Which U.S. Casino Operator Might China's Galaxy Empire Have Its Eye On?

Chinese casino mogul Lui Che Woo has built his Galaxy empire into the No. 2 operator in Macau, the Chinese island that is by far the largest gambling mecca in the world. According to a recent Bloomberg interview, the octogenarian sees further growth in Macau, evidenced by his plans to quadruple the size of his flagship Galaxy Macau property. But he is also looking for opportunities in foreign markets, including the U.S. where overall gambling revenue is on a multi-year upward trajectory. 

While individual properties might be on his wish list, he certainly has the capital to pursue well-positioned operators with diversified property portfolios.  So, which U.S. companies might peak his interest?

Biggest bank for the buck
Caesars Entertainment (NASDAQ: CZR  ) would likely be an interesting opportunity given its large operating footprint in the U.S., especially on the Strip in Las Vegas. These assets are complemented by a select group of other properties sprinkled around the world.  The company continues to struggle under the weight of a massive debt load, the result of an ill-advised leveraged buyout led by TPG and Apollo in 2008. However, Caesars does have some prized assets, including its flagship Caesars Palace property in Las Vegas. It also has one of the industry's largest loyalty-membership programs with more than 40 million members.

In its latest fiscal year, Caesars reported fairly timid results, evidenced by a 1.3% top-line gain in its Las Vegas segment; performance trailed the Las Vegas Strip's reported growth of 4.8%. More notably, the company's adjusted operating profitability slipped versus the prior year. This was due to a drop in core gambling revenue that was largely caused by a concerted effort to maintain customer market share through discounts and freebies. The net result for Caesars was weak cash flow, a competitive disadvantage in an industry that requires seemingly never-ending capital- reinvestment programs to drive customer volumes.

Unfortunately, Caesars seems intent on making itself increasingly less desirable through its current asset- divestiture program. It's a strategy that picked up speed after a sale of four properties to a company-sponsored investment vehicle, publicly traded Caesars Acquisition, for roughly $2.2 billion in early March. While Caesars continues to have a desirable portfolio of diversified properties, including the Caesars Palace and Paris properties on the Las Vegas Strip, the company's debt load would probably cause Galaxy to take a pass.

Gambling across the heartland
Fortunately for Galaxy, there are other intriguing opportunities. Boyd Gaming (NYSE: BYD  )  is a diversified operator of properties that are concentrated in the heartland of America and supplemented by positions in Atlantic City, N.J. and Las Vegas. Unlike Caesars, Boyd has been more prudent with its balance sheet. This has allowed it to pursue growth through the acquisition channel, highlighted by its late 2012 purchase of Peninsula Gaming, a transaction that added five properties and further diversified its geographic footprint.

In its latest fiscal year, Boyd generated solid top-line growth, up 16.6%. Performance was aided by both recent acquisitions and better sales results in ancillary areas, like its hotel and food/beverage operations. More importantly, the company reported an uptick in its operating profitability due to scale efficiencies in its purchasing and back-office operations that were a function of its larger size. 

The future is also looking bright for Boyd. Its strong position in the New Jersey market has allowed it to take significant market share in online gaming, estimated at more than 40%, a product area that the state legalized in February 2013.

Also intriguing to Galaxy could be Pinnacle Entertainment (NYSE: PNK  ) , a second-tier industry player that has also benefited from rising interest in gaming across America's heartland.  Like Boyd, Pinnacle has used the acquisition channel to improve the diversification of its portfolio of properties. This strategy is highlighted by its 2013 purchase of Ameristar Casinos and its eight properties, including strong positions in the New Orleans and St. Louis markets. The transaction also added a toehold in the Western U.S., a source of potential growth for Pinnacle as it expands beyond its core Midwestern base.

The bottom line
Investors should be attuned to the ambitions of the large international casino operators in the growing U.S. gambling market. While Caesars is an unlikely takeout candidate, Boyd and Pinnacle could be value-added ways for foreign operators to enter the U.S. market; they need to be on investors' radars.

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