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Howard Stutz

Offers For Aztar Just Not Enough

3 April 2006

Gaming observers said Friday they believe Las Vegas-based Pinnacle Entertainment will have to increase its $2.1 billion offer to buy Aztar Corp., or settle for about $55 million in compensation to walk away from the deal and potential ownership of the Tropicana.

Pinnacle's signed deal of $38 a share for Phoenix-based Aztar was apparently trumped by Colony Capital, a privately held real estate investment firm that owns six casinos through Resorts International, including the Las Vegas Hilton.

The Wall Street Journal reported on its Web site Thursday that Colony Capital had offered $41 a share for Aztar, a deal worth $2.25 billion, sending shares of Aztar up nearly 9 percent.

Nothing has been publicly disclosed about the proposal. Company representatives at Colony, Aztar and Pinnacle would not comment on the matter Friday.

Sources said that Aztar's board of directors was to have met Friday or would meet over the weekend to discuss the Colony Capital proposal.

"It seems they would have to take the highest offer (for the company)," said one gaming industry source.

If Aztar accepts the Colony offer, it will be up to Pinnacle Entertainment to either raise its purchase price or accept a breakup fee of $42 million, along with $13 million for reimbursement of expenses.

Reaction on Wall Street tended to lean toward Pinnacle Entertainment raising its offer to anywhere from $42 to $45 a share for Aztar, which also owns the Tropicana Atlantic City and small casinos in Laughlin, Missouri and Indiana.

"The market seems to think that there will be a chance for a counteroffer, but it's really just wait and see what happens," said Susquehanna Financial Group gaming analyst Brian McGill.

Heavy trading on Aztar stock continued Friday. After jumping $3.37 Thursday when more than 3.7 million shares were traded on the New York Stock Exchange, Aztar closed Friday at $41.99, down 43 cents, or 1.01 percent. More than 5 million shares were dealt during the session.

"A higher counteroffer from Pinnacle Entertainment is anticipated by the market," CRT Capital Group gaming analyst Steve Ruggiero said. "Our model indicates that Pinnacle could still acquire Aztar in an all-cash deal for $42 per share."

Pinnacle Entertainment operates casinos in Reno, Louisiana, Indiana and Argentina. The company also has a closed casino site in Mississippi and is building casinos in St. Louis and the Bahamas.

The company viewed the Aztar purchase as a way to gain properties in the two major gaming jurisdictions -- Las Vegas and Atlantic City.

One of the keys to the transaction is the 34-acre Tropicana Las Vegas site. Pinnacle Entertainment had said it would invest some money into cleaning up the Tropicana and would operate the hotel-casino for at least two years before imploding the buildings and constructing a new resort.

McGill said recent news out of Atlantic City could also be a factor; the Philadelphia Inquirer reported Friday that Hard Rock International was looking at building a $1 billion hotel-casino in Atlantic City on the opposite end of the Boardwalk from the Tropicana.

"Knowing that there could be another development could also play into the matter," McGill said. "(Pinnacle Chairman) Dan Lee believes in the Harrah's model about sending your best regional customers to your properties in Las Vegas or Atlantic City. I think there is going to be a lot of evaluating going on this weekend."

McGill estimated that bringing the price to $44 or $45 a share would add $200 million or more to the deal.

Los Angeles real estate investor Tom Barrick oversees Colony Capital, a $6 billion private-equity fund that operates its casinos through Resorts International. Barrick was licensed in November by Nevada gaming regulators.

Since 2003, Colony Capital has made a push into the gaming industry. The company bought Resorts, Atlantic City's first casino, for $140 million, following up with a $280 million purchase of the Las Vegas Hilton and its 59-acre site on Paradise Road for $280 million.

The company's largest investment came in 2005. As Harrah's Entertainment was buying out Caesars for $9 billion, the companies needed to divest casinos that could have federal antitrust implications.

For $1.2 billion, Colony Capital bought two casinos in Mississippi, a riverboat casino in Illinois and the Atlantic City Hilton. Since the transaction closed this year, two of the casinos, in Tunica, Miss., and East Chicago, Ill., have been given the Resorts name.

Nick Ribis, a former attorney who made a mark on the gaming industry in the late 1980s and early 1990s when he oversaw Donald Trump's Atlantic City casino empire, oversees Resorts International. In June, Fortune magazine called Resorts the nation's largest privately held gaming company and the fifth-largest gaming company, based on the properties it controlled.

In November, Ribis said having all the casinos organized under the Resorts International banner makes it easier to raise equity capital for improvements and expansion projects. The organization also improved Resorts International's ability to compete in buying power with Harrah's Entertainment and MGM Mirage, the world's largest gaming companies, he added.