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Gaming Roundup: Deal or No Deal?

By Jeff Hwang - Updated Nov 15, 2016 at 12:44AM

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One Vegas Strip deal falls apart and another takes a wild turn.

The New Frontier on the Las Vegas Strip is up for sale, and the Riviera saga continues. Meanwhile, with changes at the Horseshoe Tunica property resulting from Harrah's pending sale, the Horseshoe brand of gaming is dying.

The available New Frontier
Talks to sell the New Frontier and its 38 acres of Las Vegas Strip real estate to New York-based Elad Properties have apparently broken down. Refuting previous reports by other news sources, New Frontier owner Phil Ruffin told the Las Vegas Review-Journal last Wednesday that the sale is not a done deal, but confirmed that discussions were being held. Then on Tuesday, the Review-Journal reported that sale talks have fallen apart altogether. The purchase price reportedly would have been as much as $40 million per acre, though MGM Mirage pegged the price at closer to $35 million per acre in its most recent investor presentation. Ruffin himself considered the $40 million price "a little high."

Unless Harrah's is selling, the New Frontier site is the probably the best piece of available real estate on the Strip, located directly across the street from Wynn Resorts' (NASDAQ:WYNN) Wynn Las Vegas and Encore, and in between the Fashion Show Mall and Boyd Gaming's (NYSE:BYD) Echelon Place development site. Ruffin had previously been planning to build a $2 billion Swiss-themed resort on the site, which has a quarter-mile of Strip frontage.

Assuming the property is available, there's no shortage of potential suitors. However, a price of $30 million to $35 million per acre would put it in the range of the sale price of Aztar's Tropicana Las Vegas to Columbia Sussex last year, which is the same price that both Ameristar and Pinnacle refused to pay.

The Riviera Saga
Meanwhile, the Riviera saga has taken a wild turn. On Monday, an investor group called Riv Acquisition Holdings (RAH) made a $27 per share offer to purchase Riviera Holdings (AMEX:RIV), which owns the Riviera Las Vegas and its 26 acres of Las Vegas Strip real estate, as well as a casino in Black Hawk, Colorado. The offer represents a fairly significant increase over the $17 per-share offer the investor group made last year and values Riviera at approximately $530 million.

But on Wednesday, Riviera issued a statement rejecting the offer, saying that RAH entered into a "lockup and option agreement" with a pair of investment groups that own 9.2% of Riviera's shares without the approval of Riviera's board of directors. Riviera said that the agreement "triggered the defensive provisions of Nevada's Business Combination Law and Riviera's articles of incorporation" and, as a result, disqualifies RAH from making an acquisition bid for another three years.

And then Thursday evening, RAH issued a statement refuting Riviera's assertions and declared that Rivera's refusal to consider the acquisition proposal violates management's fiduciary duty to its shareholders.

Even if that's the case, the bid likely undervalues the company. RAH's offer would value Riviera Las Vegas' 26 acres at $20.5 million while valuing Riviera Black Hawk at zero. But even at a mere six times EBITDA, Riviera Black Hawk would be worth about $100 million, which would put the Riviera Las Vegas at $16.5 million per acre. The problem is that the Sahara further north on the Strip just went for an estimated $300 million to $400 million, or roughly $20 million an acre, give or take a few million. The Riviera has less Strip frontage, but a far better location in relation to the rest of the Strip (I recommend this map from vegastodayandtomorrow.com). That said, assuming the Riviera Las Vegas is worth $20.5 million an acre -- which may or may not be the case -- and the Riviera Black Hawk is worth $100 million, then Riviera Holdings is probably worth closer to $35 per share.

Death of the Horseshoe
The Horseshoe brand of gaming is dying a slow death. With the pending sale of Harrah's Entertainment (NYSE:HET) to private equity firms Apollo Management and Texas Pacific Group, drastic changes have been made at the Horseshoe Tunica, which at least to me was the last real casino left. As a result, the once truly unique property is starting to look more and more like any other casino and could be leaving itself vulnerable to future competition.

Until recently, the Horseshoe Tunica used to have two full pits dedicated to pitch blackjack games, mostly single-deck blackjack paying 3:2 for blackjack and a few double-deck games. This is a rarity, as single-deck blackjack in general has been pretty much phased out. Moreover, of the casinos in this country that do offer more than one or two classic single-deck blackjack games, none of them comes anywhere close to the Horseshoe Tunica in terms of quality.

With Harrah's pending sale, however, Harrah's removed an entire pitch-game blackjack pit and made it an all-craps pit. And just in the past month or so, the Horseshoe has also stopped offering its special room rate for poker players ($25 per night during the week, $35 per night on the weekends), which previously was standard for the five casinos with poker rooms in the market, two of which are owned by Harrah's.

As a result, I think the Horseshoe Tunica can be beaten now. Should another premium player such as Ameristar Casinos (NASDAQ:ASCA) or Pinnacle Entertainment (NYSE:PNK) -- for example -- enter the market, there's little to stop them from replicating the virtues of the old Horseshoe. And where the Horseshoe currently has a lock on the high-stakes poker play, forcing its players to pay full price for a hotel room could open the door for another player to capture that business. Small-stakes players can already go next door to MGM Mirage's (NYSE:MGM) Gold Strike, where the $25/$35 poker room rate is still in effect and is now a competitive advantage. The only thing stopping the Gold Strike from getting the high-stakes games now is the relative quality of its poker room.

Ameristar is a Motley Fool Hidden Gems pick.

Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has an unbeatable disclosure policy.

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Stocks Mentioned

Wynn Resorts, Limited Stock Quote
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Boyd Gaming Corporation Stock Quote
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MGM
$35.07 (-2.99%) $-1.08
Ameristar Casinos Inc. Stock Quote
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ASCA.DL

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