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Best of Howard Stutz

Gaming Guru

Howard Stutz

As Dust Settles, Pinnacle declines

9 May 2006

LAS VEGAS, Nevada -- Investors reacted exactly as gaming analysts predicted Monday after having a weekend to comprehend the fallout from Pinnacle Entertainment's increased cost to buy the Tropicana's parent company.

Shares of Pinnacle, a Las Vegas-based regional casino operator, fell more than 5 percent on the New York Stock Exchange.

Nevertheless, analysts said they think Pinnacle's stock can regain its value once the company outlines its plans if the $2.58 billion deal for Aztar Corp. is completed.

"It is our opinion that if Pinnacle is successful with its new bid for Aztar it may still achieve our one-year price target of $37," CRT Capital Group gaming analyst Steve Ruggiero said Monday in a note to investors. "However, it will take investors time to develop confidence in the high price paid."

Late Friday, Pinnacle and Phoenix-based Aztar agreed to amend their original March 13 merger agreement for the fourth time. Pinnacle will pay $51 a share for Aztar -- $47 in cash and $4 in Pinnacle stock -- which includes assumption of the company's debt. Pinnacle's original agreement was for an all-cash transaction at $38 a share, or $2.1 billion.

The offer by Pinnacle was the 14th such bid since mid-March. Four different casino companies have made offers to buy Aztar, which operates five casinos: the Tropicanas in Las Vegas and Atlantic City and three smaller properties in Laughlin; Missouri; and Indiana.

"Near-term, the deal would be dilutive to earnings at this price," Davenport & Co. gaming analyst George Smith said in a note to investors. "We estimate the deal would dilute Pinnacle's 2007 earnings per share by 16 cents."

The companies also agreed to increase the termination costs Aztar would pay Pinnacle should the deal collapse; $55.2 million in a breakup fee and up to $25.8 million in legal expenses.

Aztar is expected to file the amended merger agreement shortly with the Securities and Exchange Commission. The filing will let the company to set a date for shareholders to vote on the buyout, possibly by this summer. Pinnacle shareholder approval is not required company spokeswoman Pauline Yoshihashi said.

"We still hope to close the transaction by the end of the year," she said.

Pinnacle would not comment directly on the Aztar matter. However, during a conference call last week to discuss quarterly earnings, company Chairman Dan Lee said gaming analysts look at the deal differently than the company.

Lee said buying Aztar would fit within the company's future growth plans.

"We're only going to do this if its generates shareholder value," Lee said during the conference call. "Clearly, $38 a share was a better price. If you manage your balance sheet wisely, you can build shareholder wealth. There are a lot of ways to communicate those numbers."

Ironically, both Pinnacle and Aztar have annual shareholder meetings scheduled for this week; Pinnacle in Las Vegas and Aztar in Phoenix. However, the buyout cannot be acted upon during the meeting other than a question-and-answer session.

Shares in Pinnacle fell to $28.49, off $1.63. Subsequently, shares in Aztar rose 60 cents to close at $50.12 on the New York Stock Exchange, up 1.4 percent.

Pinnacle's deal on Friday beat out an unsolicited all-cash offer of $50 a share by Kentucky-based Columbia Sussex Corp. The privately held company operates four casinos in Nevada; the off-Strip Westin, River Palms in Laughlin, and the Horizon and Caesars Tahoe in Lake Tahoe.

A spokesman for Columbia Sussex wouldn't comment on Aztar, but gaming analysts said they still think another offer could be coming.

"We believe Columbia is likely to strike back," Smith said. "Press reports have indicated Columbia would be willing to up its offer if necessary. While this may have been posturing aimed at dissuading Pinnacle from making another bid, Columbia has been the most aggressive of the bidders and seems very intent on winning."

If Columbia Sussex outbids Pinnacle again, gaming analysts hope company executives will take the possible $81 million in termination fees.

"We hope this is the company's last effort and would not expect it to go higher," Smith said. "Assuming it ultimately lost to Columbia, Pinnacle could walk away with a very handsome breakup fee and pursue other opportunities."

Lee last week toured the Sahara, another possible takeover target.

"The company clearly wants a Las Vegas presence, which makes strategic sense longer-term," Smith said.

"However, by pushing the envelope any further, management may cause investors to question its financial discipline."