Pinnacle Boosts Bid for Aztar

LAS VEGAS – At the outset of the quarterly earnings conference call by Aztar Corp. Wednesday, analysts and investors were told company officials would not answer questions about the flurry of acquisition interest directed at the Phoenix-based owner of the aging Tropicana.

That decision shortened the call considerably as only two innocuous questions were asked.

Analysts had more interest in what took place earlier Wednesday, when the bidding war for Aztar took another twist.

Pinnacle Entertainment, which already had a signed agreement to buy Aztar for more than $2 billion, increased its offer by $5 per share. In all, Las Vegas-based Pinnacle said it would pay $43 a share for Aztar's outstanding stock and assumption of the company's debt, a deal valued at $2.27 billion.

In addition, Aztar agreed to amend its merger agreement with Pinnacle, but leaving unchanged a termination fee of $42 million and termination expenses of up $13 million, if the deal were to fall through.

The offer exceeds Colony Capital's reported $41 a share bid for Aztar, and matches the proposal by Ameristar Casinos. However, the bid is still below the $47 a share bid that was announced Monday by Columbia Sussex Corp.

Aztar officials have said they would evaluate the offers from all three companies.

Neither Aztar nor Pinnacle had any comment beyond their pre-market opening statements.

Interest in Aztar has soared since March. The company is viewed as a valuable acquisition target because it operates casinos in the major gaming capitals, Las Vegas and Atlantic City, as well as smaller properties in Laughlin, Missouri and Indiana.

The real estate housing the deteriorating Tropicana, which sits on 34 acres along the Strip, is driving the interest, according to gaming analysts.

Companies such as Pinnacle and Ameristar, which don't operate casinos in Las Vegas or Atlantic City, would acquire a competitive foothold in both markets by buying Aztar.

While Pinnacle's offer is still below the price tendered by Columbia Sussex, analysts believe it could be superior. According to a report in the Wall Street Journal, Aztar's board of directors may have concerns about possible difficulties Columbia Sussex may face from gaming regulators.

Last year, Columbia Sussex withdrew an application for a Missouri gaming license when it had a contentious go-round with state casino regulators. The company had agreed to purchase the President Casino in St. Louis for $57 million but backed out of the deal because it believed efforts to obtain a Missouri gaming license would be unproductive. Pinnacle Entertainment eventually agreed to buy the riverboat casino.

"Notwithstanding Pinnacle's $43 per share bid, which is lower than the Columbia Sussex bid, Pinnacle's bid may represent the better outcome for Aztar owing to potential licensing concerns or committed financing issues," CRT Capital Group gaming analyst Steve Ruggiero said in a note to investors.

Morgan Joseph gaming analyst Adam Steinberg said he believes Pinnacle could pay up to $48 a share for Aztar and still be able to increase to the company's 2007 earnings per share.

"We have also been consistent in saying that we would have to re-evaluate our investment thesis on Pinnacle if it were to go much above $43, given our concerns about returns on the Las Vegas Strip," Steinberg said in a note to investors.

"(If) Pinnacle were to go higher, we would be less enthusiastic about the transaction, as we do not believe Pinnacle would be well-positioned to pursue its existing growth initiatives and invest in the Aztar properties," he said.

Still, Steinberg thought the bidding war was far from over.

"We are not entirely convinced that the fat lady has sung with regards to negotiations, and we have not ruled out higher offers from Colony Capital or Ameristar Casinos," Steinberg said.

Aztar said poor results at the Tropicana drove down earnings in the first quarter, which ended March 31. During its year-end conference call in February, the company said it was looking at closing the Tropicana in favor of a $1.2 billion redevelopment. In the wake of the bidding on the company, those plans have been scrapped.

During the first quarter, Tropicana revenues fell to $40.9 million from $42.2 million a year ago, a 3 percent drop. Cash flow, described as earnings before interest, taxes, depreciation and amortization was $9.6 million, compared with $11 million a year ago.

"Results at Tropicana Las Vegas were hampered by a variety of operating issues, including customer concern and reaction to the potential closing of the property in anticipation of redevelopment," Aztar Chairman and Chief Executive Robert Haddock said. "Now that redevelopment has been deferred, we anticipate that Tropicana Las Vegas will be able to resume its normal operating pattern."

Because the company ended its Tropicana redevelopment plans, Aztar wrote off $26 million in capitalized development costs for the Strip property.

As a whole, Aztar earned 8 cents per share during the quarter, compared with 27 cents per share a year ago. Analysts polled by Thomson Financial predicted earnings of 38 cents per share. Net income for Aztar was $3.2 million, off from $9.9 million in the first quarter of 2005.

The company reported revenue of $228.6 million compared with $223.3 million a year ago, driven largely by results at the Tropicana Atlantic City. The Boardwalk casino had $116.7 million in revenue, compared with $111.7 million a year ago and cash flow grew to $31.2 million, compared with $21 million a year ago, a 32 percent increase.

The company announced earnings after the stock market closed Wednesday. Shares in Aztar finished at $45.95 in trading on the New York Stock Exchange, down 30 cents or 0.65 percent.