Ameristar: Is an Acquisition Imminent?

"Our strategic aim is to double the size of the company as measured by EBITDA during the next three to five years. We estimate that about half of that increase will come from investing in our existing properties; the other half will come from acquisitions." -- John Boushy, CEO, Ameristar Casinos

As a disclaimer, I must admit it is quite possible I am reading too much into that statement. But I should point out that last Thursday's earnings conference call was John Boushy's very first as CEO of Motley Fool Hidden Gems selection Ameristar Casinos (NASDAQ:ASCA). And frankly, you don't project that 50% of EBITDA growth over the next three to five years will come from acquisitions unless you are about to buy something.

Based on 2006 EBITDA of $265 million, the company is estimating that more than $130 million in new EBITDA will come from acquisitions, which translates into roughly $400 million to $500 million in revenue. That suggests we are probably looking at either two good-sized acquisitions or one really big one.

Imminent deal?
The main reason I think a deal must be imminent is because of the three- to five-year timeline. As Ameristar co-chairman Gordon Kanofsky mentioned later in the call, the company is "primarily focused on acquiring existing EBITDA-generating assets where the integration of the Ameristar brand and management model can significantly improve EBITDA" -- or basically, just more of what the company has been doing for the past five years.

Back in October 2000, the company announced the $475 million purchase of its two flagship Missouri properties from Station Casinos (NYSE:STN), closing the deal on Dec. 20 of that year. In 2001, Ameristar St. Charles (near St. Louis) did $44.9 million in EBITDA. In August 2002, the company introduced its new gaming barge, and in 2003, Ameristar St. Charles brought in $84.2 million in EBITDA. A renovated Ameristar Kansas City was reintroduced in September 2003.

The two properties combined to do $139.1 million in EBITDA in 2003 and $155.3 million in 2004, up from $84.8 million in 2000, when the properties were under Station Casinos' ownership.

Ameristar: Missouri Properties EBITDA

Given that, I think the project time for the Missouri properties serves as a pretty good proxy for what we can expect from Ameristar's next project(s). Figuring 18 to 36 months between the date of the acquisition agreement and the introduction of an Ameristar-quality product -- and adding an additional year of operations so we can count the chickens -- the likelihood is that we are looking at an acquisition agreement sooner rather than later.

The next question, then, is: What is Ameristar looking at?

Regional markets
During the Q4 earnings call, Kanofsky alluded to the application of Ameristar's acquisition and redevelopment strategy at its Missouri and Black Hawk properties. And then -- speaking toward the company's objective of doubling EBITDA over the next three to five years -- Kanofsky said, "We intend to aggressively seek to enter additional regional local markets throughout the United States, primarily through acquisitions of attractive companies or individual properties, but also selectively through new developments. We will also [emphasis mine] be opportunistic in considering markets such as the Las Vegas Strip and Atlantic City."

Not to hang on every word, but the impression I get is that the regional markets, and not Las Vegas or Atlantic City, are the priority targets at the moment.

And to narrow down potential targets, I think it's fair to assume that Pinnacle Entertainment (NYSE:PNK), Boyd Gaming (NYSE:BYD), MGM Mirage (NYSE:MGM), and Penn National Gaming (NASDAQ:PENN) are not sellers, with the exception of one of two Chicagoland properties in Illinois that Penn National is required to sell. The drawback to Penn's Chicagoland properties is that they are in Illinois -- a state with an unstable regulatory environment and a limit on gaming positions (1,200) that doesn't mesh well with Ameristar's "biggest and baddest property with the most penny slots in every market" strategy.

So what else would Ameristar be interested in that might also be available?

Potential targets
As I mentioned on Friday, Harrah's Entertainment (NYSE:HET) -- which is in the process of being taken private by Apollo Management and Texas Pacific Group -- may be a willing seller of assets with significant untapped potential. Saddled by what will likely be a burdensome debt load, Harrah's will focus on paying down debt, as opposed to new development. And if Harrah's can garner above-average multiples to EBITDA in a sale for assets that it doesn't plan on developing itself any time in the near future -- such as Sheraton Tunica and Grand Casino Biloxi, two good-sized ones -- then it may be compelled to sell.

Harrah's Horseshoe Hammond on the Indiana side of Chicagoland also has untapped potential and would surely command a premium price in a sale; however, it is also probably true that the property makes so much money that there really isn't a pressing need to sell it. Among the other possibilities that may be available are Resorts International's Bally's Tunica and Resorts East Chicago, both of which are also good-sized. And a remote possibility is the privately owned Eldorado Shreveport in Louisiana -- a state with a 30,000-square-foot gaming space limit, which also probably doesn't appeal to Ameristar.

One last consideration is that Ameristar may be looking for a place to ship the riverboat casino currently in operation at Ameristar Council Bluffs. With Harrah's introducing its racino in the market as the newly renovated and expanded Horseshoe Council Bluffs last March, the time has come for Ameristar to upgrade its riverboat -- a riverboat that may have some use elsewhere. This could make Aztar Evansville -- recently sold to Columbia Sussex as part of a $2.75 billion deal for Aztar Corp. -- a possible target.

Having made a list, I do think a couple of the possibilities are a lot more likely than the others. We'll take a deeper look at the most likely targets next time.

Take a gamble on further Foolishness:

• Ameristar's New Strategy Pays Off
• Ameristar's Land Grab
• Cost Controls Help Boost Ameristar's Q3
• Ameristar CEO Craig Neilsen Passes Away

Ameristar Casinos is a Motley Fool Hidden Gems pick. To find out why, and see which other companies have made the cut, you can take a free 30-day trial today.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool's disclosure policy knows when to hold 'em and knows when to fold 'em.