A lot of investors got a Christmas present a few days ago in the blockbuster announcement by several regional casino operators that looked like one of those multi-team baseball trades.
As everyone knows by now, Penn National (PENN) is buying Pinnacle Entertainment, selling four Pinnacle casino operations to Boyd, and Gaming & Leisure Properties (GLPI) will be buying the real estate of those properties and leasing them back to Boyd, plus it will buy Penn National’s Plainridge, Massachusetts, slots casino and lease it back.
The result was huzzahs all around and nearly universal raising of earnings estimates and target prices for PENN, Boyd and GLPI.
PENN will now become a regional gaming behemoth with revenues over $5 billion. Boyd has added three major markets – Kansas City, St. Louis and Cincinnati. Both are acquiring customers they can cross-market to their Las Vegas casinos, and GLPI gets more rental properties.
Further, while the buyers emphasized the low prices paid after cost savings are extracted, the valuations on a trailing basis exceeded historical averages for regional casinos. That gives both encouragement that regional casino stocks will now sell at higher valuations and that more acquisitions are ahead as higher buying prices could persuade some casino owners to sell.
Of the companies involved, Boyd received the biggest rave reviews in buying over $650 million of trailing revenues for $575 million at a price of just 6.25 times EBITDA.
That Boyd pulled off a highly productive acquisition should be no surprise. It is the company’s modus operandi to grow through prudent purchases that offer both immediate return and long-term growth. And, indeed, Boyd further confirmed that practice by several days when it later announced the $280.5 million purchase of Valley Forge Casino outside of Philadelphia.
In the Pinnacle transaction, however, Boyd will be doing something new: paying rent to a REIT in GLPI.
Boyd CEO Keith Smith and CFO Josh Hirsberg have made clear that they see value in owning real estate and don’t intend to create and spin off a REIT as PENN, MGM Resorts and Caesars have done and Pinnacle effectively did.
But they also proved their flexibility and opened up another route to growth that they might use again.
The transactions are also the latest round of consolidations that is creating a handful of regional giants. Add in Eldorado, which earlier this year acquired Isle of Capri, and Caesars, which is buying Centaur Gaming’s two Indianapolis area racinos, and regional gaming in the US is down to something like a Big Four: PENN, Caesars, Boyd and Eldorado. And MGM, while Las Vegas focused, is a growing regional operator, too, though through building, not buying.
So, that raises the question of who else is out there as a buyer or a seller.
PENN and Boyd might not be in the market for further acquisitions today, but they will be in position to buy again in the future.
Caesars, fresh from a reorganization that reduced its debt, is in the market again, as the Centaur purchase demonstrates.
Eldorado, Golden Entertainment and Monarch Casino are capable of buying properties, though, like PENN and Boyd, but maybe not right now.
There might also be a thought that Eldorado, Golden and Monarch could be targets, though they are controlled by families, that, at the moment, seem more motivated to grow their businesses.
One company that isn’t often discussed is Tropicana Entertainment, publicly traded but owned mostly by Carl Icahn.
So far, Tropicana has grown through its own relatively modest acquisitions, and it has a strong enough balance sheet to be an acquirer again.
But Tropicana might also be attractive to a buyer given its geographic diversity and the rebound of Atlantic City, home to its namesake flagship property.
Icahn is in the business of buying and selling, and he can be envisioned to go either way.
