Pinnacle bulks up
in Aztar ‘gym’

Mar 21, 2006 3:47 AM

Formerly tiny Pinnacle Entertainment is on steroids. It isn’t so tiny any more. CEO Dan Lee has it poised to sit at the same table with the biggest names in the gaming business.

Not that the former Wall Street analyst is a stranger to big deals. He helped develop the financial strategy that made the Bellagio possible.

He engineered the purchase of the various parcels making up the 55 acres on which MGM’s Project CityCenter is being built.

Before that he was doing big things on The Street for other people such as Donald Trump.

But it’s sometimes nice to just be lucky, in the right place at the right time. That was the case as he flew down to meet with the Aztar fellows at their Arizona headquarters several weeks ago.

They were about to give up hope of getting an affordable construction agreement from Marnell Corrao Construction. What’s more, the stock was moving in the wrong direction.

And along comes Dan saying, how does $38 a share sound?

The $2.1 billion deal was negotiated over a two-week period behind a shroud of secrecy so complete property personnel had no knowledge of it until the sale announcement was complete.

But is Pinnacle paying too high a price?

The price represents something like nine times earnings for a company that those familiar with the deal say is difficult to value because so much potential is based on events that are still over the horizon.

But the multiples at which companies have recently been bought and sold are edging upward. The Harrah’s purchase of Caesars penciled out at a bit more than eight. Landry’s paid about 12 times earnings for the Golden Nuggets in Laughlin and Las Vegas.

Sites in stable jurisdictions such as Nevada and Atlantic City are worth more than ever since there’s no comparable competition in sight.

But there’s also another view.

A senior official with a company that took some long looks at Aztar but eventually passed notes that Atlantic City is about to be much more competitive, what with big expansions at Caesars and the Borgata nearing completion.

In Las Vegas, this executive adds, the potential for the Tropicana is still three to five years away, about the time CityCenter, Steve Wynn’s Encore, Boyd Gaming’s Echelon Place and the myriad Harrah’s projects will be nearing completion.

Which doesn’t change the fact that Aztar, whoops, I mean Pinnacle, will have an A-plus location. Tropicana and the Strip represent one of the busiest intersections in the world. The continued big spending of MGM Mirage will only add value.

A gift that
keeps on giving

Aztar officials had previously denied any interest in selling, but what did we expect them to say?

The truth is that the company had been shopped around. There was a time when Aztar strategists reportedly hoped to get in excess of $50 a share.

What happened then was that the ugly cutting edge of reality reached up and said, "Gotcha!"

The stock began to slide after reports of supposedly weak performances early this year.

Aztar strategists had no interest in trying to compete at the upper end of the Las Vegas market. Their role models were Treasure Island, New York-New York, Paris and so forth. The expected price tag when they began planning their expansion years ago was somewhere around $750 million.

The price of getting anything significant built isn’t what it used to be. Costs have gone sky high the last several years.

One of the money-saving ideas being tossed around at Aztar would have involved leasing out a number of operations, as New York-New York did in the beginning, when it leased out its room service and restaurant operations.

And then along came Lee.

You can almost imagine Aztar CEO Bob Haddock and his team pacing the floors at their Arizona headquarters, finally saying, let’s do it.

And they did.

You can also almost imagine Lee, who has a "very good feel for the casino business," deciding to gamble with a deal that to him looks like a sure thing. He is one of those guys with a good grasp of the big picture.

Steroids notwithstanding, we’ll see.