Real Estate Key To DLJ’s $770M Vegas Deal

Target: Hard Rock Hotel & Casino

Sponsor: DLJ Merchant Banking Partners and Morgans Hotel Group Co.

Seller: Hard Rock Hotel Inc.

Purchase Price: $770 million

DLJ Merchant Banking Partners is using an unusual form of debt in a $770 million bid to transform the Hard Rock Hotel & Casino, located three blocks off the gambling Mecca of the Las Vegas Strip.

The New York-based mid-market specialist joined with publicly traded Morgans Hotel Group Co. to buy the casino in a deal closed on Feb. 2. DLJ Merchant Banking chipped in $115 million in equity, which is double Morgans Hotel’s stake.

The buyout shop’s parent, Credit Suisse Group, provided $760 million in commercial mortgage-backed securities to cover the sticker price. The extra $163 million in cash from that loan beyond the purchase price will be used for the initial renovation and expansion and to build up reserves. Credit Suisse also lined up $600 million more in commercial mortgage-backed securities to cover the multitude of additional projects planned for the property, although DLJ Merchant Banking and Morgans Hotel may not end up using the entire sum.

With the acquisition, DLJ Merchant Banking and Morgans Hotel take over a 647-room hotel, a 30,000-square-foot casino, several on-site restaurants and a concert venue, not to mention the world’s best hotel pool, as judged by Travel Channel. Just as important, the deal included 23 adjoining acres, and DLJ Merchant Banking and Morgans Hotel have big plans for the site, said Steve Rattner, head of DLJ Merchant Banking.

The joint venture has already hired an architect and general contractor to build a bank of 1,000 new hotel rooms, enlarge the casino, double the size of the pool and increase convention space from 6,000 square feet to 70,000 square feet. Adding exhibition space is crucial, Rattner said, because Las Vegas is now the nation’s No. 1 convention destination.

Eventually, Morgans Hotel and DLJ Merchant Banking plan to add a series of time-shares, additional hotel rooms and condominiums to the site, Rattner said. Morgans Hotel operates trendy hotels in five U.S. cities and London.

The deal also gives the joint venture the rights to the Hard Rock name in the western United States and parts of Asia. In the next year, the owners expect to announce the construction of new Hard Rock venues and the rebranding old casinos, Rattner said.

Buyouts rarely rely entirely on CMBS loans for funding, said Rattner. CMBS loans are typically used to finance real estate transactions, and by using this type of debt for a casino deal, the buyers could shoulder more leverage than in a conventional corporate security-backed deal, said Anthony Orso, a Credit Suisse managing director and co-head of North American Real Estate Finance.

“We feel confident lending more on a real estate model than we do on a corporate model,” he said. He added that real estate-backed debt can cover 85 percent of cost versus 65 percent of cost with a corporate loan, without big sacrifices in spreads. “We can get much more with much better execution.”

Credit Suisse, which is the only underwriter financing casino deals with real estate-backed securities instead of corporate loans, structured the second loan so the joint venture can tap the financing for construction as the project progresses.

“We don’t have to draw down the financing and have a negative spread,” Rattner said. “We draw down the financing as we need it month-to-month for the expansion.”

Jake Fuller, an analyst who covers Morgans Hotel for Thomas Weisel Partners, wrote that the deal values the casino at slightly less than 16x the hotel’s EBITDA, which is roughly $50 million annually.

Co-founded in 1971 by Peter Morton, scion of the Morton’s steakhouse family, the first Hard Rock Café in London combined rock music memorabilia and casual dining. In the 1980s, franchises sprang up in explosive succession. There are now Hard Rock restaurants, casinos and hotels in 142 locations around the world. In the last decade, Morton ceded ownership of virtually all of his Hard Rock holdings, which are now owned by the Seminole tribe of Florida. But Morton retained both control of the Vegas casino and hotel, which he built in 1995 and expanded four years later, and the right to build more Hard Rock venues.

Morgans Hotel struck the $770 million deal with Morton in May 2006 and then brought on DLJ Merchant Banking as a two-thirds equity partner in November. The joint venture had until Feb. 11 to complete the sale, or else Morton could have walked away with a $50 million break-up fee and the right to sell the property to another suitor. The Seminole tribe was waiting in the wings to snap up the casino, according to reports.

The sale has earned the blessing of the Nevada Gaming Commission.—J.H.