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Pinnacle's casino development in Vietnam in jeopardy

13 November 2012

Pinnacle Entertainment, Inc.'s $114 million investment in a casino development in Vietnam is in jeopardy after it was disclosed the development company in charge of the project is in default.

The Las Vegas-based regional casino operator disclosed the issue in the company's quarterly earnings filing Friday with the Securities and Exchange Commission.

Pinnacle disclosed that Asian Coast Development Ltd., which is based in British Columbia, Canada, is currently in default of deadlines for the completion of the initial phase of the Ho Tram Strip complex near Ho Chi Minh City.

Investors reacted strongly to the news. Shares of Pinnacle, traded on the New York Stock Exchange, were off as much as 7 percent early Monday. Pinnacle's stock closed at $11.73 down 82 cents or 6.53 percent.

Pinnacle, which acquired 26 percent of the development company in August 2011, said in the SEC filing a change was being sought with the Vietnamese government for new deadlines.

"It is not clear what would happen if the first phase is not completed, including what actions the Vietnam government might take in such event," Pinnacle wrote in the SEC filing. "If the first phase is not completed, this would have a negative impact on our investment ... and we could lose our entire investment."

Because of the default, Vietnamese banks backing $175 million in a credit arrangement to build the venture have suspended funding until a new agreement with the government is struck.

Analysts worried Monday that Pinnacle might be forced to invest more money in the venture some had questioned from the outset. Construction is currently ongoing, but could be halted until the financing issue is resolved.

Macquarie Securities gaming analyst Chad Beynon said he would most likely revise the value he has given to the project in his analysis of Pinnacle.

He didn't believe the problems in Vietnam would hurt the company's U.S. development projects, such as construction of a slot machine-only casino at the River Downs Racetrack in Cincinnati, Ohio.

"In our view, we are not assuming that Pinnacle would infuse any additional capital into the project," Beynon said.

Pinnacle's investment in Vietnam seemed out of character at a time for the company, which built itself as a regional casino operator, with two properties in St. Louis, a casino in Indiana and four casinos in Louisiana, including the $358 million L'Auberge Baton Rouge, which opened in September.

At the end of October, Pinnacle said it was close to selling a 19-acre site on the Atlantic City Boardwalk, where the company had planned to build a $2 billion hotel-casino before the economy tanked.

Deutsche Bank gaming analyst Carlo Santarelli said he wouldn't be surprised if Pinnacle lost its entire investment in the Vietnam development.

"We expect news flow around this project to get worse before it gets better," Santarelli told investors.

JP Morgan gaming analyst Joe Greff said he expects Pinnacle's stock price to take a hit because of the announcement, but that wouldn't change his overall view of the company.

"While the full loss or write-down of its investment would be a negative event, importantly, we point out that the full loss would be only a minor drag on our year-end 2013 price target," Greff told investors.