Argosy Gaming announced yesterday it would be buying out insurance company Conseco's stake in one of the nation's most successful riverboat casinos. It's a good deal for both companies, and it gives more ammunition to Argosy bulls arguing that the shares are undervalued.
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The dense fog hanging over Argosy Gaming (NYSE: AGY) has lifted. On Tuesday the company announced that it would buy from Conseco (NYSE: CNC) the latter's 29% stake in a riverboat casino resort that Argosy operates in Lawrenceburg, Indiana. By purchasing Conseco's stake in the partnership, Argosy will raise its ownership interest in the boat to 86.5%. This is a big deal for Argosy because the future of the company had been clouded by uncertainty with its flagship Lawrenceburg unit. Thanks to the casino's close proximity to the metropolis of Cincinnati, as well as limited competition in the area, this particular riverboat is arguably the most successful floating casino in the nation. The Lawrenceburg casino is set to bring in roughly $350 million in revenue this year, more than Argosy's four other riverboat casinos combined. In this year's edition of Industry Focus, in which I cover casinos and gaming companies, I wrote of Lawrenceburg, "The unit could conceivably fetch $1 billion at seven times EBITDA." (EBITDA is earnings before interest, taxes, depreciation and amortization.) That forecast proved to be in the right ballpark since Argosy is purchasing the 29% stake for some $260 million, valuing the entire unit at $896 million. This deal should prove fruitful for Argosy investors for several reasons. First, there is significantly reduced uncertainty surrounding the company, and uncertainty about the future almost always reduces a company's stock price. This is thanks to the fact that uncertainty raises the rate at which the market discounts expected future cash flows. If Argosy and Conseco could not agree on a selling price for Conseco's ownership interest, the entire Lawrenceburg unit could have been put up for sale to the highest bidder. Though the market price for the casino would have probably brought Argosy a significant one-time windfall, the company obviously preferred to keep this business in its own portfolio in order to harvest profits for many years to come. Second, the selling price at which the two companies agreed seems to indicate that Argosy's existing 57.5% stake in the Lawrenceburg unit is worth some $515 million. Considering Argosy's enterprise value as a whole (market capitalization plus debt minus cash) is only about $750 million at this writing, this means that the rest of Argosy's riverboats combined are only valued at $235 million. These boats in Illinois, Iowa, Louisiana, and Missouri generated EBITDA of $65 million through the first nine months of 2000, and should produce roughly $90 million in EBITDA next year. These figures imply that the rest of Argosy outside of Lawrenceburg is being valued at less than three times EBITDA, which is far below the industry's average multiple of 6.5. All in all, the deal looks like a good one for all the parties involved. Conseco gets some badly needed cash for a business obviously not central to its core insurance and financing operations, and Argosy's future cash flow picture is now much less opaque. More importantly, it gives Argosy investors some further indication that the company's shares are undervalued relative to the rest of the casino gaming industry.
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