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Howard Stutz

FTC questions Pinnacle Entertainment's bid for Ameristar Casinos

30 May 2013

Pinnacle Entertainment, Inc.’s $2.8 billion buyout of Ameristar Casinos, Inc. is in jeopardy after the Federal Trade Commission said the deal violates U.S. antitrust law.

In a 17-page administrative complaint issued Wednesday, the FTC said the merger between the two Las Vegas-based regional casino operators “would reduce competition” in St. Louis and Lake Charles, La.

The FTC halted the deal until a hearing in front of an administrative law judge can be held in October. The companies hoped to finalize the merger, which was announced in December, by the end of the summer.

Pinnacle CEO Anthony Sanfilippo said the casino operator was “disappointed” by the FTC’s opinion. He said the transaction would benefit “guests, team members and shareholders” of both companies.

Ameristar stockholders approved the transaction this month and will receive $26.50 per share once the deal is finalized.

“We continue to believe that the merger of these two gaming entertainment property portfolios would not have any adverse effect on competition in any of the geographies in which the combined company would operate,” Sanfilippo said.

Nevada gaming regulators signed off on the transaction earlier this month, pending FTC approval. Gaming Control Board Chairman A.G. Burnett said the FTC concerns didn’t involve Nevada, but regulators could recall Pinnacle for additional licensing if anything were to change.

The transaction would double the size of Pinnacle, giving the company 17 gaming properties plus one resort under development. Pinnacle owns casinos in Louisiana, Missouri and Indiana and racetracks in Ohio and Texas and is acquiring eight properties in Missouri, Iowa, Colorado, Mississippi, Indiana and Northern Nevada.

As part of the deal, Pinnacle will take over Ameristar’s two casinos, Cactus Pete’s and the Horseshu, in Jackpot near Northern Nevada’s border with Idaho.

In its ruling, the FTC said Pinnacle could sell two casinos — one each in St. Louis and Lake Charles — to complete the transaction.

“We would be open to considering the divestitures in St. Louis and Lake Charles,” FTC attorney Alexis James Gilman said. “We would have to be satisfied with the remedy.”

Pinnacle owns two of the four casinos in the St. Louis market: Lumiere Place and River City. The company would acquire Ameristar St. Charles, which is near St. Louis, through the buyout. The fourth casino, Hollywood St. Louis, is owned by Penn National Gaming.

The FTC also took into account two casinos across the Mississippi River in Illinois that draw customers from St. Louis.

According to the FTC, Pinnacle and Ameristar’s combined market share in St. Louis is 88.3 percent, which would “make the transaction presumptively unlawful in that market.”

In Lake Charles, Pinnacle owns one casino-resort, L’Auberge, and would acquire Ameristar’s under-construction $500 million hotel-casino.

“The new casino will be Pinnacle’s closest and most significant competitor,” the FTC said. The agency said the merger would hurt the three other casinos in the area: Isle of Capri Lake Charles, a racetrack casino owned by Boyd Gaming Corp. and an Indian casino.

“The proposed deal would reduce competition and lead to higher prices and lower quality for customers in the St. Louis and Lake Charles areas,” the FTC said in a statement.

According to the FTC, both markets have significant barriers to entry for a new casino. Missouri and Louisiana have a limited number of casino licenses, and all the available licenses have been issued in each state.

“In addition, state laws and regulations limit the expansion of existing facilities,” the FTC said.

The news, which announced before the stock markets closed, was not a surprise to investors. The FTC requested additional information on the buyout a month ago, and Pinnacle complied.

RBC Capital Markets gaming analyst John Kempf said he expects Pinnacle won’t give up on the buyout, even if it means disposing of two casinos, potentially at a loss.

“There are still substantial benefits for Pinnacle from the merger even with the proposed disposition of two assets,” Kempf told investors. “In addition, we do not expect a change in the Ameristar acquisition price, given the recent increase in gaming multiples and the risk of shareholders not approving the deal at a lower price.”

Kempf said selling the casino could eliminate a significant portion of the $40 million in anticipated cost savings.

Pinnacle shares closed at $18.92, down $1.70, 8.24 percent, on the New York Stock Exchange on Wednesday. Ameristar shares fell 39 cents, 1.46 percent, to close at $25.91 on the Nasdaq Global Select.