Boyd defends Mississippi purchase

By agreeing to purchase the IP Casino in Biloxi, Miss., Boyd Gaming Corp. is again trying to emphasize to Wall Street that it has growth prospects and is reining in a heavy debt load.

For three years, Boyd stock has hovered around $10 a share as analysts have raised caution flags about the company's large position in a sluggish Las Vegas locals market and in Atlantic City, which has been losing gamblers to Pennsylvania. Even the Sam's Town in Shreveport, La., is "under pressure" due to competition from Oklahoma tribal casinos closer to the important Dallas-Fort Worth market, company executives acknowledged Thursday in a conference call.

The company has brightened its outlook about Las Vegas in the past couple of quarters but hasn't created many converts.

By agreeing to a $332 million deal for the IP -- $278 million to buy it from the Engelstad Family Foundation, $10 million for the foundation's charitable donations in the region over the next five years and $44 million budgeted for upgrades -- Boyd expects to boost profits as soon as the deal closes. President and CEO Keith Smith said the IP's operating earnings had grown "quite dramatically in the last 12 months" due to higher revenues and greater efficiency, but the tie to Boyd could boost earnings even more through greater purchasing power and the customer loyalty program.

Also, 13 acres of the IP's 23-acre site are vacant, giving Boyd room to build something. Smith said the company did not know what it would do with the land.

With 1,100 rooms and a 70,000-square-foot casino floor with 1,900 slots and 62 table games, IP is second in Biloxi only to MGM Resorts International's Beau Rivage. The IP opened in 1997 and was renovated six years ago.

Even though Boyd will borrow about $200 million to complete the deal, according to analyst estimates, Smith characterized the deal as "an important step in achieving our strategic goal of strengthening the balance sheet."

IP's earning power, coupled with the cash Boyd will put in the deal, would improve the company's standing with credit rating agencies, Chief Financial Officer Josh Hirsberg said.

The deal, announced before trading opened Thursday, received mixed reviews from analysts. Boyd stock closed at $7.86, up 3 cents, or 0.38 percent.

JP Morgan analyst Joseph Greff wrote in a research report that although he liked the move to reduce dependence on Las Vegas and Atlantic City, "we are surprised that Boyd would invest this amount of money in a no-growth market."

He also thought the IP could signal a lack of "genuine interest" in purchasing MGM Resorts' half-interest in the jointly owned Atlantic City Borgata that MGM Resorts has put up for sale. Company executives stressed there was no connection, but also said no decision on the Borgata has been made.

David Katz of Jeffries & Co. rated the deal "just OK" in view of Biloxi's "limited growth profile."

Conversely, Joel Simkins of Credit Suisse wrote that he is "positive on the Gulf Coast, as it is unlikely to see new material supply in future years."

Dennis Forst of KeyBanc Capital Markets wrote that he approved of the deal because Boyd "will put about $140 million of excess cash to work ... the company's debt de-leverage ratio will improve and its percentage exposure to the weak Las Vegas market will be reduced."

The Engelstad Family Foundation, created by the late casino developer Ralph Engelstad, sold the Las Vegas Imperial Palace to Caesars Entertainment six years ago. Its 2009 tax return, the most recent available, showed
$533.8 million in assets but did not specify whether it had any more properties it could sell.

The Las Vegas-based foundation has made multimillion-dollar gifts to organizations, including the Nevada Cancer Institute, University of Nevada, Las Vegas, College of Southern Nevada and the Legal Aid Center of Southern Nevada. The foundation has also awarded a broad range of smaller grants and has funded groups in Mississippi and in Ralph Engelstad's native North Dakota.

Contact reporter Tim O'Reiley at
toreiley@reviewjournal.com or 702-387-5290.