Pinnacle Extends Its Grasp - Thursday 16th of March 2006

by Howard Stutz

Las Vegas Gaming Wire

LAS VEGAS Las Vegas-based Pinnacle Entertainment, which has carved out a niche in the past few years as a successful operator of regional-based casinos, took a step up the gaming industry ladder Monday, agreeing to a $2.1 billion purchase of Aztar Corp., owner of the Tropicana.

The sale, which is expected to close by the end of the year, is an cash transaction, with Pinnacle paying $38 a share for Phoenix-based Aztar's outstanding shares. The buyout covers $1.45 billion in stock, and Pinnacle will assume Aztar's $723 million in debt.

Pinnacle operates casinos in Louisiana, Mississippi, Indiana and Argentina, as well as the Boomtown Casino outside of Reno. Buying Aztar also gives the company the Tropicana in Atlantic City, the Ramada Express in Laughlin and casinos in Indiana and Missouri.

"For a company like Pinnacle, this is a huge transaction," said CRT Capital Group gaming analyst Steve Ruggiero. "It provides Pinnacle with a national footprint and expands their scope into the two most important gaming markets, Las Vegas and Atlantic City, which is critical and necessary for the long term."

Based on overall gaming revenue in 2005, the deal would make Pinnacle the industry's sixth-largest casino company with more than $1.6 billion in overall combined revenue. When the deal closes, Pinnacle will operate 12 casinos in six states and overseas with 9,000 hotel rooms and 22,000 slot machines.

Pinnacle is building two casinos in St. Louis, valued at more than $800 million, that are expected to open in 2007 and 2008. Its Casino Magic in Biloxi, Miss., has been closed since August after it was damaged by Hurricane Katrina. No reopening date has been given. Pinnacle is building a casino that will adjoin a Four Seasons hotel in the Bahamas.

Wall Street reacted favorably to the deal. Shares in Aztar jumped $6.51 to close at $37.21, up 21.21 percent. Pinnacle shares closed at $29, up $1.04, or 3.72 percent. Both companies are traded on the New York Stock Exchange.

"A quick back-of-the-envelope analysis of the deal yields an accretion potential to Pinnacle of 3 cents per share," Morgan Joseph gaming analyst Adam Steinberg said in a note to investors.

The Aztar acquisition doesn't reach the overall price of the gaming industry's two most-recently completed transactions Harrah's Entertainment's $9 billion buyout of Caesars last June and MGM Mirage's $7.9 billion purchase of the Mandalay Resort Group in April.

Still, Pinnacle Chairman Dan Lee said the deal was just as important to the overall casino playing field. Lee said that once completed, the transaction will make Pinnacle second only to Harrah's when comparing a geographic spread of casinos around the country.

Lee said that having the Tropicana casinos in Las Vegas and Atlantic City will allow the company to entice its regional customers with trips to the casino capitals.

"This is a tremendous opportunity for our company," Lee said. "The transaction allows us to create a nationwide casino network, similar to what our competitors have accomplished. There were a lot of synergies between the two companies. We don't have to sell any properties to complete the deal and we're much stronger geographically."

Lee said the deal was negotiated "in about two weeks."

Pinnacle collects almost 70 percent of its revenue from three properties. The buyout will make the Tropicana Atlantic City Pinnacle's chief revenue driver with 31 percent, almost triple the revenue of any other Pinnacle property.

The transaction gives new life to employees of the Tropicana Las Vegas, an aging property that has been rumored for demolition. Aztar announced plans last month to knock down the existing buildings and construct a $1.2 billion resort on 17 acres of the Tropicana's 34-acre Strip land parcel.

Lee said the company will most likely tear up those plans and develop a much larger hotel-casino using the entire Tropicana parcel. That aspect will take at least two years to plan and five years to complete.

"By the time we're done with St. Louis, we'll be ready to roll right into the Tropicana redevelopment," Lee said. "We looked up and down the Strip and the Tropicana, in some ways, was the last great site that was available for purchase for a company like ours. We're going to start with a 34-acre clean sheet of paper and we'll take our time to develop something special."

In the interim, Lee said, Pinnacle will invest some money into refurbishing areas of the Tropicana, such as updating the slot machines. Aztar had cut off hotel reservations for the Tropicana as of April 15, but on Monday, reservations were being accepted indefinitely.

"Emotionally, Las Vegas is our home and we wanted to be on the Strip," Lee said. "We wanted to have a casino here. We can see the Tropicana from our offices."

Other Aztar projects will be completed, Lee said. Pinnacle said a hotel at Aztar's Evansville, Ind., casino would open as scheduled this year while the expansion and refurbishment of the Tropicana Atlantic City would also be finished by 2007.

Pinnacle, originally known as Hollywood Park Entertainment, moved its headquarters from Glendale, Calif., to Las Vegas in 2002 when Lee took over as chief executive officer.

Lee, who spent several years as a Wall Street analyst and six years as the chief financial officer for Mirage Resorts, tried to engineer a purchase of the bankrupt Aladdin for Pinnacle in 2004, losing out to Planet Hollywood.

"Dan was part of the Mirage development team, so he has the experience, the back ground, the credibility and the vision to take this company further along," Ruggiero said.

Lee has had Pinnacle an expansion mode. In May 2005, Pinnacle opened L'Auberge du Lac, a $365 million hotel-casino in Lake Charles, La., which has become one of the state's most popular casinos with $151.6 million in gaming revenue in its first seven months.

"What we did at L'Auberge was a wake-up call to everyone and showed what this company was capable of accomplishing," Lee said.

In January, Pinnacle completed a $164.1 million stock offering, with the proceeds being used to add additional hotel rooms at L'Auberge and Belterra in Indiana while building a hotel tower at the room less Boomtown in New Orleans.

Both Pinnacle and Aztar have submitted bids for casino licenses in Pennsylvania. Pinnacle intends to pursue both licenses while finding a partner for one of the potential licenses.

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