Penn National's Illinois Chips Down

Last November, when racetrack and riverboat casino operator Penn National Gaming (NASDAQ:PENN) announced a $2.2 billion deal to acquire Argosy Gaming (NYSE:AGY), it looked to substantially boost its riverboat presence -- and quality -- by adding Argosy's six riverboat casinos in five states. The acquisition would practically double Penn National's revenues and EBITDA (earnings before interest, taxes, depreciation, and amortization).

The Illinois Gaming Control Board meets Thursday, and Penn National said it hopes the merger will be approved then. But when all is said and done, it appears that the company is ultimately willing to move on without the second- and fourth-biggest pieces in the deal -- both in Illinois.

Penn National said Monday that to secure regulatory approval for the Argosy acquisition, it has proposed to reach agreements to sell both of Argosy's properties in Illinois within 18 to 24 months of completing the acquisition. Last month, the deal hit a snag when the board delayed its vote scheduled for Aug. 25, apparently because of the question about whether the merger would create an "undue economic concentration of assets in the state."

Penn National owns the Hollywood Aurora casino in the Chicagoland market, while Argosy owns the Empress Joliet -- also in that market -- and the Alton Belle on the Illinois side of the St. Louis market. Combined, the Empress Joliet and the Alton Belle account for almost one-third of Argosy's net revenues and operating income:

It's not really surprising that the Empress Joliet would be a cause for concern, because Penn National already has a presence in Chicagoland. On the other hand, the Alton Belle is probably just a throw-in to make sure the deal gets approved more quickly. After all, if Penn National isn't keeping any acquired assets in Illinois, then there isn't much for the state board to debate. Illinois casinos in Chicagoland include:

Theoretically, I don't think Penn National would have much difficulty keeping the Alton Belle if it really wanted it; Harrah's Entertainment owns two properties in Illinois -- Harrah's Joliet in Chicagoland and another Harrah's-branded casino in Metropolis. And there's Argosy's two properties in Illinois.

But Penn National isn't really giving up much, either. The Alton Belle -- the first riverboat casino in Illinois and the first in St. Louis -- is a distant fourth place in a St. Louis market dominated by fierce competitors Harrah's and Ameristar Casinos (NASDAQ:ASCA). And the Alton Belle's position will be further weakened when Pinnacle Entertainment (NASDAQ:PNK) enters St. Louis with a pending $400 million downtown casino in 2007, and a second $375 million property toward the south of the market in 2008. The St. Louis market includes:

The Illinois board remains the last regulatory hurdle to the acquisition. Penn National just may have to float the deal without two big boats.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos.