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Best of Howard Stutz

Gaming Guru

Howard Stutz

Deals on the Strip: Bidding War for Aztar Flares Again

25 April 2006

Wall Street analysts who follow the casino industry are growing weary of the bidding war for the Tropicana's parent corporation. But they also don't see an end to the hostilities.

The latest skirmish came Monday when Las Vegas-based Pinnacle Entertainment boosted its offer for Aztar Corp. by $2 a share, amending for the second time the March 13 merger agreement between the two casino companies. The $45 per share offer for Aztar matched an offer tendered Friday by rival regional gaming operator Ameristar Casinos, which has raised its bid three times.

Factor in a $41 per share offer by Las Vegas Hilton owner Colony Capital and a $47 a share bid by Kentucky-based Columbia Sussex, and eight different bids have been tendered for Aztar since mid-March.

"It's getting to a point where every morning, you're not surprised to see another bid on the ticker," said Susquehanna Financial Group gaming analyst Brian McGill. "We'll have to wait and see what comes out of the discussions between Columbia and Aztar. That's the sleeper in this whole process. And Colony is just sitting on the sidelines being very quiet."

Gaming observers said the bidders may be nearing a point of overpaying for Aztar, which operates a Las Vegas casino, a resort in Atlantic City and three smaller casinos in Laughlin, Missouri and Indiana.

Aztar's board of directors has said it would discuss the different proposals with each company.

Many expect Colony Capital and Columbia Sussex, both privately held, well-financed firms, to increase their respective bids in an attempt to close out publicly traded Pinnacle and Ameristar.

"With its latest offer we believe Pinnacle is essentially the preferred bid again, and Ameristar and/or Colony will have to increase their bids above this level if they expect to win," J.P. Morgan Securities gaming analyst Mario Kontomerkos said in a note to investors.

"We believe higher bids will be announced over the next few days. We believe both Pinnacle and Ameristar are close to reaching their best and final offers," Kontomerkos said.

Most believe Pinnacle, which generated $726 million in revenue in 2005 through its properties in Indiana, Louisiana, Argentina and Reno, has an edge because of its signed merger agreement with Aztar.

The companies amended that agreement Monday to increase a break-up fee that Aztar would pay Pinnacle should the deal fall through. If the merger agreement collapses, Aztar would pay Pinnacle $49.6 million as a termination fee and cover up to $16 million in expenses.

Analysts have viewed a buyout of Aztar as a positive for Pinnacle. The deal would give the regional casino operator footholds in Las Vegas and Atlantic City.

Pinnacle had previously announced it would operate the Tropicana for at least two years before demolishing the existing hotel-casino complex in favor of an estimated $3 billion redevelopment.

One gaming analyst thought Pinnacle's $45 a share bid was the end of the company's rope.

Adam Steinberg of Morgan Joseph downgraded Pinnacle's stock from "buy" to "hold," saying the Aztar assets would drive down the value of Pinnacle's at that particular purchase price.

"While we still believe the acquisition can be accretive to 2007 earnings for Pinnacle Entertainment, we can no longer support the acquisition at these levels, as we believe inclusion of the Aztar assets creates no value for Pinnacle shareholders," Steinberg said in a note to investors.

CRT Capital Group gaming analyst Steve Ruggiero, however, thought Pinnacle's offer of $45 a share was still a good deal.

"Our model indicates that the transaction is neither accretive nor dilutive to Pinnacle Entertainment based on an all cash deal and our 2006 pro forma operating income assumptions," Ruggiero said. "We believe that the merger of Pinnacle with Aztar would be a long-term positive ..."

For the same reasons as Pinnacle, analysts said buying Aztar makes sense for Ameristar, which had gaming revenues of $961 million in 2005 through its casinos in the Northern Nevada town of Jackpot as well as Colorado, Mississippi and Missouri.

"Whoever loses out is going to have to find some other vehicle for growth," McGill said. "There is not a lot left to acquire in Las Vegas."

While Columbia Sussex has the highest bid at $47 a share, the company, which operates four Nevada casinos including the Westin and Caesars Tahoe, has yet to produce a letter showing a financial commitment to fund the purchase, analysts said.

"The bids lower than the $47 offer from Columbia indicate that operators believe licensing could pose a difficulty in that proposal," Deutsche Bank gaming analyst Marc Falcone said. Last year, Columbia dropped a bid to buy a casino St. Louis after contentious meetings with Missouri gaming regulators.

"Other bidders could still make offers, and Pinnacle maintains right of last bid due to its original agreement with Aztar," Falcone said.

Monday's events played out in trading on Wall Street. On the New York Stock Exchange, shares in Aztar closed at $46.34, down a penny or 0.02 percent, while Pinnacle shares were off $1.59 to close at $29.38, down 5.13 percent.

On the Nasdaq National Market, shares of Ameristar closed at $25.60, up 16 cent or 0.63 percent.