Will This Gamble Help Pinnacle?

Thanks to the rising demand for online poker and higher consumer spending on commercial casino gaming, the revenues of the gambling industry have increased in recent years. Due to poor margins, however, the losses on the income statements of most industry players are also increasing. Their debt-to-equity ratios are also worsening over time. To counteract this situation, many companies are selling off their assets to repay their debts. Pinnacle Entertainment  (NYSE: PNK  )  and its two competitors, Caesars Entertainment  (NASDAQ: CZR  ) , and Boyd Gaming  (NYSE: BYD  ) have recently sold their assets. Today, I will dig out the effects of the spinoffs made by these three players.

Pinnacle has announced it will make two divestitures. The company has entered into a definitive agreement to sell off its Lumiere Place Casino and Hotels for approximately $260 million. The book carrying value of these hotels and casinos was $401.5 million as of June 30. The company has incurred a loss of $141.5 million, and the per-share loss from this transaction is around $2.40.

The company also decided to sell all the equity interests of its Ameristar Casino lake development project to Golden Nugget, with Golden Nugget completing the lake development project once the sale is final. Golden Nugget will pay total consideration equal to all cash expenditures on the development of the project. It will also pay outstanding payables related to this project, less a $37 million credit.

The proceeds from both these divestitures will be used to repay debt and reduce leverage for the company. The company's current debt-to-equity ratio is 4, which is higher than the industry average of 3.3. The divestiture of Ameristar's Lake Charles project will eliminate future capital expenditure. This increase in expenditure was expected to enhance free cash flow generation, accelerate debt repayment, and further reduce leverage. This shows that both these transactions have brought some losses for Pinnacle.

Besides the divestitures, Pinnacle has also completed the acquisition of Ameristar Casinos. This will lower the risk of the company's portfolio by expanding its operations into more than double their current geographic regions. The new geographic regions will be Council Bluffs, Black Hawk, Vicksburg, Nevada Regional, Kansas City and Greater Chicago, which are some of the nation's best gaming markets. After the acquisition, Pinnacle's properties would grow by 100%.

This increased operational and geographical diversity in best gaming markets is expected to bring annual synergies of at least $40 million per year with per-share synergies of around $0.68 per year. The acquisition will complement Pinnacle's existing portfolio, growing its revenues and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by 101.9% and 140.2%, respectively. The adjusted EBITDA margin would improve by 4.4%. The pro forma discretionary cash flows are expected to increase by 61.5%.

What are the competitors up to?
Caesars Entertainment, one of the casino giants, has also entered into an agreement to sell its property in Macau to an Asian developer for $438 million. The proceeds from the divestiture will pay down the company's debt.

Another reason for this divestiture is the poor performance of this segment. In 2013 the revenues from the segment have declined by 12.5%. As of June 30th, the end of the first half of the fiscal year, the company's net loss from Macau was $18 million, whereas on June 30, 2012 the net loss incurred by this segment was $96.4 million. Therefore, the sale is expected to improve the profitability of the company.

As the first half ended, the company's net revenues declined by 2.5% as compared to the same period in the prior year. The losses from continued and discontinued operations reduced by 20% and 43.4% respectively, whereas the operating margin improved by 2.2%.

Another competitor of Pinnacle, Boyd Gaming, has made two divestitures in 2013. In its first transaction, the company sold its Las Vegas Echelon resort for $350 million cash. After paying a portion of these proceeds to fulfill the company's obligations to LVE Energy Partners, Boyd got $157 million from the deal.

During the second quarter, the company made another transaction in which it sold Dania Jai-Alai, a resort located in Florida. After the sale, it realized a pre-tax gain of $18.9 million which was intended to be used for the repayment of debts. These deals will strengthen the company's balance sheet and improve its long-term financial position by reducing debt. At the end of the 2012 fiscal year, the company's outstanding debt was $4.8 billion. Its current debt-to-equity ratio is 13.8.

In its second quarter of 2013, the company reported net revenues of $738.7million, which were 20.3% higher than the same quarter in 2012. The adjusted EBITDA grew 40.7% to $160.2 million, compared to $113.8 million in the same quarter of the previous year. The net income for the quarter was $4.3 million, or $0.05 per share. Net income for the six months ending on June 30, 2013 was down by 36.7%, compared to the same period in the prior year.

Final words
Although the divestitures are bringing more losses than benefits for Pinnacle, the company's financial performance is still very stable. The Ameristar acquisition is going to bring significant revenues and profitability to the company in coming years. Overall, the company's stock provides a very attractive option to investors and I would suggest buying the stock.

Caesars' future outlook is positive after the divestiture of Macau, as it improves the company's net revenues and its debt profile. These improvements will lead to profitability and less volatile earnings for the company. Moreover, the company's net loss has decreased and its operating margin has improved compared to the previous year.

Despite all these improvements, the company is still entrenched in the huge losses that it incurred in prior years. From 2008 to 2012, the company had positive earnings only in 2009. Based on this fact, I would not recommend buying the stock.

Boyd Gaming's revenues and net income have improved over the period, but its net income is declining compared to the prior year. At the end of 2012, its net loss increased by almost 100% compared to 2011. The company's debt profile is the worst among its industry peers. Although its spinoffs will improve its financial position to some extent, they will not be enough to bring the company back to the profitable position it held three years ago. As a result, I would not recommend buying this company's stock.

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  • Report this Comment On September 11, 2013, at 4:20 PM, TFman wrote:

    Your analyses on Boyd is short sighted. You used their end of year 2012 net loss to paint a picture, when in fact the divestitures occurred this year. In addition, you fail to mention the companies recent secondary offering and 200,000,000 raise and payoff of long term debt. Get the information right so you do not give poor advice. Many analysts like Morgan Stanley have BYD as a strong buy with an $18 price targets on it.

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