Investors in Trump Entertainment( TRMP) might want to take some winnings off the table.
The stock has jumped 11% over the past two days on rumors that the company will partner with
to redevelop one of its Atlantic City, N.J., properties. But such a deal is far from a sure thing and potentially would face problems.
A report in the
Tuesday said Wynn Resorts founder Steve Wynn is looking to tear down the Trump Plaza casino and build his own site on the 12-acre plot of land, which sits on prime real estate on the boardwalk in Atlantic City. A story in the
New York Post
Wednesday said that Trump and Wynn are looking at a joint-venture partnership to redo the site. Both articles cited anonymous sources.
Trump declined to comment for this story. But a person close to the company told
, "I'd caution you about going too far out on any specific rumor."
Joe Weinert, a casino consultant with Spectrum Gaming Group, says he expects there is something to the rumors about Wynn and Trump, but "exactly what remains to be seen."
It is no secret that Wynn is interested in entering the Atlantic City market, which continues to transform itself from a seedy destination into the sparkling Las Vegas of the East Coast. Wynn previously owned the Golden Nugget casino in Atlantic City, but sold it in the mid-1980s after growing frustrated with New Jersey's regulatory environment.
Investors are excited about the prospects of a possible deal since it would presumably allow Trump to immediately profit from some of the value potential at the Plaza site. Any proceeds from a joint venture agreement or an outright sale would allow Trump to fund expansion in other markets and help pay down debt.
"We think a deal between Trump and Wynn makes sense for both organizations, says Steven Gart, an analyst with Nickel Capital, which owns Trump shares.
"However, given the move the stock has just made on this speculation, we're a little cautious on the upside from here given the competitive pressure in Atlantic City (during the third quarter)," he adds.
In particular, the trendy Borgata casino, jointly owned by
, has been stealing customers from other casinos in the city. Casino giant
( HET) said in its earnings conference call Wednesday that its results were hurt by aggressive promotional spending in the Atlantic City market, spurred by the newly renovated Borgata.
There also is a major roadblock to bulldozing the entire Trump Plaza site.
Trump still doesn't control the dilapidated house that sits in the middle of a parking lot adjacent to the casino. The company says it has three acres of development potential at the Plaza -- but this hinges on not having to build around that house.
Vera Coking, the elderly woman who owns the house, successfully fought Trump's attempt several years ago to seize the property through eminent domain via the New Jersey Casino Reinvestment Development Authority.
The entire 12-acre Trump Plaza parcel represents a tremendous development opportunity since it lies on the boardwalk, just steps away from the renovated Pier at Caesar's, where upscale restaurants and shops are popping up.
But it's not clear why Trump or Wynn would want to raze the existing casino, since Trump recently spent a good amount of money renovating the casino floor and rooms and adding new dining and bar options at the Plaza site.
Beyond the building issues, Gart says the structure of any deal would be critical given Trump's debt level. Trump has a debt-to-equity ratio of 3.4 times, which is among the highest in the industry.
If the two parties pursued a joint-venture redevelopment of the site, they could use nonrecourse debt, Weinert says. That would be a big bonus to Trump as well as Wynn, which recently spent a hefty sum to develop its Macau casino.
Shares of Trump closed Wednesday at $21.08, up $1.59, or 8.2%. The stock hasn't been that high since June, when the entire gaming sector peaked and Trump shares hit a 52-week high of $22.40.
The company reports earnings next week. If the quarter looks a little messy, the Wynn rumors might be nice timing to provide some cushion to the stock.
But for those investors seeking assured gains, the recent stock jump could be the opportunity to pocket profits.