Pinnacle punks Penn, swipes Ameristar

We’ve learned two important things today. One, that the Mayan calendar is not the most reliable predictor of events. Two, that Ameristar Casinos‘ on-again/off-again talk about putting itself up for sale was back in “on” mode. Before hardly anybody got wind of what was happening, Ameristar cut a deal to be purchased by Pinnacle Entertainment. Unfortunately for the latter, by the time the sale closes, it will probably be too late to get back into the Massachusetts market that Ameristar vacated and where it still owns land. (That must have depressed the sales price a wee bit.) Ameristar choosing to sell is not the big shocker. That, while trying — and generally succeeding — to right the ship after former skipper Dan Lee ran it onto a reef of excessive expenditures, Pinnacle would flood its hold with $1.9 million in debt inherited from Ameristar … that’s surprising. But it’s only out $869 million in cash, a small fraction of what it would cost to build eight casinos in today’s market. While Penn National Gaming was busy blowing its own … horn, Pinnacle was cutting an actual deal. Penn CFO William Clifford sounds like an even bigger ass today than he did yesterday.

Even at a standard industry multiple of 7.6X cash flow, no doubt some shareholders will shriek that the transaction is underpriced — a ripoff! — threaten to sue and get a few hundred million extra thrown their way. (Company insiders hold a weak hand.) It’s standard procedure. Already the stock has vaulted 20% and at this very moment trades at the $26.50/share Pinnacle is offering. Let’s say Ameristar CEO Gordon Kanofsky did shop Ameristar to his competitors, who’s got the scratch to buy it … even with the hotly coveted Jackpot, Nevada market up for grabs? Certainly not crippled Caesars Entertainment or tapped-out Boyd Gaming (busy enough absorbing its Peninsula Gaming purchase). Probably not vastly leveraged MGM Resorts International. It’s far too small potatoes for Steve Wynn or Sheldon Adelson, while there would sufficient geographical redundancies to put Penn National Gaming off the scent. Cordish Gaming is a developer, not an acquirer, and pursues a go-slow strategy toward growth. It looks like Ameristar was damned lucky to find a live one out there at all. Deutsche Bank‘s Carlo Santarelli, however, foresees a possible rejection of the deal by shareholders and “would not be surprised to see competing or increased bids.” I agree: No way $26.50/share gets this deal done, no matter the risk of going up to 8X EBITDA or farther. Let’s just hope any bidding stops well short of the double-digit cash flow multiples that marked the catastrophic Aztar Corp. sale, Station Casinos LBO and Harrrah’s Entertainment LBO.

Pinnacle undertakes some redundancies of its own. Ameristar St. Charles is the big dog in the St. Louis market, where Pinnacle has fading Lumiere Place (right) and rising River City. It also means going into competition with oneself in Lake Charles, where it would have L’Auberge du Lac and $500 million, new Mojito Pointe … and a stranglehold on Louisiana’s most strategic jurisdiction. Getting into the Kansas City area at this time is quite like bolting the barn door after the horse has fled but Ameristar Kansas City (above) is one of the market’s most resilient properties, all of which are taking a battering from Penn’s Kansas Speedway racino. Pinnacle, however, gets to plant its flag in East Chicago as well as adopt the Council Bluffs, Iowa casino that’s been pounding a nearby Harrah’s-branded one into submission. It also will broaden its reach to encompass Mississippi and Colorado. Ironically, although both companies are headquartered in Las Vegas, this deal gets neither one a whit closer to operating in Sin City, although I can think of three or four Strip properties that could use a change of management. One of them, the Las Vegas Hotel & Casino, is owned by Goldman Sachs, which is co-financing the Ameristar takeover.

Goldman’s partner is J.P. Morgan, whose gaming analyst, Joseph Greff, calls for a 50% increase in Pinnacle’s share value (to $24/share) by year’s end. That’s a tall order for three or four business days. Greff justifies this radical upgrade on “highly attractive math,” including 107% earnings per share accretion … when the deal closes. He dismisses MGM (t00 much debt), Wynn (frying bigger fish in Philadelphia and Boston) and Penn (caught with its pants down) as rival suitors. Greff also forecasts a record 13% ROI for the super-sized Pinnacle as well as no federal taxes in the near term, partly due to certain writeoffs (goodbye, Atlantic City). The biggest caveat involves possible Federal Trade Commission objections to three Pinnacle casinos in St. Louis, although that would also give CEO Anthony Sanfilippo a gift-wrapped excuse to unload Lumiere Place in favor of River City (above). Some of the big boys, like MGM or Wynn Resorts, might come running for a one-0ff if federal strictures cause Mojito Pointe to be put on the block. That’s as close as they’re going to get to Houston for a good, long while.

Over at Penn, executives have decided to quit pouting about their big defeat on Election Day in Maryland and make a competitive bid for the Prince Georges County casino license. One of the goals of the current REIT silliness is engage in some transparent ledger-demain whereby REIT Penn pursues Rosecroft Raceway while identical-twin cousin Penn PropCo hangs onto failing Hollywood Casino Perryville. Whether county leaders are fooled by such thin smoke and dull mirrors remains to be seen, although I doubt it. Besides, Penn has spent the last four years making enemies by the bushel in Maryland, thanks to its tiresome and splenetic me-me-me way of doing things. Of course, with a half-billion dollars pledged toward Rosecroft, it also might have difficulty going on its much-ballyhooed shopping spree.