Pinnacle, Ameristar merger may drag into next year
Federal antitrust regulators had few questions when a trifecta of casino industry mergers — just under $20 billion in combined value — created the Strip’s two largest corporate ownerships and a regional gaming giant nearly a decade ago.
But last month, the Federal Trade Commission halted Pinnacle Entertainment’s $2.8 billion buyout of regional gaming rival Ameristar Casinos, the industry’s first major merger since before the recession.
Both companies are headquartered in Las Vegas, but neither owns a casino in Southern Nevada.
In a 17-page administrative complaint that was approved unanimously by four commissioners, the FTC said it would ask a federal judge to block the merger. The transaction, the FTC said, would not be fair to other casinos in St. Louis and Lake Charles, La.
Analysts say the buyout is far from dead.
Pinnacle may have to sell one of three casinos the company would own in St. Louis, and part with or scale back a $580 million hotel-casino project in Lake Charles.
Neither aspect was part of the scenario when Pinnacle announced the Ameristar buyout in December. The process is too far along to abandon now.
Shareholders from Ameristar approved the transaction and Nevada gaming regulators unanimously blessed the merger last month. If Pinnacle walks away, the company has to pay an undisclosed break-up fee.
“The news throws a significant wrench into the transaction, albeit one that we had previously expressed concern over when the deal was originally announced,” Credit Suisse gaming analyst Joel Simkins said following the May 29 FTC ruling.
Deutsche Bank gaming analyst Andrew Zarnett said Pinnacle’s timeline to close the deal by the end of summer will not be met. The process could drag into next year.
“We expect management to challenge the lawsuit and to defend the merger as not (anti-competitive),” Zarnett said.
Most analysts expect Pinnacle to sell one of the St. Louis properties — either the company-owned downtown Lumiere Place, the suburban River City or the Ameristar St. Charles. Pinnacle may negotiate with the FTC to keep the Lake Charles project.
JP Morgan gaming analyst Joe Greff said the most likely and simplest resolution for Pinnacle is to sell the casinos. An FTC challenge could “potentially take a long time to pursue.”
Casino divestitures “would have minimal to no impact” on the company’s valuation, Greff said.
“A number of public companies have been talking about mergers and acquisitions, while a number of private companies have recently been expanding their portfolios,” he told investors.
In a May 29 statement, Pinnacle CEO Anthony Sanfilippo said the deal would move forward, but the company has had little more to say. Vice President of Finance and Investor Relations Vincent Zahn could not be reached for comment.
MARKET CONTROL
The Ameristar buyout, in which Pinnacle would pay $26.50 for each share of Ameristar and assume $1.9 billion of debt, would double the size of the company. The company would grow to 17 gaming properties plus the Lake Charles project.
Pinnacle owns casinos in Louisiana, Missouri and Indiana and racetracks in Ohio and Texas. Ameristar has eight properties in Missouri, Iowa, Colorado, Mississippi, Indiana and two, Cactus Pete’s and the Horseshu in Jackpot on the Idaho state line.
The concern is St. Louis. The FTC said Pinnacle would control 58.4 percent of that market, which includes two casinos on the Illinois side of the Mississippi.
Analysts speculated Lumiere Place, near the Gateway Arch and the city’s sports complexes in downtown St. Louis, is the most likely sale candidate.
“There is a perception in the market that Pinnacle’s downtown property is in an unsafe area, though we don’t necessarily agree with this assessment,” Union Gaming Group Managing Director Bill Lerner said.
Lumiere Place is also the smallest of the three casinos.
Brean Capital gaming analyst Justin Sebastiano said Lumiere Place would attract several bidders. He said the merger and acquisition market for regional casinos “has been rather liquid lately.”
He said Pinnacle would likely keep the two suburban St. Louis casinos.
“Pinnacle’s strategy has been to operate casinos where people live, not where they work,” Sebastiano said.
LAKE CHARLES FOCUS
Although many analysts anticipated that St. Louis would present antitrust issues, the FTC’s focus on Lake Charles was a surprise. The project, once owned by Pinnacle, has changed hands twice. It’s been known as Sugarcane Bay and Mojito Pointe.
Simkins said Louisiana gaming authorities are “anxious to see this project developed and opened as it has been delayed for many years.”
But Sebastiano said investors might want to dump the project, which would let the company to pay down debt instead of spending $340 million to finish it.
Still, Sebastiano said it would be in Pinnacle’s best interest to finish and own the property to avoid competition. Pinnacle’s flagship is the neighboring L’Auberge Lake Charles resort.
“We believe the Houston feeder market is drastically under served,” Sebastiano said. “Therefore, we believe there is room for another riverboat in Lake Charles.”
Analysts speculate that other companies might jump in if Pinnacle’s buyout of Ameristar collapses.
MGM Resorts International once had a deal to operate Mojito Pointe with Creative Casinos. However, Creative Casinos owner Dan Lee, who bought the development from Pinnacle, sold the project to Ameristar. MGM Resorts and Ameristar have a marketing alliance.
Also, Churchill Downs Inc., which owns racetracks and regional casinos, reportedly was interested in acquiring Ameristar Casino.
Wells Fargo Securities gaming analyst Cameron McKnight said either MGM Resorts or Churchill Downs might be tempted.
“It could be accretive for both,” McKnight said. “Alternative bidders could emanate from an extended deal timetable or the less likely collapse of the deal.”
Representatives of MGM Resorts and Churchill Downs declined comment.
Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871. Follow @howardstutz on Twitter.
Many Mergers in Gaming
The casino industry hasn’t experienced any major consolidations or seen much merger and acquisition activity since 2005.
In April 2005, MGM Mirage acquired the Mandalay Resort Group for $7.9 billion, creating MGM Resorts International. Two months later, Harrah’s Entertainment acquired Caesars Entertainment Inc. for $9.4 billion.
The transactions created the Strip’s two dominate casino operators.
Today, MGM Resorts controls 10 Strip resorts, including MGM Grand, Bellagio, Mandalay Bay and The Mirage.
Harrah’s, which renamed itself Caesars Entertainment more than two years ago, also owns 10 Strip casinos, including Caesars Palace, Harrah’s Las Vegas, Bally’s Las Vegas and the off-Strip Rio.
The Federal Trade Commission, in reviewing both buyouts in 2005, saw little antitrust concern.
State casino regulators, however, had different rules.
In Michigan, MGM Resorts, which owned the MGM Grand Detroit, sold Mandalay’s stake in the Motor City Casino to satisfy a rule that the company own just one property in the three-casino market.
Before Caesars was acquired by Harrah’s, the company sold casinos in Atlantic City and Tunica, Miss., to head off any concerns. The FTC said its only issue was in South Lake Tahoe, but the matter was satisfied without a stipulated settlement when the Caesars Lake Tahoe casino was sold to Columbia Sussex Corp.
In July 2005, Penn National Gaming acquired Argosy Casinos in a $2.2 billion transaction. The FTC said Penn needed to sell Argosy’s casino in Baton Rouge and the companies signed a consent order on the same day agreeing to the stipulation.
A spokesman for the FTC said the Pinnacle-Ameristar situation is different because the companies have not agreed to a stipulated settlement.
FTC attorney Alexis James Gilman said the agency would seek a restraining order should Pinnacle move forward with the merger or seek the approval of Missouri Gaming Regulators.
HOWARD STUTZ/LAS VEGAS REVIEW-JOURNAL
