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Privately held Harveys Casino Resorts has offered to acquire Pinnacle Entertainment (NYSE: PNK) for $25 per share, an attractive 45% premium to the company's closing stock price March 6.
Word of Harveys' offer began circulating yesterday and shares of Pinnacle, formerly Hollywood Park, advanced $2 in trading to $19 1/4. Pinnacle, which has agreed to negotiate exclusively with Harveys through March 2000, got another boost today and traded around $20 3/4 in the early afternoon.
Pinnacle shareholders got used to the company's stock climbing last year as management focused on its gaming business by moving to divest its horse racing properties. Though Pinnacle is down for the year, it's more than doubled from around $8 1/2 last April as expansion efforts continue producing good receipts and it prepares to open Belterra, a 308 room property in Indiana about 35 miles south of Cincinnati.
Gaming, lottery, and pari-mutuel companies in the S&P 500 are down 13.2% this year after a high-rolling 29% return last year. Poor performance, however, doesn't have much to do with fundamentals since companies like Pinnacle, MGM Grand (NYSE: MGG), and Harrah's Entertainment (NYSE: HET) reported excellent cash flow and operating results for the fourth quarter and full year. The main problem is that gaming stocks are consumer cyclicals, which means investors fold their cards after the first whiff of rising interest rates and slower economic growth -- anything that could impact tourism and reduce consumers' spending money.
The possible deal comes two days after one of the biggest casino deals in recent history. MGM is buying Las Vegas rival Mirage Resorts (NYSE: MIR) for $4.4 billion in cash and debt, or $21 per share. MGM bumped its offer up from $17 after Mirage rejected the initial bid.
A Pinnacle-Harvey's combination is a different animal than the MGM-Mirage deal, however. MGM, for example, will control the powerful Las Vegas strip and had revenues of $1.5 billion last year. Pinnacle operates in niche markets, away from the super-competitive, bright lights of Las Vegas and Atlantic City, and had revenues of $707 million last year. Also, consider that Mirage Resorts spent nearly $2 billion to build its Bellagio hotel and casino in Las Vegas, while Pinnacle is expected to spend just $200 million on Belterra, a 15-story property with a riverboat casino, 18-hole golf course, and 1,500-seat entertainment facility. Pinnacle focuses on the value-oriented gambler.
Regardless of the differences, both MGM and Harveys, owned by the privately held investment firm Colony Capital of Los Angeles, hope to grab market share. Adding Pinnacle to its properties in Lake Tahoe, Nevada, Central City, Colorado, and Council Bluffs, Iowa would give Colony a better breadth of properties in developing niche markets, plus a company with a management team that knows how to execute. Pinnacle owns eight casinos in Nevada, Mississippi, Louisiana, and Argentina, though it's selling its Casino Magic Bay and Boomtown Biloxi properties to Penn National Gaming (Nasdaq: PENN).
Like many deals, this one looks good on paper, but why should Pinnacle sell out when it's made fast progress on its plan to reduce expensive debt, increase cash flow, and sell off its non-core racing properties? Pinnacle's focus on the value oriented gambler has kept the company away from pricey misadventures like Mirage's Beau Rivage, its ultra-expensive casino in Biloxi that's had trouble attracting local guests. Although it's a good sign that the Harveys offer is contingent on Pinnacle management maintaining its equity interest in the combined company, I'd like to see Pinnacle keep its hot streak rolling.
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