Ameristar's Land Grab

I'm probably about as excited as you can be about something you've bought but haven't actually seen in person.

Here's why: At the end of 2000, Ameristar Casinos (NASDAQ:ASCA) struck gold when it acquired its two flagship riverboat properties from Station Casinos (NYSE:STN). Those two properties -- in the St. Louis and Kansas City, Mo., markets -- essentially put Ameristar on the map, and even now account for about two-thirds of the company's revenues.

Tuesday night, a maturing Ameristar took another step forward, announcing its latest acquisition: the Mountain High Casino in Black Hawk, Colo.

Rocky Mountain high
Though not nearly on the same scale as the Missouri transaction, this acquisition is a similar fit. Like Ameristar's other market-leading properties, the Mountain High is the largest casino in the 22-property, $500 million-plus Black Hawk gaming market, located about 40 miles west of Denver. The casino's 425,000 total square feet and 57,000 square feet of gaming space make it the biggest in all of Colorado.

Moreover, the Mountain High will give Ameristar seven properties in six markets, and will be the fifth casino to carry the Ameristar brand. The property, along with Ameristar's plans for it, which we discuss below, probably most closely resemble the company's operation in Council Bluffs, Iowa, in both size and scope. In other words, even though this isn't a monster acquisition, the deal is relatively significant for Ameristar.

Black Hawk's Biggest Casinos

*Includes both blackjack and poker tables.

A reasonable deal
Under terms of the deal, Ameristar will pay $115 million to bankrupt Windsor Woodmont for the casino while assuming about $2.4 million in debt. In addition, Ameristar may also make contingent payments over the next four years equal to 10% of any property EBITDA (earnings before interest, taxes, depreciation, and amortization) earned in excess of $17.5 million in each of those years, and 10% of EBITDA in excess of $24 million each year following the opening of a planned hotel.

That seems pretty reasonable considering that the initial cost of the property was about $150 million. Not only will this help diversify Ameristar's revenue stream beyond Missouri, the company also gets a relatively new casino, the Mountain High having opened in December 2001. Others had expressed interest in the bankrupt casino, including Argosy Gaming (NYSE:AGY) and Majestic Star, which owns the Fitzgerald's-branded casino in the market.

Location, property, and expansion
As I've noted in previous columns, location is an important factor in determining a casino's success. Consider this from Windsor Woodmont's website:

The Mountain High Casino is located at the desirable four-corners intersection of Highway 119 and Richman Street in the center of the Black Hawk gaming district and has the market's only direct highway access into an attached parking garage.

While it doesn't really tell the whole story, that blurb should at least give you an idea. The casino is also located across from the Lodge Casino, a strong competitor with a hotel and the biggest poker room (22 tables) in a market that includes a couple of like-sized competitors in the Riviera and Isle of Capri (NASDAQ:ISLE).

Over the next three years, Ameristar plans to put in an additional $75 million to re-brand the property using the increasingly valuable Ameristar name and add a 300-room hotel and additional parking, while expanding and upgrading the casino's 1,000 slot machines and 24 table games.

There's more
According to the Colorado Division of Gaming, the property currently runs a mere 12 blackjack and 12 poker tables, which nonetheless gives it the most blackjack tables and the second-largest poker room in the market. The capital investment plan also involves the introduction of cashless slots from companies such as International Game Technology (NYSE:IGT) and WMS Industries (NYSE:WMS), which will probably include many more of Ameristar's ever-productive penny slots (see Those Pennies Add Up).

Similar to Ameristar Council Bluffs, Ameristar Kansas City, and Ameristar's Cactus Pete's in Jackpot, Nev., the Mountain High Casino features a 5,000-square-foot entertainment showroom to add to the property's non-gaming attractions. And, according to Mountain High's website, the casino boasts the only Starbucks (NASDAQ:SBUX) and Krispy Kreme Doughnuts (NYSE:KKD) in Black Hawk, though that might change with Ameristar's arrival. A likely addition could be one of Ameristar's popular Amerisports-branded sports bars.

Ever optimistic
As a shareholder, I was pretty disappointed back in September when Ameristar lost out to rival Harrah's Entertainment (NYSE:HET) in its bid for Jack Binion's Horseshoe Gaming. This time, Ameristar won out, getting a nice opportunity in a pretty decent market -- at what at very least seems a decent price. The acquisition should also ease investor fears by diversifying the revenue stream beyond Missouri, while offering management an avenue to direct its free cash flow.

Ameristar, with its market cap hanging around $800 million and its management doing all the right things, has long struck me as a true hidden gem (I even think I'll run it past Tom Gardner when I get a chance). After all, Ameristar's success in every attempt to establish market leadership and create value through careful expansion has clearly rewarded investors. There is absolutely no reason to think it won't do it again.

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Fool contributor Jeff Hwang owns shares of Ameristar Casinos, International Game Technology, and Starbucks. The Motley Fool has a disclosure policy.