May 29, 2010--RENO -- A federal bankruptcy judge on Friday gave his initial approval for the auction process that will place a large chunk of locals' casino giant Station Casinos on the open market.

U.S. Bankruptcy Court Judge Gregg Zive approved two motions sought by the bankrupt gaming company concerning a two-pronged reorganization that was proposed to the court in March. In addition to the auction process, Zive approved a lease agreement for the initial steps to divide the 18-casino company into two entities.

As part of the reorganization, Station Casinos will place 11 casinos -- including Texas Station, Santa Fe Station and the two Fiestas -- certain land holdings and American Indian gaming contracts up for sale in a bankruptcy auction as one entity.

Fertitta Gaming -- a business formed by Station Casinos' founders Frank Fertitta III and Lorenzo Fertitta, real estate investor Colony Capital, and primary lenders Deutsche Bank and JP Morgan -- plans to bid for the properties as the "stalking horse" bidder with an offer of $772 million.

Zive said he approved the bidding process because he would control the auction. He also thought the stalking horse bid or starting bid was "an adequate floor in which to commence an auction."

Under the judge's ruling, potential bidders need to submit letters of intent by July 1. Bids are due by July 30 and need to be at least $17.5 million higher than the Fertitta Gaming offer.

Zive said he will conduct the auction Aug. 6 in Reno.

Still, Zive said he wanted the parties to continue to discuss ways to increase the value of the bankrupt company, which has about $6 billion in secured and unsecured debt.

"This, in fact, is a complex set of relationships that are difficult to disentangle," Zive said. "There would be legal issues and questions at every step of that separation, all of which most probably involve the incurrence of a great deal of fees, costs and expenses."

He added that ongoing operations of Station Casinos' properties could be hurt if he had not ruled the way he did.

"(It) might jeopardize the employment of thousands of people," Zive said.

Zive wants representatives of the Fertittas and the company's secured lenders to continue discussions with unsecured creditors, who are facing a loss of some $2.5 billion.

"I'm not finding that the unsecured are out of the money," Zive said. "The economics indicate there is great difficulty for them to be in the money unless the auction generates interest."

Zive also rejected a third motion because he thought it was redundant to other motions he had already approved.

Zive took close to 90 minutes to explain his rulings. His explanation came after a nearly 10-hour hearing on Thursday. Attorneys for all sides in the case were given opportunities to argue their points on the motions.

Several times Thursday, the mood grew a bit testy with attorneys making snide remarks, much to Zive's chagrin.

"Address me, not each other," Zive told Station Casinos attorney Thomas Kreller at one point late in the day when the Los Angeles lawyer made a remark directed toward unsecured creditors' attorney Bonnie Steingart of New York, who had muttered a comment during his argument.

Under the proposed reorganization plan, four of the company's largest properties -- Red Rock Resort, Palace Station, Sunset Station and Boulder Station -- along with the Wild Wild West and its adjoining 110 acres, would be spun off into a new holding company owned by Station Casinos' lenders, Colony Capital and Fertitta Gaming.

Land holdings in Nevada and California would be divided between the new holding company and the entity up for auction. Green Valley Ranch Resort and Aliante Station aren't included in the auction. The properties are 50-50 joint ventures between Station Casinos and the Greenspun family.

In his rulings, Zive gave a few hints as to how he might rule sometime in July on the overall reorganization plan.

"I am persuaded the (casinos to be auctioned) have far more value to (Fertitta Gaming) than anyone else, unless there is someone else who could end up with all 18 casinos," Zive said.

The judge's approval left in place a clause known as the "Texas Station Put," a $75 million added cost that covers the casino's land on North Rancho Road and Lake Mead Boulevard. Victoria Fertitta, the widow of Station Casinos founder Frank Fertitta Jr. and the mother of Frank Fertitta III and Lorenzo Fertitta, owns the Texas Station land.

If the Fertitta brothers and their partners win the auction, they will not have to pay for the property.

Zive said there could be dire economic consequences if the complicated reorganization fails.

"There is little doubt such a division, if it were to occur in absence of a rational and comprehensive business approach, could create economic disaster for many parties," Zive said.

The approval of the bidding process means Station Casinos' employees, including hourly workers, will retain their current positions, wages and benefits if Fertitta Gaming is the successful bidder.

The process does not guarantee what will happen if another entity is the successful bidder.

However, Zive said on Thursday that he thought anyone interested in acquiring the 11 properties would want the employees to remain in their jobs.

Contact reporter Howard Stutz at [email protected] or 702-477-3871.

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