Two Way Hard Three | Las Vegas Casino & Design Blog

April 3, 2006 8:09 AM Posted by detroit1051

How high is up?

ASCA has entered the bidding war for AZR. Personally, I'd prefer PNK get it. Dan Lee is an excellent operator and could do the most with Aztar.
http://biz.yahoo.com/bizj/060403/1267892.html?.v=1

April 3, 2006 2:39 PM Posted by Steve S

I still prefer that PNK get it(note I am biased here as I own shares in PNK). PNK seems to have better credentials with regards to building new destination resorts(Belterra, L'Auberge, St. Louis) and I think we probably all realize that the Las Vegas land is THE key to the deal for ALL of these companies. I've listened to both conference calls and I'm not sure that ASCA has the ability to pull off the redevelopment - they seem to be better at incremental upgrades, not full blown redevelopment (their properties appear to me as just locals joints, am I wrong here? or would anyone call their properties destination resorts?) I will also note that PNK did an equity financing that was listed for hotel additions at three properties - they could still use this for the Aztar bid. Things are just getting interesting here - ultimate price is probably closer to $47/48 (plus breakup fee depending on who ultimatley wins). My guess, and this is simply a guess, PNK waits to see what Colony will do (and I wouldn't rule out PENN placing a bid either).

April 3, 2006 5:55 PM Posted by detroit1051

What does PNK do now? Here is a press release from Aztar Monday evening, April 3:

http://biz.yahoo.com/prnews/060403/lam158.html?.v=1

April 3, 2006 8:49 PM Posted by Steve S

The Aztar press release is almost exactly as one would have expected (truthfully, I thought they'd put one out Friday with respect to the Colony offer - given all cash proposals Aztars' board must take the highest bid).

Pinnacle has several options: first I believe they get 3 days to review the competing proposals before they must do anything (from the time they are given written notice by Aztar, and without knowing when Aztar notified PNK in writing, I would guess that PNK has until Thursday as I assume notice was sent by AZR to PNK today - presumably before the AZR press release). I would expect PNK to utilize the full amount of time to see if any other bids come forward (from Colony or a potential 4th party - see my previous post). At that point they could match the highest bid, go higher yet (the $44/share range is my guess if they choose to up the bid) or elect to sit on the sidelines (personal opinion: Colony involvement is more worrisome than the ASCA offer - they don't have to report to public shareholders so may be able to push bidding higher, remember the break-up fee - if assumed to be the full $55 million, based on 37.2 million Aztar shares, is an extra $1.48 per share for the competing offers to pay - so the ASCA bid although listed at $2.25B is actually a little over $2.3B to the ASCA shareholder). My guess is that unless another bid comes in before then, PNK matches the ASCA bid. After that it's up to the other bidders. As an interesting aside ASCA said this was a strategic acquisition - my guess is they will raise their bid at least one more time should someone top the bid made today. To recap the bids so far are: PNK $38/share, Colony $41/share and ASCA $42/share (for the common shares, not sure what figure Colony and ASCA are giving for the preferred shares as there seems to be a discrepancy between their offer per share and the total price when you use the same debt and outstanding share figure for Aztar that the PNK offer does. It would appear they are either skewing their figures, assuming a different debt number, preferred share pricing, or worse yet just can't add). It should workout that every $3 increase in the price is about $111.6 million increase in the total deal.

ASCA may not be making a wise bet at this point if they press higher (something that I think their �ego� dictates - on the conference call they weren't shy about saying how superior their proposal was, yet had very few answers for the questions asked. I always get a kick out of conference calls where after the presentation portion the floor is opened to analyst questions - only to hear that the company doesn't want to talk about it. If they don't want to talk about it, WHY are they having a conference call? The PNK agreement allows the offer to go straight to the board without the public disclosure until AZR tells their shareholders � they should have stuck to a press release as the call made them sound rather silly). Anyways, if memory serves, their primary earners are in Missouri (Kansas City and St. Louis). Should PNK end up with the President St. Louis, they may be able to move a "boat" to the Kansas City market. Given the ASCA expansion plans, should they acquire AZR, if they experience a decrease in profitability in Missouri (almost a certainty given the PNK projects in St. Louis) and a simultaneous slow down at the Tropicana (pick whatever reason you want here - the Borgata expansion, Caesars expansion, gaming in Pennsylvania or the (rumoured but likely) new $1.0B dollar casino to be built in A/C) and they could end up with a cash flow/debt problem (they'd solve this by issuing shares - but then it kind of defeats the whole point for ASCA shareholders - you'd own part of a larger company, but might end up with a much smaller stake in it given the dilution they may require, as they still have to tell us how they plan on financing the Vegas rebuild).

Like I said in my earlier post, this is just starting to get interesting. Given the number of suitors here, I wouldn't expect the final bid to be on the table until late April or the start of May (unless upon doing their due diligence ASCA and Colony walk away - a highly unlikely case). It�s almost certain PNK will make another offer (I think their earnings in the first quarter are likely to be higher than market expectations given their performance through the end of February in Louisiana). PNK is in the position of either getting Aztar or $55 million, while also having improving operations and EBITA (my guess is they have a shot at breaking $200 million this year �especially if New Orleans margins remain above 30%). ASCA is in almost the exact opposite position. Their dominance in the markets they serve leaves the cash flow almost nowhere to go but down for their current operations (except in Colorado, but we can discuss that later. In the Missouri markets the last quarter I looked � which was Q3 - their revenue went up but their EBITA fell. It would appear that they are no longer getting the great returns they previously had as Harrah�s takes a more serious approach in these markets and new competitors get set to enter), and all of their expansion projects are �brown field� projects. If bidding goes high enough, they can �win� and still lose royally here.

My recommendation is that you get set to watch a show unfold over the next month or so, with the big winners being the Aztar shareholders (note: depending on the ultimate price paid, they could end up being the only winners in this game � at a certain point it becomes a negative-sum game for ALL the bidders).

Sorry if this was a little long - there's A LOT that could be said on this topic.

April 4, 2006 12:57 PM Posted by Hunter

Don't worry about the long post, very informative.

Do you work in the financial industry? M&A?

April 4, 2006 2:53 PM Posted by Steve S

Thanks Hunter, and no I don't work in the financial industry. Just been involved in a few stocks that have/are being bought out (Full disclosure: I do NOT own share of AZR, but wish I had before the original PNK offer was announced - those people have made about 45% so far if they still haven't sold, and the price will still go higher from here). Also, I've been following the markets and picking my own mutual fund and stock investments for over 15 years, and took my BA in Honours Economics and Accounting when I went to university.