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Best of Liz Benston

Gaming Guru

Liz Benston

Potential Buyers List for Harrah's, Caesars Properties is Growing

3 August 2004

Midsize casino companies nationwide as well as relative unknowns are expected to join a long list of potential buyers for assets that will be sold should the MGM MIRAGE-Mandalay Resort Group and Harrah's Entertainment Inc.-Caesars Entertainment Inc. mergers go through, analysts say.

Harrah's -- which is acquiring a more widely dispersed array of casinos from Caesars that overlap with its existing properties -- is likely to sell more casinos than MGM MIRAGE in its bid for Mandalay, however, they say.

Midlevel casino operators Boyd Gaming Corp., Ameristar Casinos Inc., Isle of Capri Casinos Inc., Penn National Gaming Inc., Argosy Gaming Co. and Pinnacle Entertainment Inc. could be among a long list of interested buyers of Harrah's or Caesars casino assets, analysts say. All of the companies but Penn National, which is building a resort in Louisiana and has bids to develop two more around St. Louis, are known as active buyers, they say.

Meanwhile, the capital markets are receptive to financing casino purchases and several companies have enough cash on their books to buy, analysts say.

The majority of assets acquired in the MGM MIRAGE-Mandalay deal will be in Las Vegas, a market that may survive regulatory scrutiny, analysts say. MGM MIRAGE executives also say they don't want to sell off any properties unless they are forced to. MGM MIRAGE and Mandalay each own a casino in Detroit, where state law prevents the ownership of two or more casinos. MGM MIRAGE spokesman Alan Feldman said the company isn't entertaining offers on the casino because any sale would be contingent on the deal receiving final approvals and because the companies are focused instead on providing information to federal regulators.

Harrah's Chief Executive Gary Loveman has said the company will likely sell casinos in Indiana and Tunica, Miss., and potentially in Lake Tahoe. Regulators may also force the sale of casinos in Atlantic City, where Harrah's would own five of 12 casinos, officials say.

Some analysts say those sales and others could add up to as much as $1 billion worth of assets. Some of those sales could come before the deal is expected to close a year from now, they say.

Selling off assets beforehand could help Harrah's maintain its investment-grade bond rating by appeasing rating agencies that will be scrutinizing the company's debt in the months to come, analysts say. It could also give Harrah's more leverage in a transaction than if the company was forced by regulators to sell off particular assets, they say.

Harrah's spokesman Gary Thompson declined to comment on which assets the company might sell or how much they might be worth.

Jefferies & Co. analyst Ray Cheesman said Harrah's may unload casinos in many states while keeping properties in three core markets: Las Vegas, Atlantic City and Mississippi. Harrah's has identified these three areas as stable regulatory environments that have the greatest growth potential, he said. Antitrust concerns may lead regulators to force the sale of assets in Tunica, Miss., where the company would eventually own five of 10 casinos in the region, he added.

Cheesman said the company might also sell off casinos in Lake Tahoe as well as unload the Reno Hilton and Harrah's Reno properties, which have been hurt by competition from California casinos.

Bear, Stearns & Co. bond analyst John Mulkey said Harrah's may sell its casino in East Chicago, Ind., because the Caesars Indiana casino is part owned by another entity and because the East Chicago location may warrant a higher price.

In a research note last month, Mulkey said likely buyers for the Indiana property would include Ameristar Casinos Inc., Isle of Capri Casinos Inc., Boyd and Penn National.

Penn National has a strong balance sheet for acquisitions, Ameristar has no casino in the market and Isle of Capri is interested in Chicago, where the company recently won a state bid to develop a casino, Mulkey wrote.

Harrah's also may sell a casino in Atlantic City, though it's less clear which one, Mulkey said. The company's Showboat property might be a likely candidate because it was recently refurbished and could fetch a high price, he said.

Several companies are in a position to acquire assets even as they eye casino projects in markets as diverse as Pennsylvania, Florida, Ohio, Nebraska and the United Kingdom, analysts say.

Boyd has a history of buying single assets at relatively depressed prices and then fixing them up, said Joe Greff, a gaming analyst with Fulcrum Global Partners.

"I actually don't think they need to get bigger. They have enough growth development opportunities" on their plate, Greff said. Still, larger companies with greater cash flow are better positioned to take advantage of new projects, he said.

Boyd spokesman Rob Stillwell said the company is pursuing at least four major construction projects at existing casinos and is also crafting plans to expand its Borgata resort in Atlantic City.

Buying new assets "would depend on what was in play and we don't know that yet," he said.

Harrah's sold its Shreveport hotel-casino to Boyd in May to alleviate antitrust concerns by Louisiana regulators. Federal regulators approved the purchase last month.

Greff calls Argosy a "prime candidate" for acquisitions because the company is an active buyer of assets and has been "hoarding cash" for future purchases.

During the company's second-quarter earnings call last week, Argosy Chief Executive Dick Glasier said the company is studying "four or five markets" that it might want to buy into through merger spinoffs but declined to elaborate on locations.

The company has the financial flexibility to increase its debt load "for a short period of time" if the price of the casino is right, Glasier said.

"The sweet spot for us would be to take an underperforming asset at the right price. There will be some of that opportunity I think in the next couple of quarters that we will look at closely," he said.

"For us it's going to come down to price and whether we can drive value for shareholders," Argosy spokesman Jim Wise said. "We're not going to get in a bidding war. But we're a six-property company. There's a lot of places we're not in, and we can go in any number of different directions."

Penn National Gaming Inc., whose stock surged on favorable earnings growth, has been stockpiling cash to build three potential casinos -- two in Pennsylvania and one in Maine. But the company has been relatively silent on its interest in casino assets, with executives declining to comment on the issue during the company's second quarter conference call.

A company spokeswoman also declined comment on specific opportunities. "Penn National Gaming is an aggressive growth company that continually looks at all available gaming opportunities in the country," spokeswoman Amanda Garber said.

Ameristar Casinos Inc. Chief Executive Craig Neilsen said the company will acquire or develop its own casinos depending on "the approach that yields us the highest growth potential."

"Whether we buy or build is a question we continue to debate. I think the answer is we're seriously looking at both alternatives," Nielsen said during the company's second quarter earnings call last week.

Isle of Capri Chief Executive Tim Hinkley said his company will examine assets that end up for sale.

While the company, like some of its midsize peers, is concentrated in the riverboat casino market in the Midwest and South, Hinkley said his company will "keep an open mind" about assets in other markets such as Las Vegas or Northern Nevada.

"We're not averse to operating in Nevada though we've concentrated our assets primarily in the Midwest," he said.

Phoenix-based Aztar Corp., which owns the Tropicana hotel-casino in Las Vegas, may not be in the running for new casino assets from any of the merger candidates, analysts say.

During a recent second quarter conference call, Aztar Chief Executive Paul Rubeli said the company hasn't historically grown through acquisitions and has chosen instead to focus on redeveloping its core properties in Las Vegas and Atlantic City.

"If they wind up selling what they don't want, why would we want to buy it?" Rubeli said.

Pinnacle Entertainment Chief Financial Officer Steve Capp said his company has traditionally grown by developing rather than acquiring casinos because "we can build them for far cheaper than we can buy them."

That said, the company is interested in acquisitions "at the right price" and wouldn't exclude any particular region from consideration because of the company's geographic diversity, Capp said.

Don Barden, the Detroit-based owner of the Fitzgeralds hotel-casino in downtown Las Vegas and three other properties nationwide, said he also would buy for the right price but wouldn't necessarily be any more interested in his hometown of Detroit than any other location where a casino might be for sale.

"There are great opportunities coming available other than Detroit," he said.

Besides expected casino bidders, analysts say the asset sales will attract an unprecedented number of private equity groups and other new blood to the casino business.

"The casino industry is still a relatively young industry," Greff said. "There will be a lot of people potentially displaced with these potential acquisitions that could partner up, leverage their access to capital and expertise in the gaming industry."

Only a few bidders will end up making the cut because of the regulatory and financial barriers involved in casino purchases, Barrick Gaming Corp. President Stephen Crystal said. Barrick, a startup company that purchased four downtown Las Vegas casinos this year, has made general overtures to both MGM MIRAGE and Harrah's about buying assets.

"You're talking about a handful of companies at the end of the day," Crystal said.

Potential Buyers List for Harrah's, Caesars Properties is Growing is republished from