PokerStars in New Jersey: Anatomy of a Killed Deal (Part 2)
Online poker industry analyst Chris Grove, via his Twitter account, and the site Diamond Flush Poker both have pointed to a provision of the New Jersey gaming regulations that they believe could save Rational Group’s deal to acquire the Atlantic Club casino in New Jersey, a deal that was purportedly terminated by current owner Colony Capital a week ago. The provision in question, Article 6B of the New Jersey Casino Control Act, provides in relevant part:
whenever any person contracts to transfer any property relating to an ongoing casino operation … under circumstances which require that the transferee obtain casino licensure … the contract shall not specify a closing or settlement date which is earlier than the 121st day after the submission of a completed application for licensure or qualification… Any contract provision which specifies an earlier closing or settlement date shall be void for all purposes.
Without seeing the acquisition agreement between Colony and Rational, it’s difficult to determine the applicability of Article 6B to the situation. Did Stars miss a closing date deadline that was impermissibly drafted under New Jersey law, or did the company miss an earlier conditional deadline relating to licensing suitability, as to which Article 6B would not apply? We just don’t know.
Either way, one has to wonder why a purchase agreement executed in December contained a provision that specified Stars had to obtain preliminary licensing approval by April 26th. The process takes upwards of 120 days, which didn’t leave Stars much wiggle room. Even if Stars’ application was deemed complete (which it wasn’t) when initially filed in mid-January, Stars likely would have missed the April 26th deadline.
I’ve been in an analogous situation in my prior life as a corporate lawyer. My company entered into a joint venture with another company to develop a piece of real estate in Romania that my company owned. The joint venture agreement assigned a fair value to the land and required the joint venture to purchase the land from my company at that price by a certain date that was months down the road. If that did not happen, either side could terminate the joint venture.
As the purchasing deadline approached, neither party was ready for the land to be transferred to the joint venture. We began to negotiate an extension. However, at the same time, my company discovered that the value of the land had increased significantly in the intervening months since the execution of the joint venture agreement. Although initially we told the other party that we would gladly extend the land transfer deadline, when we realized the new value of the land, we felt we had to terminate the joint venture agreement and sell the land into the market.
The difference between my Romanian real estate example and the Atlantic Club is that the Atlantic Club lost about $125 million over the last five years and had been on the market for almost two years before PokerStars agreed to buy it. Although the Atlantic Club is arguably worth more now than it was in December, it will still be tough to convince any buyer to take on a property that is losing $26 million a year, with or without online gaming.
For Colony to terminate the purchase agreement now, they must have a strong belief that someone will pay significantly more than $12 million for the property (putting aside the outlandish idea that they are so bullish on online gaming that they intend to operate the property themselves after dropping almost $100 million on it the last five years).
Colony could be trying to squeeze PokerStars, now that PokerStars’ cards are on the table about its true interest in the property. They may be betting that Stars will be willing to pay north of $25 million for the property, a price that would encompass the original price of $12 million, Colony’s operational loss during a few months of negotiations ($7 million) and a premium to boot.
Or maybe Colony has a different buyer in mind. Global Gaming Business has suggested that Station Casinos could be interested in the property. Station launched Ultimate Poker, the first regulated U.S. online poker site, without much warning earlier this week but does not own any properties in New Jersey. Unless New Jersey and Nevada enter into a player pooling agreement, Ultimate Poker will not be able to offer online poker to New Jersey players when those games begin later this year.
If Station believes that a player pooling agreement between New Jersey and Nevada is a long time in the offing, Station may have an interest in acquiring a New Jersey property. Station does have a previous business relationship with Colony – Colony acquired a 75% stake in Station as part of the going-private transaction of Station in 2006. It appears, however, that Colony’s ownership interest was wiped out by the bankruptcy of Station from 2009 to 2011.
Are the two companies willing to get back into bed with online gaming on New Jersey’s horizon? Anything is possible at this point. Whoever does win up operating the Atlantic Club will have to tackle the property’s daunting annual operational loss, first and foremost. With increased competition from Pennsylvania and Delaware, and more competition coming in Maryland and New York, it will take a major overhaul to bring the Atlantic Club to anything close to profitability.