Why PE Firms May be Interested in the Trump Brand (TRMP)

By Glenn Curtis | April 03, 2007 AAA

Rumors are flying around that Trump Entertainment (Nasdaq: TRMP) may be bought out by one or more private equity firms.

Why would PE firms be interested in Trump?

There are several reasons. In fact, the more I think about it, the more I think it makes sense for the company to go private.

First, Trump's crown jewels, the Taj Mahal in Atlantic City, Trump Plaza, and Trump Marina, are unbelievable properties, and I think that there is an enormous amount of pent up value in each. The trouble however is that I don't think that value will ever be realized with Mr. Trump at the helm.

Now don't get me wrong folks, "The Donald", as he is affectionately known, is an awfully shrewd guy. After all, he's revamped the skyline of two major cities in my neck of the woods (New York and Atlantic City), and he's made a ton of money doing it.

However, if you've been to the Atlantic City boardwalk at periodic points over the last 20 or so years as I have then you know that these properties have gone from being best in class, to being kind of second rate.

Yes, sure I'm impressed by the opulent chandeliers at the "Taj", and I think the view from the "Marina" is, as Trump would say, "the best". But have you checked out the Borgata or some of the other new or recently revamped offerings down throughout the city? It's no contest.

Folks, the Borgata smells new. Its restaurants and bars are trendy, and crowded beyond belief on the weekends. And its rooms are simply beautiful. Trump's offerings are decent. But they just don't match up -- at least not in this writer's humble opinion.

So What Can Donald Do?
The way I see it, Trump has three choices if he wants to continue to run the properties:

• He can continue to market his properties as "the best" -- and then make them the best by overhauling them entirely.
• He could continue with the status quo, and lose market share to the newer offerings.
• Or he can market his wares as value-oriented second-tier properties. (He could even lower room rates and try to lure a different type of clientele).

But do any of these options really make sense?

Nah, and I think that the Donald knows this.

The problem is that Trump can't afford a major overhaul of his properties at this point. And no matter how good it might sound, he would never agree to being a second-tier player (even though it can be a very lucrative niche, by the way).

But a PE firm on the other hand would be more willing to play second fiddle, and market the properties as second tier. In other words, instead of trying to lure the upscale New York crowd (like Trump does now, and which the Borgata seems to have a virtual stranglehold on), they could focus on "day trippers," and making their properties "family friendly" destinations for the people that live within a 200 mile radius of the casinos.

Seriously folks, there are tons of potential customers out there, but because of Trump's mindset, I don't think they'll ever be tapped. But again, I think that a PE firm would be more apt to change the company's branding, and to go after those dollars.

Real Estates Values
Then there's the value of the properties themselves. For those unaware the price of real estate in the northeastern United States has simply skyrocketed over the past several years. To that end, I'm fairly certain that the property values listed on Trump's balance sheet do not fairly accurately reflect their true worth in this market.

In any case, I think that a PE firm could theoretically sell off one of the weaker properties (such as Trump Plaza), and then use the proceeds to either refurbish the other properties or to finance acquisitions in other up and coming gaming areas (possibly outside of the Atlantic City region). In short, I think that a strategy such as that could materially enhance the value of the overall company.

That said, I don't think that this is an option for Mr. Trump. You see, he likes to own things. And I don't think he'd ever sell the properties piecemeal, because to him it would be like conceding defeat. Very simply, PE firms can entertain that option.

Would Donald Ever Agree to be Bought Out?
It's still unclear at this point. But with Trump focusing a large amount of his time and effort on his television program, and the erection of several prominent buildings and homes in Chicago, and Florida, there is a distinct possibility that he might be persuaded to sell.

Another sign that perhaps he's looking for an "out" is that the company hired Merrill Lynch (NYSE: MER) to look into it's "strategic options".

So would a buyout be good for shareholders? I think it would.

Right now Trump's stock is selling at roughly $18 a share. And while I wouldn't bet the ranch on it, I'm pretty sure that Trump (who owns about 12 million shares or 30% of the stock) would want to be paid a premium for his shares.

For what it's worth my hunch is that he won't sell for less then $22 to $25 -- which I think would be quite reasonable given the expected single digit revenue growth the company is expecting over the next year and the pent up value in the company's real estate holdings.

The Bottom Line
I think that the mere speculation that Trump could be a takeout candidate may drive the stock materially higher in the near term. For that reason, (and because I think that the company will show improved earnings growth in the next 12 to 24 months) I think the shares are worth the risk at these levels.

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