What's Ameristar Worth?

Last week, riverboat casino operator and Motley Fool Hidden Gems selection Ameristar Casinos (Nasdaq: ASCA) announced that it was exploring "strategic alternatives," which would likely include the possibility of a sale. On the announcement, shares of Ameristar shot up 12% on Wednesday, and then another 5% or so on Thursday.

The obvious question is, "Who's buying Ameristar?"

Well, the company is not necessarily looking to sell; alternatively, it's also possible that Ameristar is openly seeking a strategic merger partner -- most likely one with Las Vegas Strip assets.

The distinction is important, because in today's game, the list of casino operators who would be interested in buying Ameristar is quite different from the list of casino operators who are in financial condition to actually do so. Meanwhile, the list of casino operators who are in the best financial shape to purchase Ameristar outright -- Penn National (Nasdaq: PENN), Boyd Gaming (NYSE: BYD), and Wynn Resorts (Nasdaq: WYNN) -- is also different from the list of casino operators for whom Ameristar might have the most value, namely MGM Resorts (NYSE: MGM) and Las Vegas Sands (NYSE: LVS).

That said, in order to more accurately examine the potential suitors and outcomes, we must first figure out what Ameristar is worth. This requires determining a reasonable range for normalized EBITDA, and then assigning a reasonable multiple.

Determining normalized EBITDA
Unfortunately, determining a normalized EBITDA range for Ameristar is not as simple as looking at earnings reports and using EBITDA numbers for the past few years, because there are a number of distortions -- not the least of which is a down economy. That said, in 2009, Ameristar benefited from improved regulatory conditions in Missouri and Colorado (the removal of the $500-per-two-hour loss limit in Missouri in November 2008; and an increase to 24-hour operating hours, a raise in betting limits from $5 to $100, and the addition of craps and roulette in Colorado in July 2009). In addition, the company opened a 536-room hotel at its Ameristar Black Hawk (Colorado) property, providing further punch.

These benefits more than offset the pressure from the depressed economy. However, the East Chicago operation has suffered from a permanent bridge closure in Q4 2009; meanwhile the St. Louis property saw a new competitor enter the market when Pinnacle Entertainment (NYSE: PNK) opened the River City casino in March 2010.

And for the first half of 2010, Ameristar reported across-the-board declines in adjusted EBITDA, with the exception of its Black Hawk property, which -- on the strength of the favorable regulatory changes and the new hotel -- saw adjusted EBITDA double from $13.1 million over the first half of 2009 to $26.9 million over the same period in 2010. Adjusted EBITDA at Ameristar St. Charles (St. Louis) was down 14.8% for the first half of the year to $44.7 million, while adjusted EBITDA at Ameristar East Chicago was cut in half from $30.9 million to $14.1 million, as net revenue dropped 21.4% to $107.0 million.

Ameristar's other properties showed nominal declines in adjusted EBITDA.

That said, the biggest problem in determining normalized EBITDA is the East Chicago property, because the property's adjusted EBITDA margin was 13.1% over the first half of 2010 -- and only 10.8% for the second quarter -- down from 22.7% in the first half of 2009. This is in stark contrast to the rest of Ameristar's properties, which posted adjusted EBITDA margins ranging from 29.9% to 44.7% for the first half of the year. Meanwhile, annual net revenue at the property dropped from $282.9 million in 2008 to $251.7 million in 2009, and -- as previously noted -- is down another 21.4%.

Let's look at the company excluding the East Chicago property, and then evaluate the East Chicago property separately. Below is Ameristar's reported annual property-level EBITDA resorts from 2007 to 2009.

Ameristar: Property-Level EBITDA (Excluding East Chicago)

Source: Company filings.

Looking at that table, I'm comfortable assigning a property-level EBITDA range between $320 million and $350 million for the company, excluding contributions from the East Chicago property. And the reason I am comfortable in this range is largely due to the gains from the Black Hawk property, which should offset declines in other markets.

Over the past four quarters, Ameristar Black Hawk has generated $136.6 million in net revenue. However, the hotel did not open until the end of Q3 2009; meanwhile, net revenue at the property over the first half of 2010 was up 81.4% to $74.5 million. And even if you factor a less than 60% increase in net revenue in Q3 2010, you can still get to $150 million in annual revenue. Applying a 35% EBITDA margin (adjusted EBITDA was 36.1% for the first half of the year), you get $52.5 million in annual EBITDA, or $23 million more than the property generated in 2009.

Meanwhile, Ameristar St. Charles posted a year-over-year decline in adjusted EBITDA of about $3.4 million during the second quarter following the opening of its new competitor. If you spread that out over four quarters, you get about a $14 million hit to EBITDA. At the same time, the rest of the properties were down about $7 million in EBITDA for the first half, which amounts to about another $14 million annual hit to EBITDA over the 2009 figure.

But there's another factor offsetting some of those declines: starting July 1, 2010, the Missouri properties were allowed to operate 24 hours a day (except for one hour each Wednesday morning).

Add it up and it's about a wash at roughly $335 million in annual EBITDA, give-or-take $15 million.

For Ameristar East Chicago, for the purposes of this exercise, we will give it credit for $200 million in annual revenue. But at the same time, I think it's both fair and conservative to assign a normalized EBITDA margin of 20%, despite the 10.8% margin posted last quarter. The fact is that the property went from being a $289 million property to about a $200 million-$225 million property very quickly; given some time to adjust, I would be shocked if the property is not back in the 20% range by 2012, if not sooner.

That said, at $200 million in annual revenue at a 20% EBITDA margin, the East Chicago property adds $40 million in annual EBITDA, bringing the annual total property-level EBITDA for Ameristar to between $360 million and $390 million. Backing out about $60 million in corporate-level EBITDA expense, we get annual, normalized EBITDA of about $300 million to $330 million, compared to adjusted EBITDA of $331 million for 2009.

Basically, the whole thing is about a wash except for the losses in East Chicago.

Valuation
The next step is to apply a range of multiples to generate a range of enterprise values. Based on a range of 7 times to 9 times times EBITDA -- a reasonable range for a premium competitor -- we get an enterprise value range of $2.1 billion-$3.0 billion. This is the number that separates potential buyers with access to capital (PENN and BOYD, and maybe even WYNN) from everybody else (MGM and LVS).

Then, we add the roughly $100 million in cash and subtract the $1.6 billion in debt Ameristar reported on its balance sheet at the end of the second quarter, and divide by the 57.87 million shares outstanding to get a range of stock values.

Ameristar: Fair Value Range

The result is a fair value range between $10.37 and $25.40 per share. At about 8x annual EBITDA of $315 million, I think the stock is fully valued under normal circumstances. My guess is that it probably takes in the neighborhood of 9 times EBITDA for Ameristar to be a seller, which does not preclude the possibility of some other type of transaction.

For more of my Ameristar analysis:

• More Suitors for Ameristar Casinos? (2008)
• Who's Buying Ameristar? Part I and Part II (2007)