Trump Bear's Rebuttal
by Paul Larson ([email protected])

Instead of sounding like a defense attorney arguing for his client, Dale sounds more than anything like he is giving a confession. What is there to rebut when he says things like gambling "doesn't sound like his idea of fun." Or how about, "This pretty much means that the debt holders are in charge on this one." Then he says, "That [debt] leaves little margin of safety." What is there left to argue over?

Well, there are a few points I can make in this rebuttal. The first is that the pro forma expectations that Dale has for the company when he assumes no growth in EBITDA this year are extremely aggressive. No growth is the absolute best the company can hope for. Declining -- possibly significantly declining -- EBITDA is what should be expected from the company in 1998 given the preliminary results thus far. 1999 and beyond does not look much better due to all the reasons I outlined in my original argument. And since EBITDA and cash flow multiples are the metric most often looked at in the gaming industry, the forecast for the common stock does not look positive.

Since consolidations are in large part determined off of multiples of EBITDA, the declining EBITDA will not help in Trump's potential quest to sell off its properties in order to pay down some of the debt. Even if a buyer is willing to pay 10x EBITDA (unlikely), the actual amount a buyer is willing to pay will decline as cash flow declines. And as Dale pointed out himself, "Investors aren't going to pay up for a less attractive natural growth rate in a market where competition is intense."

There is no doubt that the gaming industry is in the middle of a hot consolidation wave. Mergers and acquisitions are one of the few ways to boost profits in the sector since the raw growth in the gaming industry is expected to be essentially flat over the next two to five years. However, will consolidation really help investors in the common stock of Trump? Even if Trump decided to sell off *all* of its properties, it is uncertain whether the proceeds would even be enough to pay off the debt the company carries. Whether the properties together are worth $1.6 billion or $2.2 billion is the question investors in Trump need to decide for themselves.

The bonds trading roughly at par are not a big deal. The bond market can be rather inefficient, too. Dale states that Trump has never defaulted on his secured debt. However, Equity Investing 101 tells you that the common stock, what we are dueling about here, is anything but a secured obligation. And if I were holding Trump's stock, I would certainly be feeling more than a little insecure at this point.

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