Ameristar's Regional Network

Last week, we discussed how Motley Fool Hidden Gems selection Ameristar Casinos (Nasdaq: ASCA  ) is on the acquisition prowl, noting that comments made by company management during its Q4 earnings conference call may suggest that a deal could even be imminent. We also narrowed the list of probable targets to a handful of riverboat casino operations in a few key markets, including Tunica, Biloxi, Chicagoland, and Evansville, Ind. Out of those markets, Ameristar would likely pluck a couple of good-sized properties in a single deal, based on the size of the projected acquisition(s), which equates to roughly $130 million in EBITDA in "three to five years" from now.

With these acquisitions, Ameristar is doing more than just buying properties in new markets -- casinos it can destroy and rebuild with the Ameristar touch. It's also building a potentially powerful regional casino network, with which the company can generate substantial value from its current casino properties via cross-market play. Right now, when everybody seems preoccupied with the idea of Las Vegas, it's easy to forget that there are plenty of casino markets in the Midwest and South. By my count, adding a premium property in Tunica alone would increase Ameristar's number of cross-market distribution routes in the network by 75%.

Allow me to explain.

Ameristar's present regional network
In my view, there are three properties currently in Ameristar's regional network: Ameristar St. Charles (St. Louis), Ameristar Kansas City, and Ameristar Council Bluffs (Council Bluffs/Omaha). The main criterion for inclusion in what I'll call "The Network" is that each property be within a five-hour drive from the nearest Ameristar property. Any distance beyond that, and I'm assuming that flying would be the preferred means of travel, at which point an alternative destination such as Las Vegas would become a serious competitor. That leaves out the Jackpot (Nevada) properties and Ameristar Black Hawk (Denver); it also leaves out Ameristar Vicksburg for the time being.

All three properties in The Network are top-end local competitors in their respective markets. By the end of 2007 (with the opening of the hotel at Ameristar St. Charles), all three will also serve well as regional destinations -- particularly given their key locations in major gaming markets. The only thing missing is that Ameristar's Star Awards players club program isn't yet linked among the properties. On that count, it doesn't hurt that current Ameristar CEO John Bushy was the guy most responsible for the existence of Harrah's (NYSE: HET  ) Total Rewards system.

There's also Missouri's $500-every-two-hours loss-limit rule, which could be repealed this year. Removal of the loss limit would significantly improve the profile of the two Missouri properties as regional destinations.

The table below shows the approximate travel times by car from each Ameristar property in The Network to each of the other properties, including Ameristar Vicksburg. Travel routes of approximately five hours or less from an Ameristar property to an Ameristar destination are highlighted in bold.

Ameristar: Current Network (Approx. Driving Distance in Hours)*

Market

St. Louis

Kansas City

Council Bluffs

Vicksburg

St. Louis

X

3

6

8

Kansas City

3

X

3

11

Council Bluffs

6

3

X

14

Vicksburg

8

11

14

X

*Give or take half an hour.

As you can see, there are four routes in bold, representing distribution routes for cross-market play. Patrons local to Ameristar Kansas City are about a three-hour drive from both Council Bluffs and St. Charles, and would view both properties as regional gaming destinations. Likewise, regular patrons at both Council Bluffs and St. Charles would view Ameristar Kansas City as a regional destination. However, cross-market play would be more limited between Council Bluffs and St. Charles, given both the six-hour drive time and the requirement to pass Kansas City to get from one property to the other in that time frame.

Building the network
If a deal were to be done today, I can think of a few scenarios that might make sense. As I said last time, I think it's safe to assume that Boyd Gaming (NYSE: BYD  ) , Penn National Gaming (Nasdaq: PENN  ) and Pinnacle Entertainment (NYSE: PNK  ) are not sellers. I also think if Ameristar is buying two properties, it's a fair assumption that it would do so in a single deal.

We'll examine the properties in greater detail next time, but the first possibility -- and my personal preference -- would involve Harrah's Sheraton Tunica and Grand Casino/Casino Magic Biloxi. Adding Tunica would create reciprocal cross-market play between Ameristar St. Charles and Tunica, which is about a five-hour drive away. Meanwhile, Ameristar Vicksburg would become a feeder property for both the Tunica and Biloxi properties -- but not vice versa, given Vicksburg's limited attraction as a destination. That said, the benefit here cannot be overstated: Ameristar's 47% share of the four-competitor Vicksburg market would give Ameristar first dibs on local gamblers whenever they visit Tunica or Biloxi.

As you can see from the table below, adding Tunica and Biloxi to the network would double the number of cross-market distribution routes to eight.

Ameristar: Desired Network (Approx. Driving Distance in Hours)*

Market

STL

KC

CB

Vick.

Tunica

Biloxi

Evans.

CHI

St. Louis

X

3

6

8

5

11

3

5

Kansas City

3

X

3

11

8

14

6

8

Council Bluffs

6

3

X

14

11

17

9

7

Vicksburg

8

11

14

X

3

4

8

11

Tunica

5

8

11

3

X

7

7

8

Biloxi

11

14

17

4

7

X

10

14

Evansville

3

6

9

8

7

10

X

5

Chicago

5

8

7

11

8

14

5

X

*Give or take half an hour.

The second possibility I like would be Resorts International's Bally's Tunica and Resorts East Chicago, which would give Ameristar nine prime cross-market distribution routes. I also think Columbia Sussex's Aztar Evansville is worthy of mention as a possible follow-up deal. The property -- a local-area monopoly (LAM) -- is about three hours from St. Louis and five hours from Chicago. So while the property on its own has limited value as a destination, it would be an excellent feeder property for the St. Louis and any future Chicagoland property.

Closing thoughts
Of course, I could be wrong about what Ameristar is looking at, and I may have just made up the term "local-area monopoly." Regardless, you can see how important having a premium property in Tunica would be to Ameristar in building a regional network. You can also see the potential that Ameristar St. Charles itself has as a regional destination, given St. Louis' central location.

Meanwhile, having the best property in every market in which it competes gives Ameristar a significant advantage over weaker competitors when it comes to building such a network -- the kind of quality regional network that nobody else has right now except for Harrah's.

Until next time ...

Ameristar Casinos is a Motley Fool Hidden Gems selection. Strike it rich with more small-cap treasures unearthed by Tom Gardner and Bill Mann; you can see them all with a free 30-day trial.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has a disclosure policy.


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