Rebirth of the Riviera?

A group of experienced real estate developers has reached an agreement with the chief executive of the company that owns the Riviera to buy out his shares of stock in the casino's parent company -- a deal experts say will allow the group to eventually take over the company and redevelop the aging Las Vegas property.

Riviera Holdings Corp., which owns the Riviera on the Strip and the Riviera Black Hawk in Colorado, has been subject to numerous buyout offers and other redevelopment proposals over the years, none of which came to fruition.

Some experts say the purchase agreement is different than the past deals because it is led by a group capable of financing the purchase and redevelopment of a major Strip resort, whereas previous groups did not have the expertise or ability to finance a makeover that could cost more than a billion dollars. The deal was made public in a Securities and Exchange Commission filing.

North Strip revitalization

The agreement comes as several older properties at the north end of the Strip, including the Stardust and the Westward Ho, face the wrecking ball. Those and other properties will soon become higher-density resorts and condominiums in response to rising land prices, demand for Strip-front residences and competition from newer, more upscale resorts.

The group purchasing Riviera shares includes Barry Sternlicht, the former chief executive of Starwood Hotels and Resorts Worldwide, Las Vegas real estate developer Brett Torino and Chicago real estate executive and casino investor Neil Bluhm. Torino and Bluhm declined to comment further on the agreement, and Sternlicht could not be reached for comment by press time.

Riviera officials, including Chief Executive Bill Westerman, also declined comment.

Brett Torino

In partnership with New York-based real estate investors, Torino has accumulated more than 18 acres around Harmon Avenue and the Strip, including the Hawaiian Marketplace retail mall.

Torino's partnership, called Metroflag, once planned to build a casino resort at the corner of Harmon Avenue and Las Vegas Boulevard with Minnesota-based Lakes Gaming, which sold its interest to Metroflag four years ago. The Sept. 11 attacks put those plans on indefinite hold, and the company has yet to announce any major development plans, preferring to lease the property to retail tenants.

Barry Sternlicht

Sternlicht made a name for himself as an aggressive dealmaker and is known for buying undervalued hotel properties.

Last year Sternlicht left Starwood Hotels and Resorts, one of the world's largest hotel and resort companies, to focus on running a private real estate investment firm he founded in 1991.

Greenwich, Conn.-based Starwood Capital Group Global LLC manages a real estate portfolio worth more than $10 billion. Sternlicht began his real estate career with JMB Realty Corp. in Chicago, one of Bluhm's companies.

Starwood Hotels once owned Caesars Palace and Desert Inn but exited the casino business before it could capitalize on the boom in luxury tourism in Las Vegas.

The company has returned with several deals, including hotel management contracts at the Aladdin -- soon to become a Planet Hollywood resort -- and the Westin Casuarina hotel on Flamingo Road. Starwood has also agreed to manage Las Vegas' first W hotel, which is planned as part of a resort and condominium complex that has not yet begun construction at the corner of Harmon and Koval Lane.

Neil Bluhm

Bluhm has more than 30 years of experience buying and selling real estate and is a principal in Walton Street Capital, a major real estate investment firm based in Chicago. He has another company that developed two Canadian casinos, Casino Niagara and the $1 billion Fallsview Casino Resort, and is one of several investors who has submitted a proposal to build a casino in Pennsylvania.

Casino boss Steve Wynn in 2004 pulled out of a joint bid with Bluhm to build a casino near Chicago -- a bid that did not ultimately win.

In 2005 Bluhm was listed as the 235th richest American by Forbes, with $1.4 billion.

"Clearly the three principals are very sharp guys with really strong real estate backgrounds," Deutsche Bank bond analyst Andrew Zarnett said. "That's a big difference from anybody else who's been involved" in trying to purchase the Riviera, Zarnett said.

Volatile stock

The buyers would likely continue to operate the Riviera for a period of time before redeveloping the property, Zarnett said. They can make improvements to the property that can help generate more profit and pay down the company's debt, while allowing the land to increase in value, he said.

The Riviera was receiving so many potential offers from buyers over the years that it decided to hire an investment banking firm last year to consider those offers as well as other options for the property, including joint venture deals. But the company finished that process, saying none of the options at the time looked appealing.

Sources familiar with the company, who declined to be named, said none of the deals were rich enough given where Riviera stock was trading at the time. Riviera shares are volatile, trading up and down based on other land deals and announcements of new projects on the Strip.

Licensing hurdle

Westerman is increasingly concerned with making sure the company ends up in good hands, sources said. Some of the offers the Riviera has received in years past were less than solid because they would have relied on debt financing and little in the way of cash, they said.

The investor group already purchased about 1.1 million shares from Westerman in early January at $15 per share and has an option to purchase the other half of Westerman's roughly 18 percent stake in the company -- promising to pay at least $15 per share -- over the next six months. Before investors can buy the remaining million shares, they must first obtain a Nevada gaming license. That's because the group has to be licensed by state gaming regulators before it can own more than 10 percent of a Nevada gaming company.

Some observers say a six-month licensing process would be optimistic considering that some license investigations take at least a year to complete.

State Gaming Control Board Chairman Dennis Neilander declined to say when the buyers would be licensed, saying that would depend on a variety of factors, including whether they have obtained previous gaming licenses, the number of investors who will be licensed and the complexity of their financing.

"I would have to think getting a license investigation completed within six months would be difficult," Neilander said.

Two more hurdles

The buyers, who have not yet submitted a purchase offer for the Riviera, face at least two major hurdles before they can take control of the property.

Shareholders with a stake of 10 percent or more in the company must still receive approval by the company's board of directors to vote all of their shares -- a defense intended to fend off hostile takeovers.

The purchase would not be considered hostile.

Also, the company has a change-of-control provision that requires buyers to redeem the company's roughly $215 million in bonds, plus 1 percent of their value. That means investors would have to pay off the bonds or refinance them, plus pay an additional $2.2 million to buy the company.

The timing of the deal makes sense for the Riviera and the Strip, where development has typically come in surges to capitalize on the buzz that new attractions can generate, observers say.

The latest building boom is expected to set yet another record in Las Vegas in terms of cost and scope -- surpassing previous building cycles in 1993 and again in 1998 and 1999. MGM Mirage's Project CityCenter, Boyd Gaming's Echelon Place, Wynn Resorts' Encore resort and the Venetian's neighboring Palazzo resort will account for most but not all of the more than $15 billion in Strip projects.