Back in February, comments made by Ameristar Casinos
Wednesday morning, Ameristar -- a Motley Fool Hidden Gems recommendation -- announced an agreement to purchase Resorts East Chicago from privately held Resorts International, an affiliate of Colony Capital, for $675 million. The purchase price amounts to about 10.5 times estimated 2007 EBITDA, which the company expects to be in the mid-$60 million range. Resorts International had previously acquired the East Chicago property along with Bally's Tunica, Harrah's Tunica, and the Atlantic City Hilton as part of a $1.3 billion deal with both Harrah's Entertainment
In one shot, Ameristar has moved strongly toward achieving several goals:
1. Geographic diversification. Though it would only be Ameristar's third- or fourth-biggest EBITDA contributor, behind the St. Louis and Kansas City properties and in line with Ameristar Council Bluffs based on 2007 estimates, the $326 million in gross gaming revenue that Resorts East Chicago generated in 2006 would already make the property Ameristar's biggest revenue producer, accounting for 24% of the company's total revenue. The revenue contribution from Ameristar's Missouri properties would be reduced from 56% of revenue to 42%.
2. Prime and exclusive access to a key market with massive potential. The $2.6 billion Chicagoland gaming market is the nation's third largest, but is still largely underserved, with the highest win-per-position per day of any gaming market in the country. This is a function of the 1,200-position limitation on the four casinos in the Illinois side of the market, and the fact that three of the four casino operations on the Indiana side of the market still operate previous-generation riverboats. Meanwhile, the five licenses allocated for the Indiana side of the market are locked up at the four properties already in existence.
With a strong preference for the Indiana side of the market -- the side with the relatively stable regulatory environment, no gaming position limit, and somewhat friendlier tax rates -- the East Chicago property's location roughly 25 miles from downtown Chicago is trumped only by that of Harrah's Horseshoe Hammond property. The property's location is also about 30 miles closer to downtown Chicago than Boyd Gaming's
3. The development pipeline. The East Chicago property gives Ameristar the big-time shot in the development pipeline that the company hasn't had since the acquisition of the two Missouri properties from Station Casinos
The property and expansion opportunity
Upon the expected closing of the acquisition late this year, Ameristar plans to immediately embark upon a major expansion project centering largely around the replacement of the existing casino.
The property sits on 28 acres and includes a good-quality 291-room hotel, a 3,000-space parking garage, and a four-deck gaming boat with about 1,900 slots and 60 table games over 53,000 square feet of gaming space. On the conference call, Ameristar CEO John Boushy suggested that the new master plan facility would involve a single-level gaming barge with a whopping 4,000 slots and 120 table games, which would make the new Ameristar East Chicago easily among the very largest gaming facilities in the country on both counts when it opens in 2010. The expansion would also likely include an expanded streetscape with additional non-gaming amenities, as well as additional structured parking.
Ameristar projects that property EBITDA would more than double to more than $130 million, with a 15% cash-on-cash return, which suggests a project cost of around $250 million to $300 million. It also suggests that Ameristar expects to grow revenues into the $500 million to $600 million range.
In the meantime, Ameristar should see fairly significant EBITDA improvement simply by improving margins. On the conference call, Ameristar CFO Tom Steinbauer estimated Resorts East Chicago's EBITDA margin at 18% based on an effective tax rate of about 31%-32%. However, Ameristar St. Charles operates in an EBITDA margin range of about 31%-32% based on an effective tax rate of about 27%. Steinbauer noted that were the East Chicago property to operate as efficiently as Ameristar St. Charles, its EBITDA margins would be in the 26%-27% range. That would put annual EBITDA at around $85 million to $88 million with no increase in revenues, and drop the effective purchase price down to less than eight times EBITDA.
The competition
The one major obstacle Ameristar faces is that Harrah's is in the midst of its own $500 million MOAB (mother-of-all-boats) project at the Horseshoe property, which does have a superior location closer to downtown Chicago. That property is expected to open sometime in mid-2008, setting the stage for another Ameristar-Harrah's showdown.
Meanwhile, Boyd Gaming's Blue Chip is in the midst of its own expansion project about 30 miles farther away from downtown Chicago, and Lakes Entertainment
Chicagoland Market Gaming Revenues
Indiana Casinos |
2004 |
2005 |
2006 |
---|---|---|---|
Horseshoe Hammond (HET) |
$379 million |
$419 million |
$432 million |
Resorts East Chicago |
$314 million |
$286 million |
$326 million |
Majestic Star* |
$288 million |
$290 million |
$251 million |
Blue Chip (BYD) |
$223 million |
$263 million |
$289 million |
Illinois Casinos |
|||
Grand Victoria (owned by MGM Mirage |
$401 million |
$407 million |
$430 million |
Harrah's Joliet (HET) |
$272 million |
$314 million |
$348 million |
Hollywood Aurora (owned by Penn National Gaming |
$230 million |
$241 million |
$266 million |
Empress Joliet (PENN) |
$228 million |
$238 million |
$254 million |
For further Foolishness:
- Ameristar: Is an Acquisition Imminent?
- Ameristar: The Acquisition Strategy
- Ameristar Rumor Central: Tunica, Biloxi, and Evansville
- Ameristar's Regional Network
- Ameristar's New Strategy Pays Off
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Fool contributor Jeff Hwang owns shares of Ameristar Casinos. The Fool has a disclosure policy.