Boyd takes Peninsula, punts Echelon (again)

Ever since a highly quixotic and even nonsensical attempt to take over most of Station Casinos, the cards have been played very, very close to the vest at Boyd Gaming. However, like another second-tier major, Ameristar Casinos, it’s showing renewed signs of aggression. Like Caesars Entertainment, it’s extending its presence into new (f0r Boyd) markets. Unlike Caesars, it’s doing so without significant capex expenditures. First came the acquisition of IP Biloxi, which has been performing up to expectations and arguably above them.

Then, in the gloaming of yesterday, Boyd disclosed that it had committed $1.4 billion to obtaining Peninsula Gaming, a riverboat-and-racino outfit concentrated in Midwest and South. So eager is Peninsula to be bought out that it’s actually loaning Boyd $144 million to close the deal. Boyd will draw another $1.2 billion from its line of credit, in addition to paying Peninsula $200 million upfront. In light of Peninsula’s $109 million cash flow last year and boffo early numbers from its Kansas casino (above), Boyd expects the purchase to begin paying for itself straightaway, increasing EBITDA 35%.

My hunch is that Peninsula overextended itself with recent thrusts into Kansas and Louisiana, and was only too happy to talk sale terms with Big Daddy Boyd. (There may have been some last-minute renegotiation: The Wall Street Journal initially reported the terms as half cash/half debt.) Investor’s Business Daily gets the booby prize for most inane coverage of the sale, by the way.

The price is a market-standard 7X cash flow although there’s a nice bonus for Peninsula owners on the back end of the deal. If Kansas Star casino, near Wichita, generates $105 million in cash flow in 2015 (a lead-pipe cinch), the ex-Peninsula boys get $7.50 for ever dollar above that. This could be a huge windfall: Even in its temporary form, Kansas Star is on pace for $107 million this year — a 38% ROI! Imagine how much bigger that number will be when the place is fully operational and has a couple of years’ of player development under its belt.

Boyd CEO Keith Smith and spokesman David Strow both spun the purchase as a Kansas Star-centric deal (even though the Kansas Lottery gets 28%-31% of the take, and owns the casino equipment, Peninsula the building). However, it also gets Boyd into Iowa, where it will captain the two Diamond Jo vessels in Dubuque and Northwood, respectively. In an otherwise weak April (0ne full week less than last year), the Diamond Jos were both up 3% and have been reliable performers across the preceding 15 months.

Boyd also picks up two more assets in a favored territory, Louisiana. The Amelia Belle riverboat is a Columbia Sussex souvenir that Peninsula picked up and which now goes to Boyd, along with Evangeline Downs, which draws upon the Baton Rouge and Lafayette markets (“Red Stick” being the only Louisiana region to post favorable comparisons last month). Amelia Belle significantly outperformed the state, up 10%. The two properties grossed $146 million last year, before the Pelican State’s casinos began to trend upward and early indications are for 2012 to be even stronger Down South. Also, Boyd’s soon-to-be-five assets are sufficiently spread geographically that cannibalization should be nil.

Although Boyd stock bounced nicely on the news, Wall Street analysts were their usual gloom-and-doom selves when it comes to Boyd, even though the Kansas Star deal reduces the company’s much-criticized (over)exposure in the Las Vegas locals market and adds five turnkey properties. Instead, J.P. Morgan‘s Joseph Greff called it “a distinct positive indicator” … for Pinnacle Entertainment, due to the latter’s “fresher” Louisiana assets. Unremarked in the excitement is that this explains Boyd’s recent move to punt resumption of Echelon into 2018. In case we didn’t take the hint, CEO Smith said, “there is not an opportunity in Las Vegas to invest this money.” Besides, the Peninsula purchase will take Boyd’s long-term-debt-to-equity ratio from 2.8-1 to 3.7-1.  Resuming a $4 billion metaresort is out of the question, unless you’re leverage-lovin’ MGM Resorts International or Caesars. Speaking of whom …

It does not escape one’s notice that the Wichita casino is the license that then-Harrah’s Entertainment CEO Gary Loveman had in hand just a few years back. (The project design can be seen at right.) However, in one of his innumerable flip-flops regarding the Sunflower State, Loveman simply up and fled. Indeed, while Capt. Deadbeat has done everything short of hang “For Sale” signs on Caesars’ regional casinos, Smith bypassed Loveman in favor of Peninsula. Caesars has underperformers like Louisiana Downs (down 8% last month) and toxic Harrah’s Council Bluffs (-15%) that it would surely love to ditch but it couldn’t have have offered the attractive five-pack of properties that Peninsula did — and probably not at that price.