Ameristar’s purchase scrutinized

A $675 million deal by Ameristar Casinos to purchase a riverboat casino about 25 miles from downtown Chicago matched the prediction made last winter by new Chief Executive Officer John Boushy.

Some gaming analysts, however, are wondering if Ameristar is paying too much for the property owned by Resorts International and located in East Chicago, Ind., on the shores of Lake Michigan.

The transaction, which Ameristar is funding from within its existing cash structure, was announced last week and is subject to regulatory approval and closing conditions. The acquisition was valued at about 10.5 times the cash flow generated by Resorts East Chicago. Ameristar hopes to close the purchase by year's end.

"The purchase price ... is comparable to other recent industry transactions, and we view this as being a reasonable value for a well-positioned property with expansion potential in such a dynamic market," Boushy told analysts in a conference call.

Boushy said the acquisition allows Las Vegas-based Ameristar to move into the lucrative Chicagoland jurisdiction, which includes populous Chicago and its more than 6 million residents and parts of Indiana. The area generated more than $2.6 billion in gaming revenue in 2006, becoming the United States' third-largest commercial gaming market, trailing the Strip and Atlantic City according to figures provided by state gaming commissions.

He said he thought Ameristar could double the casino's cash flow over the next four years.

"(The deal) allows us to enter an extremely attractive market, diversifies our cash flow, enhances our distribution channels and provides a platform from which we can substantially grow an already well-positioned property, while achieving an appropriate return," Boushy said.

The casino at Resorts East Chicago is 53,000 square feet, with 1,900 slot machines, 60 table games and a 16-table poker room. The hotel has 291 rooms. Ameristar said it would eventually expand the 28-acre site, possibly doubling the size of the casino by 2010.

In 2006, Resorts East Chicago generated $325.6 million in gaming revenue, according to regulatory filings. Ameristar's largest revenue producer is Ameristar St. Charles outside St. Louis, which generated $302 million in gaming revenue last year.

Some gaming analysts were taken aback initially by the purchase price. But most believe the property, which is expected to be renamed Ameristar East Chicago, will fit into the company's future plans.

"We believe the company paid too much, but we understand its decision," gaming analyst Justin Sebastiano of Nollenberger Capital Partners said in a note to investors. "We assume Ameristar came in high and hard with its offer to avoid a bidding war. Acquisitions like this one should help Ameristar achieve its previously stated goal of doubling its (cash flow) over the next three to five years."

Brian McGill, gaming analyst for Wachovia Securities, was also initially uncomfortable with the purchase price but believes the deal will help Ameristar.

"Overall, we believe this was a good acquisition for Ameristar," McGill said. "We believe the property does provide Ameristar with significant growth in cash flow going forward."

With the casino located in Indiana, analysts said Ameristar won't be encumbered by the rather stringent gaming regulations of Illinois.

Ameristar, which operates seven casinos in six regional markets, does not have a casino in Las Vegas. The company is spending $557 million to grow and add amenities at three of its casinos; $90 million for an expansion at Ameristar Vicksburg in Mississippi, $209 million for a hotel tower at the Ameristar Black Hawk outside of Denver, and $258 million for a hotel and other amenities at Ameristar St. Charles.

Boushy became president and CEO of Ameristar in November after the death of company founder and majority stockholder Craig Neilsen. Immediately, speculation began that Ameristar would be sold.

Boushy sought to alleviate those concerns, traveling to Wall Street in February to tell analysts and investors that the company would expand its scope.

"Perhaps now investors will believe that Ameristar is not for sale," Sebastiano said.

Prudential Equity Group gaming analyst Joel Simkins thought the Chicago market might grow increasingly competitive shortly. Harrah's Entertainment is upgrading its Horseshoe property in Hammond, Ind., while an American Indian casino is expected to open near the area by September.

"While we think Ameristar is well-run and has an attractive portfolio, the stock appears to be fully valued," Simkins said in an investors note. "In our view this dilutive acquisition could further pressure the shares."