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Rod Smith

The Strip: No Stopping This Shopping

10 April 2006

Rather than taking a breather after two years of megamergers, the sale and consolidation of casino companies are shifting into high gear.

Just in the past two weeks, agreements were announced to buy two gaming companies with aging Strip properties but valuable and developable land.

The first announcement, to buy Aztar Corp., quickly drew two competing offers.

Gaming companies and investors are chasing ever more deals to consolidate ownership and control, access high finance and build customer bases, insiders and analysts said last week.

Analysts said there are four main reasons for the latest spate of interest in Strip acquisitions.

* First, the supply of real estate is limited and operators do not want to get locked out of the country's hottest hospitality market.

* Second, hospitality and gaming industry operators need major Strip footprints to burnish their brands and keep up with the competition.

* Third, the interaction of supply and demand has prices spiraling and developers want to buy in before they are priced out, analysts said.

* Finally, the cachet of the Strip on Wall Street means access to capital for any major land holder.

Brian Gordon, a partner in Las Vegas-based Applied Analysis, said these factors together are driving demand for property and operations in Las Vegas.

"The brand awareness and demand for Las Vegas are piquing interest of developers and casino operators as well as visitors," he said. "There's no hotter market anywhere."

CRT Capital Group gaming analyst Steve Ruggerio said market forces are making both Las Vegas real estate and their operating companies attractive investments.

"The wave of acquisitions hasn't slowed since 2004 and you can expect them to continue," he said.

Four recent megamergers -- Harrah's Entertainment with Horseshoe Gaming; Boyd Gaming Corp. with Coast Casinos; MGM Mirage with Mandalay Resort Group; and Harrah's Entertainment with Caesars Entertainment -- already recast the industry.

Those mergers gave the surviving companies more access to Wall Street financing for expansion, larger market shares and broader customer bases.

Wall Street analysts said they showed investors that major mergers involving Strip real estate will benefit buyers.

Possibly taking heed, Landry's Restaurant chain owner Tilman Fertitta bought out the Golden Nugget last year and is planning to build it into at least a 10-casino chain.

Hard Rock Hotel owner Peter Morton has been shopping his property on Harmon Avenue for $750 million; it has drawn a plethora of interest from private equity investors.

There's now a pending deal for Riv Acquisitions Holdings, a private investment group led by real estate magnate Neil Bluhm to take over the Riviera.

Negotiations are in the works for the sale of Aztar, which owns the Tropicana, to Pinnacle Entertainment, Colony Capital or Ameristar Casinos.

Ruggerio said the Aztar sale is a classic example of follow-the-leader.

"Everybody's known it was a quality location, but when Pinnacle made a move, everybody jumped," he said. "Operators are recognizing the value of having a national footprint. They need to be in Las Vegas with a quality location (or brand)."

And there's a battle for control of Chester, W.Va.-based MTR Gaming Group, owner of Binion's downtown and the Speedway Casino in North Las Vegas.

Most Wall Street analysts and consultants were reluctant to be quoted by name last week. Because so many pieces on the game board were in play, they feared conflicts of interest.

But on one point they agreed: There are more buyers lining up and added properties may come into play.

The Sahara becomes one of the most visible Strip takeover targets without a named suitor.

The Bennett family, which owns the casino, has said through company spokesmen that it receives expressions of interest weekly, but that it is interested only in offers in the $1 billion range from established buyers who are already licensed.

The New Frontier across the street is another target, at least of rumors and speculation.

Owner Phil Ruffin has said for years he has big plans in the works, but his operation lacks a management team with deep development or capital-raising experience.

Besides major properties that could still be sold, prospective investors also abound.

Stratosphere and Arizona Charlie's owner Carl Icahn, for example, was reported interested in doing a deal to add Aztar to his holdings. Icahn could not be reached.

New York real estate developer Donald Trump, who is building two condominium towers in partnership with Ruffin, is interested in owning a casino in Las Vegas. Hospitality companies, led by Starwood Hotels and Resorts Worldwide, Hilton Hotels Corp. and Ritz-Carlton Hotel Co., are also interested in establishing major footprints on the Strip.

And Wall Street analysts say private equity interests specializing in real estate are frothing for part of the action.

Analysts predicted the current wave of mergers and acquisitions will continue for the foreseeable future.

"There are hoteliers and gaming operators who have not been involved in recent negotiations and buyouts who are also trying to enter the market," Gordon said.