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Best of Howard Stutz

Gaming Guru

Howard Stutz

Pinnacle Wows Street, Finds Aztar Bid Topped

3 May 2006

LAS VEGAS, NEVADA -- Regional casino operator Pinnacle Entertainment impressed Wall Street on Tuesday with double-digit financial results in the first quarter of 2006.

But the Las Vegas-based company's real prize may be slipping away.

Before its quarterly earnings announcement, Pinnacle found out that its quest to buy Tropicana parent Aztar Corp. had been officially topped by rival Columbia Sussex. Late Monday night, Aztar triggered a 72-hour clause in its merger agreement with Pinnacle, announcing that an all-cash offer of $50 a share from Columbia was a superior proposal to Pinnacle's.

Aztar and Pinnacle now have until Thursday to either amend or terminate their merger agreement.

If the agreement is broken, Aztar must pay Pinnacle a breakup fee of just under $50 million and cover the company's merger expenses up to $16 million.

"I know everybody wants to know if we're going to pay $100 a share for Aztar," Pinnacle Chairman and Chief Executive Officer Dan Lee said during a conference call with analysts and investors. "We're not. But we've got until Thursday night to choose how to respond. If we choose not to do anything, we'll have $66 million in our bank account Friday morning."

Pinnacle signed a merger agreement with Aztar on March 13 to buy the Phoenix-based company for $38 a share. Since that time, three different gaming companies and Pinnacle have made a total of a dozen offers for Aztar, the final being an estimated $2.56 billion bid by Columbia Sussex late Friday. Columbia Sussex, a privately held firm based in Kentucky, owns four Nevada casinos.

Some gaming analysts have advised Pinnacle, which has casinos in Louisiana, Indiana, Argentina and Reno, not to match the Columbia Sussex offer.

"We have plenty of capital," Lee said. "If we choose not to match the offer, the issue is shareholder value. Everything we've done is designed to get value for our shareholders. At the end of the day, that's what's important."

In its earnings statement, Pinnacle reported net income of $13.5 million or 28 cents a share in the quarter, compared with a loss of $2.2 million or 6 cents share in the first quarter of 2005.

Analysts polled by Thomson First Call estimated Pinnacle to earn 24 cents a share in the quarter.

Pinnacle's first-quarter revenue was $234.1 million, compared with $138 million in the first quarter of 2005, a 69.7 percent increase.

The jump was attributed to results at the L'Auberge du Lac in Lake Charles, La., which had revenue of $79.7 million. Revenue at Boomtown New Orleans climbed to $63.2 million in the quarter, a 111 percent jump compared with $30 million a year ago. The riverboat casino in the West Bank area of New Orleans continued to benefit from increased visitation by gamblers displaced following last year's hurricanes and construction workers involved in the rebuilding of the city.

The company's cash flow in the quarter, reported as earnings before interest, taxes, depreciation and amortization, was $59.6 million in the quarter, a 135 percent increase compared with $25.3 million a year ago.

"We're proud of the quarter and how the company is doing," Lee said. "The stock is up fourfold and we've created a lot of opportunity."

Shares in Pinnacle traded up most of the day Tuesday on the New York Stock Exchange, closing at $29.39, up 96 cents or 3.38 percent. More than 1.6 million shares were traded.

Gaming analysts thought Pinnacle executives were smart not to let on as to what would happen next with Aztar.

"They did a good job hedging themselves," said Adam Steinberg of Morgan Joseph, who has said that Pinnacle should drop out of the bidding war. "At these levels, they should just take the money. There will be a lot of other opportunities out there."

In a statement released early Tuesday, Columbia Sussex expressed confidence it would be able to close the transaction with Aztar, which operates the Tropicana casinos in Las Vegas and Atlantic City and smaller casinos in Laughlin, Missouri and Indiana.

"Columbia Entertainment obtained its first gaming license in 1990 and has been licensed and re-licensed numerous times in Nevada, Louisiana and Mississippi," according to the statement. "Aztar's unique assets and redevelopment opportunities will complement our strong portfolio of branded hotel and gaming properties, further strengthening our position as one of the leading owners, developers and operators of hotels, resorts and casinos worldwide."