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Las Vegas-based Pinnacle Entertainment found entry into the Atlantic City casino market Tuesday, agreeing to buy the aging Sands and an adjacent 7.7-acre parcel for $270 million.
Pinnacle said it would shut down the Sands, one of the Boardwalk's oldest gambling halls, 70 days after the transaction closes, demolishing the 600-room hotel and small casino. The company said it would then construct a much larger property on the combined 18-acre site.
The deal with businesses controlled by financier Carl Icahn would complete Pinnacle's goal of operating a casino in Atlantic City. The company was outbid this spring by rival casino operator Columbia Sussex in its attempt to purchase Aztar Corp., which runs the Tropicana Atlantic City.
"This major new resort will be a key component in our plan to build a national network of gaming properties," Pinnacle Chairman Dan Lee said in a statement. "It will also help extend our development pipeline and our company's growth through 2010 and beyond."
Pinnacle, which doesn't operate a casino in Las Vegas, is spending $800 million to build two casinos in St. Louis and recently said it would spend $350 million to build a second casino in Lake Charles, La., next to its 1-year-old L'Auberge du Lac property.
No price was given on what Pinnacle would spend to build a new resort in Atlantic City. No details on the potential size and design also weren't disclosed.
Gaming analysts said the transaction was good for Pinnacle and Atlantic City.
"The company could develop a resort comparable to Borgata at a development cost of approximately $1.5 billion," Morgan Joseph gaming analyst Adam Steinberg said in a note to investors. "A redevelopment of this property is a better use of funds, generating higher returns than merely upgrading the current property."
The Sands, which opened in 1980, is now owned by the same company that runs the Stratosphere, Flamingo Laughlin and the two Arizona Charlie's. The property is at the center of the Boardwalk, next to Bally's Atlantic City and Caesars.
Bear Stearns gaming analyst Joe Greff said imploding the Sands is a more shareholder-friendly way to enter the Atlantic City market than buying Aztar's older Tropicana.
"Our sense is that Pinnacle would likely invest another $1 billion to $1.25 billion to build a new, Borgata-like property," Greff said.
In a statement, Icahn said tearing down the Sands made the most sense, even though employees will lose their jobs.
"After spending many months reviewing various projects for this property, it became patently clear that a shutdown of the Sands was necessary and inevitable to make room for a great new casino," Icahn said.
Pinnacle hopes to close the transaction, subject to New Jersey regulatory approval, by year's end.
The purchase agreement provides for severance benefits in accordance with union agreements along with severance pay for nonunion employees who stay through the 60-day closing period.
In addition, Icahn said his company will fund an additional one week of severance for eligible employees for each year of service over two years.
Pinnacle will pay full-time employees who have been with the Sands for at least six months two weeks of severance. Pinnacle will also provide outplacement services for Sands employees. Employees willing to relocate will be considered for positions at casinos operated by Pinnacle and Icahn.
The transaction includes a $250 million price for the Sands and $20 million for certain tax-related benefits and additional real estate. The vacant 7.7-acre land parcel is the site of the former Traymore Hotel. Icahn's group bought the land in May for $61 million.
There are now 12 casinos operating in Atlantic City and there have been rumblings in the market about a potential 13th casino.
Investment banker Morgan Stanley owns a 20-acre site at the north end of the Boardwalk and has been looking for a partner to develop the location.
"Pinnacle views Atlantic City as the next major market to expand their business, and with 30 million people within a three-hour driving range, we believe the market has considerable depth and potential despite new competition in the northeast," Deutsche Bank gaming analyst Elizabeth McNellis said.
She said Pinnacle could create a powerful Northeast gaming network if the company wins the license for one to two slot machine casinos planned for Philadelphia.
"Boyd Gaming's Borgata has proven that new investment in Atlantic City can be a success," McNellis said.
Borgata is a joint venture of Boyd Gaming Corp. and MGM Mirage.
CRT Capital Group gaming analyst Steve Ruggiero said displaced Sands customers will find their way into other Atlantic City properties.
"We also view this morning's announcement as a positive for all Atlantic City casinos in the short term; there will be more limited supply of product," Ruggiero said. "The Trump casinos, we expect, will be one beneficiary."
Pinnacle shares rose 20 cents, or 0.78 percent, Tuesday to close at $25.98 on the New York Stock Exchange.
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