LOS ANGELES – Shares of casino operator Penn National Gaming (PENN) surged more than 25 percent on Thursday as its plans to buy riverboat gambling company Argosy Gaming (AGY) pushed stocks higher across the sector.
The acquisition would be the latest in a string of deals this year -- including Harrah's Entertainment's(HET) purchase of Caesars Entertainment (CZR) and MGM Mirage's (MGG) pending acquisition of Mandalay Resort Group (MBG) -- that have raised price to earnings multiples.
Fulcrum Global Partners analyst Joe Greff on Thursday raised his rating on Penn National shares to "buy" from "neutral," saying the $1.4 billion cash deal, announced late on Wednesday, made "tremendous financial sense."
Penn shares closed up 26 percent at $52.22 on Thursday after hitting an all-time high of $53.98 earlier in the session. Shares of Argosy closed up 11.2 percent at $45.32 on the Nasdaq.
The deal calls for Argosy shareholders to receive $47 a share. Penn would also assume $805 million of Argosy's long-term debt.
The transaction would create the third-largest U.S. casino company, and the free cash flow would be used to fund a host of growth projects in Pennsylvania, Maine, West Virginia, Ohio and Missouri, Greff said.
Penn operates properties including the Boomtown Casino Biloxi (search) in Mississippi while Argosy, based in Alton, Illi. has riverboat casinos in such cities as Baton Rouge and Sioux City, Iowa.
Analysts said industry consolidation -- driven by factors such as scarcity of U.S. gaming properties and licenses -- is likely to continue, although the ranks of merger candidates are thinning.
Casino operators Aztar (AZR) and Pinnacle Entertainment (PNK) remain "as the few realistic acquisition targets," according to Deutsche Bank analyst Marc Falcone.
Shares of Aztar, operator of Tropicana casinos in Las Vegas and Atlantic City, closed up 7.5 percent at $33.69 on the New York Stock Exchange (search), while shares of Pinnacle were up 5.38 percent at $16.27.
Based on the price to earnings multiple in the Penn/Argosy deal, Greff valued Aztar's shares at $37 using 2005 earnings and $40 using 2006 estimates.
Other gaming companies mentioned by analysts as benefiting from talk of further market consolidation and higher multiples include Mississippi-based Isle of Capris Casinos Inc. (ISLE), and Station Casinos Inc. (STN).
Banc of America Securities analyst J. Cogan said in a report that casino mergers make sense because companies need to diversify their legislative risk and debt costs are at historical lows. He also cited renewed interest in the space from nonpublic companies and Native American tribes.
"Potential take-out prices could be as much as 20 percent above current valuations, which are at or near peak on a historical basis," Cogan said.
Wyomissing, Pennsylvania-based Penn said the Argosy acquisition, which essentially doubles its revenue, would immediately add to earnings. The deal is expected to close in the second half of 2005.
"Longer-term, we think Penn would not rule out using its balance sheet and free cash flow on future acquisitions to get a foothold in Atlantic City and Las Vegas, and create a national player loyalty program," Greff said
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