Merger madness
grips gaming industry

Apr 11, 2006 4:54 AM

Although the merger-happy casino industry is running out of takeover targets, that hasn’t stopped gaming companies from making deals wherever they can find them.

Aztar Corp., owner of Tropicana casinos in Las Vegas and Atlantic City, agreed to be acquired by Pinnacle Entertainment last month, even though Pinnacle’s offer was subsequently topped by bids from Colony Capital and Ameristar Casinos.

Aztar is currently evaluating the latest offers.

Following news of the Aztar takeover, a buyout of Kerzner International was announced last week by Kerzner Chairman Sol Kerzner and his son, Butch, and, most recently, a group led by entrepreneur Neil Bluhm has announced an offer to purchase the holding company that owns the Riviera in Las Vegas.

"It’s hard to see what will be the next target, but given the high amounts of capital interested in these types of assets, other transactions could follow," said Goldman Sachs analyst Steven Kent.

Remaining takeover candidates are few and far between, but could include Ameristar Casinos and riverboat and dockside casino company Isle of Capri Casinos.

But both are majority-owned by insiders, said Jefferies & Co. analyst Larry Klatzkin.

"Once a family decides to sell, the deal can be done quickly," Klatzkin added. "But if they don’t want to sell, a deal won’t get done."

Helping to pique the interest of capital fund managers is the skyrocketing popularity of gambling, as well as the escalating value of the underlying real estate.

And, since a minefield of regulations usually limit where casino operators can expand, acquisitions have emerged as a key growth vehicle.

"The obvious companies out there are gone — Argosy and Aztar were always the two freighted to go someday," Klatzkin said, referring to riverboat casino operator Argosy Gaming, which was acquired last year by Penn National Gaming for about $1.4 billion.

Of course, the biggest deals last year were Harrah’s Entertainment’s $6.8 billion acquisition of Caesars Entertainment, and the $5 billion buyout by MGM Mirage of Mandalay Resort Group.

Kent said the Kerzner buyout reflects how high investors are willing to pay. The purchase price is 16.6 times estimated 2006 earnings; other recent acquisitions have had earnings multiples ranging from 7 to 10 times earnings (the Aztar-Pinnacle deal had a multiple of 8.7 times earnings).

Private buyers may be willing to pay more than public companies because of the favorable financing terms and stock multiples that, in some cases, underestimate the true value of the underlying real estate, said Deutsche Bank analyst Marc Falcone.

Analysts also cite the January announcement that a Saudi prince and Colony Capital will pay $3.9 billion to buy luxury hotel operator Fairmont Hotels & Resorts as further evidence that consolidation and high asset value remain themes in the gaming and lodging sector.

The Kerzner and Fairmont deals "demonstrate the healthy appetite for international leisure real estate assets," Kent said.

With an eye toward the bidding war taking place over Aztar, the Kerzner investor group opened up a 45-day window to solicit competing bids.

Bear Stearns analyst Joe Greff said a competing bidder — most likely private equity or an international resort operator — is possible, but it would have to convince the Kerzner family to stay on.

"This would be challenging and complicated," Greff said.

Other big casino operators are also controlled by insiders: MGM is majority owned by Kirk Kerkorian’s Tracinda Corp., while Las Vegas Sands Corp., operator of The Venetian, is controlled by chairman Sheldon Adelson.

Directors and executives at Wynn Resorts, including chairman and CEO Steve Wynn, own 52 percent of the company. Wynn had previously founded Mirage Resorts, which was acquired by MGM in 2000.

"Wynn wasn’t a seller, but everything is for sale at a price," Klatzkin said. "Dramatic changes can happen."

Other tightly-controlled casino companies include Boyd Gaming, in which insiders including chairman and CEO Bill Boyd, own some 52 percent of outstanding shares.

Donald Trump holds a 30% stake in Trump Entertainment Resorts, following the company’s emergence from bankruptcy last May.

At Penn National and Station Casinos, insiders own less than 20 percent of outstanding shares, while management insiders at Harrah’s own 4.1 percent of shares.