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Takeaway: PNK up 13% looks risky with deteriorating fundamentals

Decent price and NOLs make this a positive acquisition for PNK. Excluding the acquisition, we think PNK Q4 and 2013 estimates need to come down.


"The acquisition of Ameristar is a transformative transaction for Pinnacle that will provide us the scale and diversification to more effectively compete. The coupling of Pinnacle and Ameristar properties will create a terrific portfolio of quality assets to serve our combined guests"


- Anthony Sanfilippo, President and Chief Executive Officer of Pinnacle Entertainment 


"We are excited to have reached this agreement with Pinnacle as this transaction maximizes value for our shareholders and provides them with a significant and immediate premium.  We are focused on ensuring a smooth transition and look forward to working with the Pinnacle team."


- Gordon Kanofsky, Chief Executive Officer of Ameristar Casinos commented, 




  • There is minimal overlap between the 2 companies 
  • Transaction financing: 
    • New financing will mainly consist of the bank debt
    • They are considering options for a combined capital structure, but for now they are going to keep all the debt in place
    • The increased free cash flow will allow them to fund their growth pipeline and deleverage
  • Synergies of at least $40MM through scale efficiencies, margin enhancements through best practices, redundant public company expenses, and purchasing power/supply chain management 


  • More detail on the synergies
    • They have a large NOL, so this deal will allow them to accelerate the use the their NOL so the combined company should not be a payer of taxes in the  near and intermediate term
    • Some of the syngeries they can achieve is applying ASCA's best practices and overlaying them on their own properties
  • No need to issue equity as part of this transaction
  • There are termination fees payable to each party outlined in sections 5 & 7
  • Preliminary conversations with regulators have indicated that there should be no issues with overlapping properties (including Missouri & Lake Charles)
  • Will they look at a REIT conversion once this deal closes. At the moment, their focus is getting this transaction closed, integrating the companies, and deleveraging
  • They will transition to one loyalty plan eventually. For the time being, they will continue to have the joint venture marketing programs with WYNN and MGM, respectively. 
  • Having a property in Las Vegas is not their immediate focus. 
  • The merger agreement is posted so everyone can review. 
  • NOL: not expecting PNK to be a tax payer on a standalone basis - they only pay state taxes of $2-4MM per year. Through the combination, the state taxes will go up somewhat but they should not be a payer for federal taxes for a while
  • They do not intend to dispose of any of the 3 St Louis assets. They view the assets in 3 distinct markets but view having all 3 as a strategic benefit in that market
  • There will be a holding company above the 2 siloed structure 
  • ASCA also has some tax attributes where they have a large tax shield. 
  • ASCA is happy with MGM. They will figure out their partnerships at some point in 2013
  • Continuing with the sale of their land in AC. They are almost done with the first phase of the Vietnam project.
  • They are committed to deleveraging. Their comfort level is in the 3.5-5.0x leverage range.
  • Financing timing will be dependent on the regulatory approvals which should occur by mid-year. Expect the financing to get done at or shortly before the closing in the 1H2013.



  • PNK announced the acquisiton of ASCA for "$26.50 per share in cash, for a total enterprise value of $2.8 billion, including debt of $1.9 billion and cash on hand of $116 million as of September 30, 2012. This consideration represents a premium of 45% over the average closing price of Ameristar common stock for the 90 days ended December 20, 2012. The transaction has received the unanimous approval of both the Ameristar and Pinnacle Boards of Directors"
  • Pinnacle will benefit from increased operational and geographic diversity by more than doubling in size to 17 operating properties in 13 distinct geographies. 
  • The consideration represents an EBITDA multiple of 7.6x Ameristar's Adjusted EBITDA of $365 million for the TTM period, excluding synergies Pinnacle expects to achieve.
  • "We believe there is considerable opportunity to expand reach and generate synergies and efficiencies of scale from the increased size of the combined company, as well as an opportunity to drive property margin expansion by applying best practices garnered from both Pinnacle and Ameristar across the combined enterprise. As a result of the combination, we expect to achieve synergies and efficiencies of scale of at least $40 million annually, with potentially greater realization as we move forward through the integration process. Finally, we expect the acquisition of Ameristar to be accretive to our free cash flow and earnings per share following the closing, and for it to provide increased long-term strategic and financial flexibility. We are confident this transaction will drive long-term value for Pinnacle's stakeholders."
  • Pinnacle expects the transaction to close by the end of the third quarter of 2013. Pinnacle has obtained committed financing for the transaction and the transaction is not subject to a financing contingency.

Housing: Better and Better

Housing continues to recover with more positive data coming out this morning. The existing home sales report for November was strong than expected at 5.04 million versus a consensus expectation of 4.9 million. Inventory of existing homes for sale sank 3.8% month-over-month to 2.03 million units, down from 2.14 million units in October. This is real growth in the market that shows growth is truly stabilizing and a very welcome recovery in a sector that’s been down on its luck for some time now.


Housing: Better and Better - image012

PODCAST: American Woes

On this morning’s investment call held for subscribers, we discuss how the United States is on the precipice of imploding as fiscal cliff talks melt down along with the stock market. While the rest of the world’s markets ignore the turmoil in America, the S&P 500 is down -1.5% pre-market as futures sell off across the board. We also discuss how commodities continue to decline, the risk and the range of trading US Treasuries and the interaction between the FX markets and the US political landscape.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Staggeringly Quiet

This note was originally published December 21, 2012 at 07:21 in Early Look

“No one could remember when London had been so quiet.”

-Paul Reid


That’s what Paul Reid wrote about the French surrender to the Germans on June 22, 1940. It “staggered all of Britain. Britons began to realize that the way of life they had known and loved was vanishing.” (The Last Lion, pg 105)


And with the S&P Futures having a mini flash crash of -3.4% last night (1390 was the low) on the new “news” that our political overlords have no concept of real-time risk management, all was quiet.


Staggeringly quiet.


Back to the Global Macro Grind


People who wake up every day begging for and/or getting paid by more Big Government Intervention in what were our free-markets have no business whining about this today. They want a deal? This is part of the deal. So deal with it.


While there’s no doubt some in the #PoliticalMedia panicked last night, maybe freaking out is the only thing left that will drive ratings off 8 year lows. Who knows. The Rest of Us just sat back and watched the #PoliticalClass self-implode.


Context in considering market risk is always critical. Understand that both Asian and European equity markets were immediate-term TRADE overbought to begin with, so I wouldn’t consider Asia’s closing prices overnight and/or how Europe is trading this morning anything to freak-out about.



  1. China (Shanghai Composite) only gave back -0.69% of its recent rip
  2. Japan (Nikkei) was down -1% after being up +17% in the last month
  3. Singapore and South Korea were down -0.38% and -0.95%, respectively


  1. EuroStoxx50 is only down -0.59% this morning after going straight up since mid-November
  2. Germany (DAX) is -0.68% to 7619 (up +29.4% YTD and comfortably above its SEP 7451 closing high)
  3. Denmark (OMX Copenhagen) doesn’t care about any of this noise, UP +0.4% on the session

I know, who cares about Denmark? Let me assure you that the Danes don’t care about Captain Bailout America these days either. That’s the new world we are perpetuating – a very much polarized and protectionist one. Get used to it.


Global Fixed Income and Currency markets aren’t freaking-out like US Equity Futures traders either:

  1. US Treasury Yield (10yr) has literally moved 1 beep (basis point) in the last 24hrs (1.76% vs 1.77%)
  2. US Dollar Index is actually up +0.11% on the session to $79.37, making another higher long-term low
  3. EUR/USD only down 20 beeps to $1.32 showing no stress whatsoever

Spread risk and bond yields, globally, aren’t signaling much to me this morning; neither are commodities. Other than seeing a lot of bad jokes about Mayans on my Twitter stream, all I really see going on is a bunch of politically oriented people on TV looking emphatic on mute.


*Twitter and TV Viewer Note: when you are emphatic about everything, you emphasize nothing.


Where do we go from here?


You probably pick your favorite stock this morning and buy it on red. Don’t buy a Gold stock though. You’d think on an end-of-the-world morning like this Gold would actually go up. Nope.


Our intermediate-term strategy view remains the same as it has for the last month:

  1. Long Global Consumption Stocks (NKE had a great quarter last night – FDX acted well on earnings this week too)
  2. Short Commodities (we’re still short Oil and Energy related equities)
  3. Out of Fixed Income (we sold all of ours last Friday and might short bonds today if we get our price)

If someone in your workplace is running around like a chicken with their head cutoff this morning, do me a favor and tell them to relax and realize that the way of life we had during free-markets is vanishing. Shhh.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1647-1690, $105.99-110.65, $3.52-3.59, $79.01-79.71, $1.31-1.33, 1.70-1.85%, and 1419-1450, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staggeringly Quiet - Chart of the Day


Staggeringly Quiet - Virtual Portfolio

Political Chaos

Client Talking Points

Get It Together

The markets don't believe that President Obama and John Boehner can come to an agreement on the fiscal cliff as the futures sell off en masse this morning. Ironically, the rest of the world seems to not care about America’s problems as the rest of the global equity landscape is essentially flat. No major sell offs anywhere but here. As we head into the holiday weekend, we can’t help but shake our heads over the political class and how Washington can't get its act together. 

The Cycle Turns

One of our global macro themes of commodity deflation continues as gold sells off further. There are a lot of investors who are long gold and this is a punch to the gut for them. Gold may have little bounces but they can be sold on green. Other commodities like copper to soybeans have had a very rough December. As we move from Growth Slowing to Growth Stabilizing, we will continue to see further commodity deflation.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“If people we right freaked out about USA credit risk, they'd be selling Treasuries and Dollars - they are buying both” -@KeithMcCullough


“The power of accurate observation is commonly called cynicism by those who have not got it.” -George Bernard Shaw


S&P 500 futures drop 20 points (-1.5%) pre-market amid worries over the fiscal cliff.


TODAY’S S&P 500 SET-UP – December 21, 2012

As we look at today's setup for the S&P 500, the range is 21 points or 1.02% downside to 1429 and 0.44% upside to 1450.    















  • YIELD CURVE: 1.50 from 1.53
  • VIX closed at 17.67 1 day percent change of 1.79%
  • BONDS – Treasuries haven’t budged on the budget thing – the 10yr is down 1 beep in the last 24hrs to 1.76% and remains well above the TREND breakout line of 1.69%. Currency markets aren’t moving much either – EUR/USD is down 20bps.

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Nat Activity Index, Nov. (prior -0.56)
  • 8:30am: Personal Income, Nov., est. 0.3% (prior 0.0%)
  • 8:30am: Personal Spending, Nov., est. 0.4% (prior -0.2%)
  • 8:30am: PCE Deflator M/m, Nov., est. -0.1% (prior 0.1%)
  • 8:30am: PCE Core M/m, Nov., est. 0.1% (prior 0.1%)
  • 8:30am: Durable Goods Orders, Nov., est. 0.3% (prior 0.0%, revised 0.5%)
  • 8:30am: Durable Goods Ex-Transportation, Nov., est. -0.2% (prior 1.5%, revised 1.8%)
  • 8:30am: Capital Goods Orders Non-Defense, Ex-Aircraft, Nov., est. 0.0% (prior 1.7%, revised 2.9%)
  • 9:55am: U. of Michigan Confidence, Dec. final, est. 75.0 (prior 74.5)
  • 11am: Kansas City Fed Manufacturing Activity, Dec. est. -5 (prior -6)
  • 11am: Fed to buy $1.5b-$2.25b notes in 02/15/2036–11/15/2042 sector
  • 1pm: Baker Hughes rig count


    • Washington Day Ahead
    • NRA holds news conf. on Newtown, Conn., slayings, 10:45am
    • EPA may announce latest version of Boiler MACT rule
    • CFTC holds closed hearing on enforcement matters, 10am
    • FDA decision date on Alexza’s Adasuve for agitation tied to schizophrenia, J&J’s bedaquiline for multidrug-resistant TB


  • Boehner drops "Plan B" as budget deal efforts turn to disarray
  • Citigroup said to give CCA managers 75% stake in funds for free
  • Aviva agrees to sell U.S. unit to Athene for $1.8b
  • Greenbrier calls for talks after rejecting Icahn sweetened bid
  • Crane buys bill-machine maker MEI Conlux from Bain-Advantage
  • Nokia signs patent-licensing deal with RIM, ending all disputes
  • SEC enforcement chief Khuzami said to leave agency next month
  • Facebook’s Instagram scraps changes amid outcry over content
  • ArcelorMittal reports $4.3b writedown of Europe units
  • Nike 2Q profit tops ests. as North America sales gain
  • RIM shrs fall on concern that service rev. will suffer
  • IBM judge refuses to rubber stamp SEC foreign bribery settlement
  • U.K. 3Q GDP rises 0.9%, revised from prior est. of 1%
  • BlackRock sees distortions in country ratings seeking S&P change
  • Fiscal Cliff, U.S. Home Sales, 2013: Wk Ahead Dec. 22-Jan. 5


    • Walgreen (WAG) 7:30am, $0.70 - Preview


COMMODITIES – you’d think this would be the ideal freak-out morning to be long Gold – nope; Gold snapped its long-term TAIL line of $1671 yesterday and didn’t look back – Gold and Oil are in Bearish Formations; if you need to get some short exposure on in a hurry this morning, we say stick with commodities and their related equities all day long.

  • Gold Gains in New York as Central Banks Boost Bullion Reserves
  • Copper Traders Turn Bearish as Hedge Funds Buy More: Commodities
  • Oil Declines Most in Two Weeks as U.S. House Delays Budget Vote
  • Copper Gains on Short Covering After China’s Imports Rebound
  • Tiberius Forecasts Gains in Commodities Indexes Next Year
  • Brazilian Arabica Coffee Trades at Discount, U.S. Roaster Buys
  • Oil May Rise on Higher Demand as Inventories Fall, Survey Shows
  • China Copper Imports Rebound as Exports Rise to Five-Month High
  • LNG Three-Year Rally Seen Over as Reactors Start: Energy Markets
  • Bearish Gold Options May Signal More Declines: Chart of the Day
  • Brazil Doubles Gold Reserves as Central Banks Buy Bullion
  • China Coal-Import Growth Seen Halting on Better Inland Transport
  • Aluminum Surplus May Widen 22% on China, Mideast Output Growth
  • Argentine Forecast Gap Keeps Wheat Market Guessing on Crop Size










ASIA – both Asian and European stock markets act a lot better than the US Equity Futures do – given how much both have ripped, that’s a pleasant surprise. China only down -0.69% after a monster melt-up and Singapore down -0.38%; nothing in Asia snapped even an immediate-term TRADE line of support.








The Hedgeye Macro Team




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