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Howard Stutz
 

Report: Aztar Better if Broken Up

29 March 2005

LAS VEGAS -- A Wall Street gaming analyst believes struggling Aztar Corp. could have more value to its shareholders if the five-casino company, which includes the aging Tropicana, is broken apart and sold.

In a report last week to investors, Steven Ruggiero of CRT Capital Group said Phoenix-based Aztar has waited too long to capitalize on an anticipated redevelopment of the 34-acre Tropicana site and another gaming operator could step in and grab the potentially valuable real estate.

Aztar's value, based on its Monday stock price close, is $28.21. In a "sum-of-the-parts valuation," Ruggiero estimates a sale of the casinos would push Aztar's overall value to a little more than $32 a share, which excludes excess cash the company has on hand. That price is almost 14 percent higher than the Monday close.

Ruggiero also lowered his estimated first-quarter earnings for Aztar to 26 cents per share, well below the consensus from other analysts of 33 cents a share. Aztar will report quarterly earnings April 20.

"Ultimately, the shareholders are going to have to force a way to create value," Ruggiero said Monday. "It looks like the company could have a pretty ugly first quarter. At some point the institutional shareholders are going to have to increase pressure."

Joe Cole, an Aztar spokesman, said the company, as a matter of policy, doesn't comment on analyst reports.

Aztar also operates the Atlantic City Tropicana, which fronts the oceanside Boardwalk and recently opened a 200,000-square-foot nongaming expansion that includes restaurants, retail shops and entertainment venues.

Ruggiero said the expansion, which opened last fall, is expected to show value to the company by this year's third quarter.

Aztar also operates smaller casinos in Laughlin, Evansville, Ind., and Caruthersville, Mo.

The focus on Aztar has centered on the Tropicana, which sits on two contiguous 17-acre land parcels along the Strip and Tropicana Boulevard.

Aztar had planned to reveal renovation concepts for the Tropicana last year but put off an announcement until the end of this month. When the company reported quarterly earnings in February, management again delayed any announcement until this fall.

That news, along with disappointing earnings for the year, sent Aztar's stock price down almost 12 percent in one day.

Shares in Aztar traded at a 52-week high of $35.40 last November. Monday's closing was a 20.3 percent decrease from that yearly high and was a drop of 19 cents from last week's closing, or 0.67 percent.

Ruggiero said the Tropicana might be "the single most desirable location that may still be developed" on the Strip.

However, he questions whether Aztar is the company to build on that site.

The cost for new development on the Strip has increased dramatically since Aztar began exploring a Tropicana redevelopment. Wynn Las Vegas, which opens April 28, carries a $2.7 billion price, while the Palazzo next to The Venetian is being built at a cost of $1.6 billion.

"You look at what's going on around them and (a renovation) should have happened a while back," Ruggiero said Monday. "When you look at what's happened in the last decade, that property has clearly been left behind."

In 2004, the Tropicana generated pretax earnings of $36.2 million. Its neighbors had far more substantial pretax earnings last year. MGM Grand had $290.4 million; Mandalay Bay reported $232.8 million; New York-New York had $131.9 million, and Excalibur had $113.7 million.

"The opportunity cost of not developing this high profile Las Vegas location has been substantial," Ruggiero said.

Other analysts agreed.

"The questions really are: 'What do you build?' and 'Are you the right company to do this?' Those are the questions management is asking themselves right now," Susquehanna Financial Group's Eric Hausler said.

Brian Gordon of Las Vegas-based Applied Analysis said the debate on Strip land values, which range from $15 million to $20 million an acre, make the Tropicana a highly speculative play.

"Looking at the value of the current market conditions at the Tropicana, the land is what is truly drawing value to that company," Gordon said.

Ruggiero said a lack of possible buyers has also hurt Aztar's stock price.

"Many potential industry buyers are currently busy with other acquisitions or allocating capital to Macau and Las Vegas expansions," Ruggiero said.