BYD: POTENTIAL STN BUYOUT

BYD’s preliminary offer to buy Station Casinos OpCo assets for $950 million is very intriguing. In addition to huge potential free cash flow and earnings accretion and the obvious long-term benefits of “owning” the Las Vegas locals business, this announcement may signal something very important. I certainly feel a lot better about BYD’s covenant situation knowing that the banks most likely signed off on this offer. The following are our thoughts:

• Banks are probably on board – This could possibly be the most important near term takeaway. We doubt that BYD would’ve pursued this offer without clearing it through the banks. The bear case on BYD was the potential for a covenant bust in Q2 or Q3. We think that is highly unlikely and are encouraged with the implied confidence from the banks. Look for Thursday’s earnings announcement on BYD’s liquidity picture which we’ve been arguing is better than rumored.

• Strategic long term synergies – We already could foresee the benefits to BYD of STN entering bankruptcy, just in terms of the competitive landscape. BYD “owning” the LV locals market brings exponentially greater benefits in terms of synergies, marketing efficiencies, and a less promotional environment. The long-term outlook of this market is favorable. Due to low taxes and cost of living, and a favorable climate, population growth should continue, especially among retirees (nice demographic for gaming).

• The price could be right – We calculate the multiple to be about 4.6x 2009 EBITDA, if the Thunder Valley management contract is included, which is unclear, or 6.8X if it is excluded. However, STN OpCo owns $50-75 million in net land value and has $250 million in excess cash. With these additional considerations, the multiples look low. The senior credit debt holders will probably need more than the current offer, even though it is a better offer than that offered by STN management and Colony Capital.

• Accretion – BYD is borrowing incrementally at only 1.625% above LIBOR. This is a huge asset ($2bn of liquidity not due until 2013) that BYD would deploy. Even without the Thunder Valley contract, this deal would be very accretive on a free cash flow and earnings basis.

• The timing is right despite what the sell side is going to tell you – A lot of the sell side will focus on the difficult conditions in the Las Vegas locals market and bad timing. I argue the opposite. Now is the time to pursue a transaction like this. The largest player in the market will be entering bankruptcy. As we noted in our 2/5/09 note “THE LAS VEGAS LOCAL MACRO MODEL”, 2010 could be a growth year due to population and employment growth, and the efficient and early decline of the housing market.

• Regulatory issues should not be a concern – Even though BYD would dominate the locals market with this acquisition, antitrust precedent is not to separate the Strip from the locals market to determine concentration.