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PNK wants this deal so a forced sale of properties to comply with the FTC is likely.

The big catalyst for PNK has gotten less attractive thanks to Big Government.  The FTC’s ruling yesterday will likely force PNK to divest assets in Lake Charles and St. Louis and delay the closing until the end of the year.  Forced sales are rarely value creating for the seller and this situation could be even worse - there just aren’t a lot of buyers.  We calculate $2.50 to $3.00 per share in lost value although some of that was reflected in the stock yesterday.

We assume PNK will divest its Lumiere Place in St. Louis and the yet to open Ameristar Lake Charles.  Assuming 7x 2015 EBITDA multiples and the time value of the delay, we project the “new” deal will cost the stock $2.50-3.00 in value.  The multiple for Ameristar Lake Charles is debatable and could even be considered high.  Texas is likely to legalize casinos at some point, in the future, which would likely decimate the profitability of these border town casinos.  PENN has indicated in the past that it is not interested in the Lake Charles market because of this threat.  For this reason and its similar concentration as PNK in St. Louis, we do not believe PENN would be a buyer of these properties.

The deal is still worth doing, in our opinion, and PNK seems to believe the same.  However, even with the 8% drop in the stock yesterday, we are less positive than most with the stock at $19.  While we’ve been right on the fundamentals, we’ve been wrong on the stock.  However, the catalyst has been pushed off and sentiment could turn negative.  Here are some of our thoughts:

  • PNK is doubling down on a space that faces the huge secular headwind of dying customers.  Baby Boomers appear to be the last generation of slot players.  Approximately 90% of regional gaming profits is derived from slots.  We’ve written extensively on the demographics and the lack of younger players.  Slot volumes continue to fall despite better economic conditions.  We’re not sure how regional gamers can overcome this potentially disastrous trend.
  • Yes, housing is getting better but the wealth effect takes time to build.  We’ve also written extensively on the strong impact of housing prices on gaming revenues over the last 15-20 years.  The statistical relationship is there but we feel it will take time and continued increases in home prices for this correlation to resume.  It hasn’t yet.
  • Texas – we think it’s inevitable.  Over 60% of PNK’s property EBITDA is derived in Louisiana.  Sure, this percentage will fall with the ASCA buyout and Ameristar Lake Charles divestiture but leverage is going way up.
  • May might look better in the regional markets but June is likely to move back into negative SSS territory.  Slot volumes are not going to surge anytime soon in our opinion which makes estimates still look aggressive.  Following the acquisition, leverage will increase to 6.0-6.5x which will look even worse in a declining estimate environment.   
  • We don’t believe PNK can cut the full $55 million in corporate expense out of ASCA.  It may not be widely known that ASCA actually allocates some costs to corporate that most operators push out to the properties.  This accounting treatment contributes to industry high property margins but also higher corporate expense as a % of revenues.  We think $35-40 million in expense reduction is the right number. 
  • The FTC delay increases the probability of a competing bid