Strip resorts too pricey, exec says

Financially strapped casino operators may be asking too steep a price for Strip resorts that are potentially on the market, according to a high- ranking executive with Penn National Gaming, the company most often linked to possible purchases.

However, a spokesman for Penn National, a regional casino operator located in Wyomissing, Pa., said the company continues to be interested in acquiring a Strip resort.

During an investors conference in New York this week, Penn National Chief Financial Officer Bill Clifford hinted at a strategy shift in which the company was adjusting its focus from buying something on the Strip to investing in new gambling jurisdictions.

Penn National has about $1.5 billion in cash available for casino purchases through money the company received last summer in breakup fees after a private equity firm aborted a buyout attempt. Analysts expect Penn to use the money to grow the company regionally. The company operates 19 casinos and racinos in 15 states and Canadian provinces, but does not own a resort in either Las Vegas or Atlantic City.

Penn National this week bid to operate a casino in Kansas. The company has also bid on a casino site in Maryland. Penn National is linked with gambling expansion opportunities in Ohio and Texas.

Clifford told the conference Penn National has spent time trying to work out deals for Strip casinos, but the transactions have been tough to close. The casino companies are seeking prices well above what Penn is willing to pay.

Stifel Nicolaus gaming analyst Steve Wieczynski discussed Clifford's comments in a note to investors. He said a multiple of 10 times to 12 times cash flow is what it normally takes to buy a Strip resort.

"In order to benefit the seller, who is often working through the deleveraging process, the property needs to sell at a multiple above that of the company itself, which is usually higher than Penn will pay," Wieczynski said.

CB Richard Ellis Executive Vice President John Knott, who oversees the company's Global Gaming Group, disagreed. He said the recent sale of Treasure Island by MGM Mirage to former New Frontier owner Phil Ruffin for $775 million, disputes that notion. Knott said the transaction was valued at about seven times cash flow.

"The multiples are going down because (cash flows) are starting to go down," Knott said. "Historically, Strip assets have sold at 10 or 12 times as the multiple. The Treasure Island deal reflects the change in the market."

Knott said he was surprised Penn National hasn't reached a deal yet on the Strip. In January, Penn National executives dispelled talk the company was about to buy The Mirage from MGM Mirage.

Penn National Chairman and Chief Executive Officer Peter Carlino said in February that Strip prices were too high.

"We believe selling multiples now don't reflect reality," Carlino said. "Our interest is clearly only in a Strip property, something that will benefit our current customer base around the United States and Canada. I think we are going to have to let this play out longer."

MGM Chairman and CEO Jim Murren said last month that the company, which operates nine Strip hotel-casinos, has hired an outside adviser to evaluate potential sales offers for some of its properties.

Penn National has also been linked with potential sales of properties owned by Harrah's Entertainment.

A company spokesman said Friday that Penn continues to have an interest in being on the Strip, but the company is also looking at regional markets for possible expansion.

"This is in Penn's philosophy of operating functional, low-capital gaming properties, not monuments," Wieczynski said, adding that the economic crisis has taken away some of Penn's potential competition when competing for a regional casino.

"This should give Penn a better shot at winning in new jurisdictions, whereas in the past the company would have had trouble competing against less prudent monument builders," Wieczynski said.

"Instead, with other operators deleveraging and in a tight capital environment, we believe they will be able to build more basic, less expensive properties that could still generate solid returns," he also said.

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871.