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Rod Smith

Mergers and Acquisitions: With Boyd Deal, Stability

10 February 2004

The $1.3 billion merger between Boyd Gaming Corp. and Coast Casinos is likely to help jump-start redevelopment of the Stardust as a world-class resort and stabilize the locals casino market in Las Vegas, Wall Street analysts and industry experts said Monday.

Goldman Sachs analyst Steve Kent called the transaction a "transforming" event for Boyd that will position the company to take advantage of future growth opportunities.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said a key to the deal is that it will help Boyd raise money to redevelop the 50-acre Stardust site without having to seek a partner.

University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said the deal is being driven mainly by Wall Street and will prove good for Las Vegas because it will boost financing for local development projects.

"This will be good if their endgame is more development on the Strip. That'll do something for the local economy even though locals casinos won't," he said.

The merger, announced Monday, should help Boyd attract investors by improving the company's profile and enabling the fund-raising needed to build a resort on the 50-acre Stardust site that can compete with Wynn Las Vegas and the new resort planned at The Venetian, Wall Street analysts said.

Boyd Gaming President Don Snyder said the transformed company will "move forward in a broader way than it has in the past" and will develop "much more exciting plans for the Stardust property" than it could have on its own.

Snyder added that the size of companies matters to Wall Street and that debt markets, for now, are looking very favorably on the gaming industry in general and project financing in particular.

Together, the emerging company, which will retain the Boyd Gaming name, will have revenues of about $2 billion and will operate 17 properties with 9,050 rooms nationwide. In Las Vegas, it will operate 11 hotel-casinos with a 5,300 rooms.

Boyd Gaming has 7,600 employees in Southern Nevada and 18,000 nationwide, which will be combined with Coast's 7,500 employees, all of whom work in Las Vegas.

Under the merger agreement, Coast Casinos would operate as a wholly owned subsidiary of Boyd Gaming, with Coast owner Michael Gaughan retaining his position as chief executive officer. No other management changes or employee layoffs are planned and all union contracts will remain in place.

A Culinary union spokesman said Boyd's Main Street Station, the Fremont and the Stardust are unionized, but none of its other casinos and none of Coast's casinos are unionized.

Culinary Local 226 Secretary-Treasurer D. Taylor could not be reached for comment.

Greff said the merger will also strengthen Boyd's hand in the local's casino market, reduce its dependence on the slack riverboat market in the Midwest, and cut the competitive threats the company has faced in Indiana and Louisiana.

Boyd Gaming Chairman Bill Boyd said the acquisition of Gold Coast, Suncoast and The Orleans allows his company to up the ante seriously in competing for the locals casino market.

"This really gives us the opportunity to go forward with the locals market that we've wanted to push for some time," he said.

Snyder said the transformed company plans to compete very aggressively to increase its share of the locals market.

Boyd and Coast have been locked in a stiff competition with Station Casinos for the Las Vegas locals market.

Thompson said the play for added locals business will prove critical to the merger's success or failure.

"The locals casinos are the competitive part of Las Vegas. They're really in a struggle and they're playing a zero-sum game because it's a finite market," he said. "While the market is growing, the supply of neighborhood casino gaming is expanding faster. It's about the only thing that is."

He said Boyd Gaming and Coast Casinos will be less likely to cannibalize each other after the merger.

"This will stabilize the market. Two big forces can cooperate and coordinate what they are offering. Three or more end up competing and chewing each other up," he said.

Station's Chief Financial Officer Glenn Christenson, however, was skeptical the merger will affect the locals gaming market.

"To us, it's just another day at the office," he said. "(It's) all the same competitors who were here yesterday and are here today."

Wall Street credit agencies were more skeptical about the proposed merger, and held the line or dropped Boyd's credit ratings because of the added debt the firm will have to incur to complete the buyout.

Fitch Ratings lowered Boyd's ratings further into speculative grade territory Monday afternoon following a conference call with analysts, citing substantial increases in leverage and discretionary spending involved in the deal.

Fitch analyst Patricia Wright said financing for the deal will keep Boyd's debt levels above those "we consider acceptable given their current asset profile and cash flow."

Coast shareholders will receive about $495 million in cash for the deal plus an estimated $325 million in new Boyd shares. In addition, Boyd will assume about $460 million of Coast debt, sources said.

By comparison, Standard & Poor's held the line on Boyd's credit ratings, except for bank financing which it downgraded, because of the company's strengthened position in the locals gaming market, S&P analyst Michael Scerbo said.

Boyd said he is particularly pleased with the merger because it reunites two families that were pioneers in developing the Las Vegas gaming industry.

Boyd said his father, Sam Boyd, and Gaughan's father, Jackie Gaughan, worked together in the 1940s when Jackie Gaughan was a partner in the Flamingo and Sam Boyd was a pit boss. The fathers were also partners about 40 years ago in the Nevada Hotel and the Union Plaza. Michael Gaughan was traveling and could not be reached for comment.

Shares in Boyd closed at $20.40 on the New York Stock Exchange, up $1.19 or 6.2 percent for the day on 2.4 million shares traded, 10 times the normal trading volume.