonds, and 2) Exchange for the remaining 2 million common shares of WB owned by Bugsy (also valued at $35 per share) both (a) 100% of the stock of Paradise City (PC), a holding company purchased one year ago by WB, that operates a racetrack and casino, and (b) WB’s 25% interest in Trifecta (T), a racetrack leasing company which receives rentals primarily from racetrack operators. WB’s interest in T represents

its only interest in racetrack leasing companies. At April 30, 2000, the book value of PC’s racetrack and casino (including allocated goodwill of $30 million and intercompany payables of $3 million) was $45 million, and the book value of WB’s investment in T was approximately $4 million. Fees for investment bank advisory services, fairness opinions, accountants, attorneys, and printers allocated to the exchange are estimated to total $1 million. Because WB will receive consideration of 2 million shares valued at $35 per share in the agreement (the market price of the stock at the time an agreement in principle between the parties was reached), subtracting out the book values of the net assets of PC and the investment in T, as well as the related fees, results in a pre-tax book gain of approximately $20 million. The net assets included in the exchange for the 2 million shares of WB stock represent a portion of WB’s “Gaming Operations” segment as reported in the footnotes to WB’s financial statements. Shareholder and regulatory approval for the transfer of the racetrack and casino have not yet been attained; however, such procedures are usually perfunctory. WB maintains a March 31 year-end. The exchange agreement was signed in May 2000, subsequent to WB’s year-end, but prior to the filing of its year-end financial statements.

Paradise City, What kind of arrangement is this disposal?

Answer 1

Flamingo Hotel owner Billy Wilkerson and mobster Benjamin "Bugsy" Siegel had been friendly since the mid-1930s, when Siegel was a regular at Wilkerson's famous Los Angeles nightclub, Ciro's on the Sunset Strip. By 1946, the long-time member of organized crime in New York and Los Angeles was receiving hefty monthly fees from bookmakers for a wire service that transmitted horse racing results. Siegel and his other East Coast crime partners had already made a significant investment in Las Vegas by buying and swiftly reselling the downtown El Cortez Hotel-Casino. He and associates Harry Rothberg, Meyer Lansky, Gus Greenbaum, and Moe Sedway used their profits to buy into the Flamingo as silent partners.

Siegel liked the Flamingo project and joined the more experienced Wilkerson in overseeing its remaining construction as a representative of the new partners. Wilkerson initially hired nightclub designer George Vernon Russell as the project's general architect, and Tom Douglas, an expert decorator from Hollywood, as the interior designer. When Siegel demanded exclusive control over the hotel portion, Wilkerson agreed and selected Richard Stadleman as hotel architect and Del Webb as general contractor. At first the collaboration worked, but in the ensuing months, Siegel resented Wilkerson's involvement in non-hotel operations. With Lansky's blessing, Siegel forced Wilkerson to surrender creative control of the project and remain only a shareholder. He fired Russell and Douglas. In order to run the Flamingo, Siegel appointed himself president of his Nevada Projects Corporation in June, 1946.

With building materials short throughout the United States due to the demands of World War II, Siegel struggled to keep the hotel project on track. He traveled to San Francisco and persuaded federal officials to allow him to obtain scarce building materials. Its interest piqued, the Federal Bureau of Investigation secretly monitored his actions, suspecting that he had bribed public officials to obtain the supplies.

Construction costs climbed as Siegel flew in carpenters and other workers, paying them as much as $50 a day. He ordered expensive changes, including rebuilding the boiler room and kitchen, and separate sewer systems for each bathroom of the now ninety-three-room hotel. He bought wood, pipes, and other fixtures on the black market at high prices. His modifications resulted in cost overruns totaling more than $1 million. Siegel sold a million dollars worth of stock in his company to Lansky, Wilkerson, and other partners. At times, he was the unwitting victim of profiteers in the black market goods, who would deliver the hotel's building supplies, then steal them and resell them to Siegel the next day.

The Flamingo finally opened, with 105 rooms, on December 26, 1946. Well-known singer and comedian Jimmy Durante headlined the entertainment, with some of Siegel's Hollywood friends, including actors George Raft, George Sanders, Sonny Tufts, and George Jessel in attendance. Las Vegas had never seen such opulence before. The Flamingo featured a trapshooting range, nine-hole golf course, tennis, squash, badminton, and handball courts, as well as extensive landscaping with imported Oriental date palm and Spanish cork trees. Members of Siegel's staff wore tuxedoes. Siegel preferred to attract wealthy clients who dressed with "class" in formal attire while in the casino.

Despite its luxurious amenities, the Flamingo's debut was considered a flop in part due to a rainstorm that discouraged air travel and left most of the Hollywood VIP guests grounded in California. At the gaming tables, Siegel's luck went south. The casino suffered losses of about $300,000 to gamblers the first two weeks.

Within days of the opening, few customers showed up in the casino, including local residents, who favored the more casual, western saloon-like downtown casinos. The Flamingo's showroom stars performed to handfuls of people. With shortfalls mounting from staff salaries and others expenses, and construction of the hotel's guest rooms still incomplete, Siegel closed the Flamingo. The building and start up costs now ran to $4 million. Siegel looked to friends, including Raft, to lend him money. He hired Hank Greenspun, a lawyer from New York and later publisher of the Las Vegas Sun, to be his publicist.

After Siegel reopened the resort on March 1, 1947, with the hotel rooms now completed, business at the Flamingo slowly began to improve. Siegel himself greeted many guests. Bingo games were offered to attract locals. Although the casino showed a $300,000 profit by May, Siegel's backers were impatient with him after sinking more than $3 million into the project and seeing little in return. A group of mob investors, headed by exiled former New York organized crime figure Charles "Lucky" Luciano, met secretly in Havana, Cuba to discuss the Flamingo. After hearing about the meeting, Siegel went to visit his long-time friend in Havana. He asked for more time to pay off the investors, but Luciano demanded he start paying immediately. Siegel, known for his violent temper, refused and left the meeting in a rage.