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Howard Stutz

Pinnacle Advised to Halt Aztar Bidding

12 May 2006

LAS VEGAS, Nevada -- Investors and Wall Street analysts had a message Thursday for the management of Las Vegas-based Pinnacle Entertainment.

Get out of the bidding for Aztar Corp.

After rival gaming company Columbia Sussex Corp. raised the ante for ownership of the Tropicana casinos in Las Vegas and Atlantic City late Wednesday to $2.64 billion, most thought it would be wise for regional casino operator Pinnacle to cash in its chips.

"While Aztar would bring geographic diversity and a Las Vegas presence, the price simply seems to have gotten too rich," Davenport & Co. gaming analyst George Smith said Thursday in a note to investors.

Aztar's board of directors has until Wednesday to decide if it wants to accept Columbia Sussex's all-cash offer of $53 a share. Pinnacle has a signed agreement to buy Aztar for $2.58 billion, or $51 a share ($47 in cash and $4 in Pinnacle stock).

The latest offer by Columbia Sussex, which operates eight casinos, including four in Nevada, was the 15th for Aztar since March 13, when Pinnacle agreed to a $2.1 billion buyout of Aztar at $38 a share.

If the board deems that Columbia Sussex's bid is superior, Pinnacle has 72 hours to match or better the offer. If the Aztar-Pinnacle deal collapses, Aztar must pay Pinnacle $52.2 million as a break-up fee and cover up to $25.8 million in legal expenses.

Some thought Thursday that the sides in the bidding war should call a truce.

"I have never seen this happen to this extent," CRT Capital Group gaming analyst Steve Ruggiero said of the back and forth bidding war. "It's like watching a tennis match."

Most analysts thought Pinnacle, which owns casinos in Reno, Louisiana, Indiana and Argentina, should not make another a bid and take the breakup fee from Aztar if Columbia Sussex's offer is accepted.

Pinnacle could explore other possible casino purchases on the Strip, and the company is spending $800 million to build two casinos in St. Louis. Pinnacle Chairman Dan Lee recently toured the Sahara, which is reportedly being shopped by commercial real estate company CB Richard Ellis.

Investors also thought Pinnacle should get out of the Aztar deal, based on the company's performance on the New York Stock Exchange on Thursday. Shares of Pinnacle traded higher most of the day, closing at $28.93, up 45 cents or 1.58 percent.

Analysts said investors expect the breakup fee to be worth as much as $1 a share in earnings to the company.

"We believe many Pinnacle investors may greet this news positively," Smith said. "We do not expect Pinnacle to go any higher. As evidenced by the stock's recent performance, many had grown wary of stretching for Aztar. While Pinnacle stretched a bit for Aztar, we do not believe it was reckless or went far enough for investors to question the company's financial discipline."

Many analysts think $53 a share is too much to pay for Aztar, which also has three smaller casinos in Laughlin, Indiana and Missouri.

In 2005, the Tropicana in Las Vegas had revenue of $163.8 million, 1 percent more than in 2004. Meanwhile, the Tropicana in Atlantic City drove Aztar, with revenue of $490.1 million, a 27 percent increase from the prior year.

The 34-acre Las Vegas Tropicana site, which fronts a long stretch of the Strip real estate across from Excalibur, is the prize in the deal. Before announcing its deal with Pinnacle, Aztar said it would tear down the Tropicana and build a $1.2 billion hotel-casino on 17 acres of the site.

John Knott, senior vice president of the CB Richard Ellis Global Gaming Group, said the Tropicana site is valued at between $25 million and $28 million an acre.

Gaming analysts thought the $2.64 billion price for the company was excessive.

"Columbia Sussex is making a play on the mineral, natural gas and oil rights beneath the Las Vegas 34 acres," Ruggiero joked. "As a private company, we can't really follow them. So we don't know what their thoughts are on this."

A spokesman for Columbia Sussex wouldn't comment on any aspects of the Aztar deal.

Aztar confirmed in a statement it had received the offer from Columbia Sussex but said the company's board of directors was still considering the bid.

The Wall Street Journal reported that Columbia Sussex has deposited $300 million in a bank account payable to Aztar should a signed agreement fall apart.

If the deal takes longer than six months to be completed after signing an agreement, Columbia Sussex agreed to increase the purchase price by almost one penny a share each extra day it takes to close the transaction.

Analysts wondered if Columbia Sussex could close the transaction. There has also been speculation on the company's plans for the Tropicana site.

Columbia Sussex's four Nevada casinos are Caesars Tahoe and the Horizon in Lake Tahoe, River Palms in Laughlin and the off-Strip Westin.

"The real question is whether or not Columbia's offer will be accepted," Smith said. "Aztar has stated it will consider Columbia's ability to not only close the deal, but close in a timely fashion. Some have expressed doubts about Columbia's ability to get gaming licenses given its past experience in Missouri."

Last year, Columbia Sussex dropped its bid to purchase the President Casino in St. Louis after several contentious meetings with Missouri gaming regulators.

Meanwhile, shares in Aztar again reached a 52-week high on news of the Columbia Sussex offer.

Trading around $30 a share in early March, Aztar closed Thursday at $51.59, up $1.70 or 3.41 percent.

Gaming analyst David Katz on CIBC World Markets wondered if the price for Aztar could still increase.

"The bidding could continue, as it is not clear to us that either party has reached an absolute maximum or that it is in Aztar's interest to conclude the process," Katz said in a note to investors. "Our view is that the (Columbia Sussex) offer is not materially greater than the prior offer from Pinnacle irrespective of it being all cash."