The consolidation wave in the gaming industry has taken yet another somewhat shocking turn. Wednesday afternoon, casino and racetrack operator Penn National Gaming (NASDAQ:PENN) announced that it would acquire riverboat casino operator Argosy Gaming (NYSE:AGY) in a $2.2 billion deal that would create what will be the nation's third largest casino operator.

The announcement vaulted the share prices of both companies in after-hours trading. Along with the assumption of $805 million of Argosy's long-term debt, the deal values Argosy's equity at $47 per share, a 15% premium to the price of Argosy shares at Wednesday's close. Penn National shares were up 13% to $46.75.

Penn's attraction to Argosy is obvious: Argosy gives Penn a much more substantial presence in riverboat gaming. As I said last week in a discussion regarding quarterly earnings (see Race to Slots Pumps Penn National), Penn's real strength is in its racetracks in West Virginia, Pennsylvania, and Maine, where the introduction of slot machines will create considerable value. But aside from Hollywood Casino Aurora in the Chicagoland market, Penn is little more than a bit player on the riverboat side of its business.

Argosy would clearly correct that. In Lawrenceburg, Ind., (near Cincinnati), Argosy has perhaps the most dominant and valuable riverboat casino in the industry, facing little competition. Argosy also has substantial presences in the Chicagoland market, as well as the Kansas City market. The company also has smaller operations that tap into the St. Louis, Sioux City, and Baton Rouge markets.

In addition, Argosy would substantiate Penn National by bringing in substantial cash flow and would practically double Penn National's revenues and EBITDA. Penn also expects the acquisition to provide $20 million in savings at the corporate level within the first year of closing.

But Penn is also paying up: At 8.5 Argosy's $260 million in trailing EBITDA, the company is paying a small premium. Last year, Harrah's Entertainment (NYSE:HET) agreed to acquire riverboat casino operator Horseshoe Gaming for what was then 7.2 times expected 2004 EBITDA (see Harrah's Gains, Gamers Lose); early this year, Boyd Gaming (NYSE:BYD) paid 7.4 times expected 2004 EBITDA for Las Vegas locals casino operator Coast Casinos (see Boyd Takes the Coast).

As an aside, consider what that says about the value of Argosy's rival Ameristar Casinos (NASDAQ:ASCA), which yesterday we suggested may have some upside at around 7 times 2004 EBITDA (see Ameristar is a Hold).

All said, this is sensible union that vaults Penn National and Argosy into the prime time. Following the pending mergers between MGM Mirage (NYSE:MGG) and Mandalay Resort Group (NYSE:MBG) (see The Logic of MGM-Mandalay), and Harrah's and Caesars Entertainment (see No Quick Win in Casino Merger), Penn National will be the third largest casino operator in the country upon closing.

The transaction is expected to close in the second half of 2005.

For more on Argosy and the gaming industry, check out:

Fool contributor Jeff Hwang owns shares of Ameristar Casinos.