Timing right for suitors to pursue Full House

In the grand scheme of things, the proxy fight over Full House Resorts seems like small potatoes.

But with regional markets on a downward trajectory, the company is ripe for the taking.

Las Vegas-based Full House owns three regional casinos and has a management contract for a Lake Tahoe resort. Full House, which is traded on Nasdaq, has a market capitalization of less than $24 million.

As a comparison, MGM Resorts International is spending more than four times Full House’s value to build its Park dining and entertainment development between New York-New York and the Monte Carlo.

A Full House buyout isn’t going to rile up the investment community.

A group of Full House investors, led by former Pinnacle Entertainment CEO Dan Lee, predicts better days for the casino operator if it can remake the board and map out a new direction.

“We see great value and potential for the company,” said Bradley Tirpak, a Full House shareholder and professional investor who worked for several Wall Street firms.

The group controls 6.2 percent of Full House shares and received Securities and Exchange Commission permission Tuesday to approach other company stockholders about a special meeting to vote on a board restructuring.

A trust set up by the company’s late CEO that owns 9.4 percent of Full House sided with the shareholder group.

The proxy fight hasn’t drawn much interest from analysts.

Macquarie Securities is advising Full House in the matter, which sidelines analyst Chad Beynon. Sterne Agee gaming analyst David Bain hasn’t commented on the company since May.

The proxy fight comes as regional gaming markets hit rock bottom.

Through September, just four out of 22 states have shown gaming revenue increases over 2013. Two states, Indiana (leading the downturn at 12 percent) and Mississippi (down 4 percent) are home to Full House casinos.

The company’s Rising Star Casino in Indiana has been hurt by new competition across the Ohio River in Cincinnati. Since 2011, Rising Star’s revenue is down 47 percent.

Statewide, Indiana’s gaming revenue declined 40 times in the past 45 months, according to Macquarie. The Indiana region that draws from the Cincinnati market has experienced 30 consecutive monthly declines.

In other words, this the perfect time for Lee and his investment group to make a run at Full House.

The company put itself on the market last week and invited Lee’s group “to participate in the sale process.”

Lee said it’s unclear whether Full House can actually be sold, and if a buyer will surface. Gaming and Leisure Properties, the real estate investment trust that was spun off from Penn National Gaming could have some interest.

Declining gaming revenues nationwide have worked to drag down stock prices of regional casino companies, including Pinnacle Entertainment, Boyd Gaming Corp., Penn National Gaming, Isle of Capri Casinos and Caesars Entertainment Corp.

Penn National’s revenue fell nearly 10 percent in the third quarter, but the company’s overall results still beat most analyst projections. Penn National has 26 casinos and racetracks in 17 states and provinces, and sits at ground zero in the regional gaming downturn.

“The operating environment in the regional markets continues to be challenging, given the frugality of the consumer and the cannibalization from supply additions,” Deutsche Bank gaming analyst Andrew Zarnett said.

Wells Fargo Securities gaming analyst Cameron McKnight said new and expanded regwional casinos, such as the Horseshoe Casino Baltimore, are slicing into existing customer bases as markets grow more competitive.

“Industry trends should improve in 2015 given limited additional supply growth,” McKnight said.

Beynon said stock prices of regional gaming companies underperformed Standard &Poor’s average by 6 percent, so consumer spending continues to be muted.

“Our channel checks indicate that tier-one and (tier)-two players are moderately healthy, but lower-tier players aren’t showing up at the same rate they did years ago,” Beynon said.

Full House has suffered along with other regional casino operators. That’s one reason the company dumped plans to buy a Tunica, Miss., casino earlier this year, even though the company lost 97 percent of a $1.75 million escrow account and $300,000 in professional fees.

Full House is still part of two groups seeking casino opportunities in upstate New York and the company has expressed interest in potential racetrack projects in Kentucky.

Lee is skeptical about the current regional environment.

“Management’s pursuit of new projects requiring capital and attention could represent a tremendous risk to stockholders,” Lee said.

Howard Stutz’s Inside Gaming column appears Wednesdays and Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. Follow on Twitter: @howardstutz.

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