What should shareholders in each company be considering?  Risk looks to the downside on PNK.





How will the market treat a Q4 miss?

  • We think PNK could report as low as $0.14 for Q4. 
  • 2013 estimates look like they need to come down from $1.01 to closer to $0.92 given poor performance of the regional markets

Probability of a competing bid from MGM or PENN or another entity?

  • PENN, MGM, and WYNN have to take a look at this deal
  • PENN can roll up ASCA into its REIT structure.  We think they could offer up to $40 per share
  • MGM has significantly more NOLs than PNK and a bigger multiple.  Could offer a little stock and mostly cash and make the deal deleveraging.  Cheaper way for MGM to de-lever
  • Given the NOLs this would be a slam dunk for WYNN as well but Steve Wynn may be reluctant to be involved in regional markets.  We've believed in the rationale of this acquisition for sometime now.
  • Obviously, any competing bid would be a hugely negative catalyst for PNK.  Unlike some others on the sell side, we wouldn’t classify a competing bid as unlikely.

What is the combined entity worth?

  • PNK currently trading at 8.0x 2013 and 7.5x 2014 EV/EBITDA
    • Looks reasonable although at the higher end of historical regional multiples
    • EBITDA growth of combined entity looks limited
  • 30% FCF yield
    • Appears very high but the combined entity is highly leveraged and free cash flow will be used to reduce debt for 4 years
    • Most of their debt is short-term variable so big interest rate risk.   Yield is likely not sustainable




Probability of a competing bid

  • PENN/MGM/WYNN could pay significantly above $26.50 and make it value added
  • We don’t believe there was a competitive bidding process so deal may have caught other casino companies by surprise

Probability of closing

  • We think absent a higher bid, the deal has a high likelihood of gaining regulatory approvals
  • The 9 month timeline looks reasonable and could even be conservative
  • If we were a shareholder we would hold out for a higher price.  We think ASCA is worth at least $40 in a REIT structure similar to the one announced by PENN.  PENN could accelerate this process by bidding for ASCA.

Mexican Markets

We don’t think it’s a good time to short Mexican equities right now despite financial markets being “priced to perfection.” The Mexican economy’s underlying fundamentals are vulnerable to cyclical erosion in the first quarter of 2013 and the stock market may pull back to some degree, but anticipate any weakness to be reasonably well-contained with respect to the intermediate-term TREND duration (3 months or more). As you can see in the chart below, the Dow Jones Mexico Stock Index is above our TREND and TAIL lines of support and has held above our TRADE line of resistance. We think stocks will continue to work well in Mexico's financial markets as long as there are no political hiccups that get in the way.


Mexican Markets - mexico1

FNP: Gotta Get Long

We added Fifth & Pacific (FNP) to our Real-Time Alerts this week as the quantitative setup clicked with our fundamental views on the stock. Our bullish stance comes from several factors, mainly that the stock has more unrealized value than many other names in retail. The Kate Spade brand is strong growth driver while Lucky Brand helps contribute to cash flow. While the Juicy Couture brand we view as a risk, we believe that FNP will soon get rid of the brand through a sale of some sort. We view 2013 as a good year for FNP and see upward revisions on the earnings side going forward.


FNP: Gotta Get Long - FNP

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Bullish TREND: SP500 Levels, Refreshed

Takeaway: If 1419 snaps, I guess I’ll have to think about changing my mind.

POSITION: Long Consumption, Short Commodities


Adding to our long Consumption theme (SBUX, NKE, FDX, etc) we bought YUM on red today. I also just covered my OIL and Energy (XLE) shorts, and shorted Bonds (TLT). SP500 TREND support of 1419 holding is the primary reason for those risk management decisions.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1450
  2. Intermediate-term TREND support = 1419
  3. Long-term TAIL support = 1370


With the VIX raging to immediate-term TRADE overbought here and Bonds not signaling any change in the fundamental shift we’re seeing in Global Growth (stabilizing, not slowing), 1419 holding makes sense to me.


If it snaps, I guess I’ll have to think about changing my mind.



Keith R. McCullough
Chief Executive Officer


Bullish TREND: SP500 Levels, Refreshed - SPX


Takeaway: Incremental positive for IGT/BYI/WMS

IL approvals have biggest month yet in December



Yesterday, the Illinois Gaming Board (“IGB”) released a list of all licensees, which included 955 licensed establishments as of December 20, 2012, implying the approval of 305 incremental establishments – the largest increase yet.  The marks a big acceleration over the 164 granted in October and 105 granted in November.  To date, there have been no establishment licenses revoked and 37 establishments have been denied licensure.  There has been one terminal operator who had its license revoked along and 23 terminal operators and 1 manufacturer that have been denied licensure.  Currently, there are 2,522 establishments pending approval, a 5% decline from November and a noticeable decrease in the number of technicians and terminal operators waiting for licensure this quarter, which is a positive sign implying that the IGB is getting through the backlog.


Each location can have a maximum of 5 machines so 955 approved locations imply a current maximum market size of 4,775.  On October 10th, after 3 weeks of testing, the IGB allowed 65 establishments to go live with VLT gaming.  In the September quarter, BYI and WMS recognized several hundred game sales into IL.  In the December quarter, most suppliers will be able to recognize revenues associated with placements in this market. 


Our best guess is that 3,000 VLTs will be shipped to IL in 2H2012, and by the end of 2013, the market should comprise of about 10,000 units.  Given that we are just in the 7th month of establishment approvals, it’s too early to say whether these estimates will come to fruition.  We expect that most of the VLT sales (upwards of 75%) will come with some sort of financing, but most will be accounted for as for-sale machines.


Our understanding is that ASPs should be around $12k range.  The consensus is that VLTs will win about $100 on average per day, with a large range depending on the location.  We believe that distributors receive a 10-15% cut of the purchase price as their commission, with the big suppliers paying on the low end of that range and some of the smaller guys paying at the higher end of that range.  Typically, distributors take the machines on a consignment basis, meaning that suppliers cannot recognize revenues until the machines are placed in the establishments.



Distributor:  3

Manufacturer:  3 (including Speilo and Konami)

Supplier:  6

Technicians:  23

Terminal handlers:  151

Terminal operators:  14

Establishments:  2,522 pending


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.