Mergers yes; high multiples maybe not

The seemingly uncontrolled merger-and- acquisition activity that permeated the gaming industry a few years ago could soon return, although the purchase figures that resulted in ridiculously high cash flow-to-price multiples are a thing of the past.

In a report to investors, Deutsche Bank gaming analyst Andrew Zarnett said bankruptcy sales and companies strapped for cash would flood the market the next two years with gaming assets at cheap prices.

Corporate raider Carl Icahn has taken advantage of bankruptcy deals to buy the Tropicana Atlantic City for $200 million and the unfinished Fontainebleau, once priced at $3 billion, for $150 million.

Zarnett, who has followed the casino industry for more than 14 years, said gaming companies piled on vast amounts of debt through private equity buyouts. Their blueprints for success turned into "a failed investment strategy."

Harrah's Entertainment, for example, sold for $17.1 billion, about 10.7 times cash flow. Station Casinos went private for $5.5 billion, roughly 16.5 times cash flow.

"The motivation by those private equity firms, at the time, we believe was the substantial cash flow generated by gaming operators (prerecession) and the perceived undervalued real estate holdings," Zarnett said.

We know how those deals worked out.

Harrah's averted bankruptcy by conducting multiple debt exchanges. Near-term debt maturities have been extinguished, at least in the interim.

Station Casinos, on the other hand, is working its way through a Chapter 11 bankruptcy restructuring, proposing a plan that would slice off key assets into a new holding company while putting the rest of company on the auction block. The Fertitta brothers, through their new Fertitta Gaming business, hope to retain those casinos with a stalking-horse bid of $772 million.

Zarnett said it would be a challenge for the Fertittas to retain those assets.

In addition to Station, he predicted Harrah's and MGM Mirage would unload assets.

As for potential buyers, Boyd Gaming Corp., which made two offers to acquire all or part of Station Casinos, is lurking. The casino operator is not alone.

Others include a partnership between Baltimore-based Cornish Group and longtime casino operator Dennis Gomes, Malaysia-based casino operator Gentling, and Treasure Island owner Phil Ruffin.

Zarnett thought regional casinos operators America Casinos, Pinnacle Entertainment, Penn National Gaming and Isle of Capri Casinos could go either way. The companies could be buyers, sellers or both.

Howard Stutz's Inside Gaming column appears Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. He blogs at lvrj.com/blogs/stutz.