For some time now there's been speculation on Wall Street that Las Vegas-based Ameristar Casinos (Nasdaq:ASCA) was going to be bought out. These hopes took a hit on Tuesday when the Associated Press reported Justin Sebastiano, an analyst for Morgan Joseph & Co., wrote in a note to clients, "We believe the cost of debt to consummate any deal is too expensive."
Sebastiano also said the estate of former CEO Craig Nielsen, who passed away in 2006 and controls a 55% stake in the company, would probably hold out for a higher price. I hear what Sebastiano is saying, but I think there could be some other factors to consider.
Non-Traditional Locations Offer Diversification
Las Vegas and Atlantic City are synonymous with gaming and have been for decades. However, many operators are eager to expand beyond those areas for the simple reason that the competition has become too intense, and because untapped markets have the potential to generate big bucks. The company has several properties in increasingly popular markets including:
- Ameristar St. Charles - located in the St. Louis area;
- Ameristar Kansas City - which sports a 140,000 square foot gaming floor;
- Ameristar Council Bluffs - located in Iowa but close to Omaha, Nebraska;
- Ameristar Vicksburg - a dockside gaming facility in Mississippi; and,
- Ameristar Black Hawk - located near Denver, Colorado.
A big-name, deep-pocketed casino operator could find Ameristar very attractive. The company's large number of casinos outside the Las Vegas and Atlantic City markets could help provide what amounts to portfolio diversification, allowing a big player to mitigate risk and offset weakness if profits in traditional gaming locals soften. (To learn more, see Mergers And Acquisitions: Doing The Deal.)
MGM A Logical Choice
I think MGM Mirage (NYSE:MGM) could be a logical suitor. MGM Mirage has built an empire in Las Vegas and Atlantic City. And in recent years it has shown a lot of interest in other markets such as Macau. It's also built out facilities in Michigan, Illinois and Mississippi, so I would argue that it could appreciate the benefits of diversification. Finally, MGM Mirage should have the means to pull off such a deal. Dubai World, a holding company for the Dubai government, recently made a $5 billion investment in MGM Mirage, so perhaps that cash is burning a hole in MGM's pocket.
My point is that I think Sebastiano's focus on cost is certainly correct; however, it seems a bit overblown given the potential for longer-term positives. Ameristar has enviable locations, plus I would think that MGM or another large suitor could eventually refinance a portion of its Ameristar's roughly $1.6 billion in long-term debt, which in turn could save money - let alone any gains incurred from economies of scale. (For more on the advantages of size, check out What Are Economies Of Scale?)
Estate's Moves Hard To Predict
In late 2006, Ameristar's then chief executive Craig H. Neilsen passed away. This meant 55% of the company's outstanding stock passed onto his estate. There is certainly some logic behind Neilsen's estate holding out for a better price. After all the stock is only trading at about $19, or roughly half of what it was worth a year ago. However, the estate may also have its own agenda and time line, and holding out for the perfect moment may not be feasible.
This potential problem is mentioned in Ameristar's latest 10K: "The Estate of Craig H. Neilsen owns a majority of our common stock and may have interests that differ from those of other holders of our common stock."
What this boils down to is 25 million shares, roughly 44% of the outstanding stock, is slated to pass to a foundation that focuses on funding spinal cord research. The estate may have a donation schedule to keep, and it's hard to predict how long the estate's executors would be willing to hold out.
Beyond this there is also the issue of estate tax. Typically, after a wealthy person dies his or her estate must pay estate tax liabilities in full within nine months - although extensions are possible. Again, it's difficult to predict if there would actually be a need to sell out to pay the estate tax, but it does add an unknown into the equation. (For related reading, check out Owners Can Be Deal Killers In M&A.)
Bottom Line
While Sebastiano might not see a deal coming to fruition anytime soon, I suspect the need to diversify away from the Las Vegas and Atlantic City markets, coupled with its Ameristar's low stock price, may entice a larger, better-financed suitor to step up. Neilsen's estate adds a second wrinkle, as it's difficult to predict how the majority stakeholder will act.
I think that a sale could still be in the cards, and feel the stock would be more fairly valued in the $25-30 range.
