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Rising Regionals

Consolidation is under way in the heartland. Who are the winners and losers?

Rising Regionals

The setting was the Southern Gaming Summit in Biloxi, Mississippi, an event reinvigorated under the management of Roger Gros and the crew of Global Gaming Business Magazine.

The topic was gaming industry consolidation, discussed by a panel led by Deutsche Bank analyst Andrew Zarnett.

The panelists were two leaders of the consolidation, CEOs Tim Wilmott of Penn National and Keith Smith of Boyd Gaming, and myself as kind of the lay person.

The conclusion: Consolidation will continue, but we probably are at a point where there won’t be a mega-merger, such as Boyd and Penn joining forces, in large part thanks to the limitations states have placed on the number of licenses a company can hold, or because of regulator concern about industry concentration.

The logic for consolidation is simple and classic. The industry is beyond its go-go growth years of a generation ago and, as with any maturing industry, acquisition becomes a preferred path for growth.

And the means are there, as lenders and borrowers are more comfortable with debt at four and five times EBITDA, and even a little more.

Thus, we’ve seen the cycle in which companies like Penn, Boyd and Eldorado Resorts run their debt ratios up to five times or so, cut costs to increase cash flows that reduce ratios to around four times, then buy again.

That process has created three regional gaming companies with revenues of several billions of dollars each, and an appetite for more.

Much of the consolidation has been facilitated by the coming of gaming real estate investment trusts, the first of which, Gaming & Leisure Properties, was created when Penn spun off its real estate and became a rent-paying tenant to its own offspring.

The rationale was that REIT stocks sold at 13 and 14 times EBITDA compared to seven and eight times for casino companies. So, REITs can buy casinos at nine and 10 times, raising the valuations for casino investors while adding to earnings. And the casino companies could buy the gaming operations of the properties at low valuations in exchange for becoming rent payers.

Meanwhile, casino company shareholders can win in other ways, depending on how the deal was structured. When Pinnacle sold its real estate to Gaming & Leisure, Pinnacle’s shareholders also got stock in Gaming & Leisure. The result was a higher combined stock value, and investors began to receive a dividend that has been around a 7 percent yield. You can’t get 7 percent on your money just about anywhere else—not CDs, not money markets, not U.S. bonds. And the REIT investor has the security of owning real estate, the most tangible of all tangible assets.

So, we ask—as investors must do trying to protect and grow our money—where do we go from here?

Gaming & Leisure Properties has been the most active of the REITs, and has been broadening its tenant base beyond Penn, including in the most recent deals in which Boyd and Eldorado became rent payers.

But Gaming & Leisure will soon have competition as MGM Resorts spin-off MGP Properties and Caesars spin-off VICI Properties also broaden beyond buying the properties of their parent companies and leasing them back.

So, we have a cast of acquisitive companies and facilitators. In addition, other companies are acquisitive. As examples, Churchill Downs is buying small operations that larger companies might not want, such as Lady Luck in Vicksburg, Mississippi, and Presque Isle Downs outside Erie, Pennsylvania, from Eldorado. Golden Entertainment, from its smaller base, is playing the buy, reduce debt then buy again game. Nor can Hard Rock International, Golden Nugget, Monarch Casino and even little Full House Resorts be forgotten.

Finally, there could be new blood entering in the form of Native American gaming enterprises and international companies. The Seminole Tribe of Florida already owns the aforementioned Hard Rock. The Mohegan and the Mashantucket Pequot tribes of Connecticut have ambitions beyond their reservations. The Poarch Band of Creek Indians of Alabama raised eyebrows with their agreement to buy Sands Bethlehem in Pennsylvania from Las Vegas Sands for $1.2 billion.

As for international players, Genting already has a growing U.S. presence with Resorts World at Aqueduct, brand-new Resorts World Catskills and Resorts World Las Vegas rising off the Strip. Galaxy Entertainment has bought 4.9 percent of Wynn Resorts and, while the company says it’s merely an investment, a relationship has been established that could lead to something more.

So, what’s left to buy? A lot, is the answer. Privately held multiple-property companies such as Rush Street, JACK Entertainment and Affinity might some day be on the market, delivering properties to companies that want a presence in Chicago, Philadelphia, Pittsburgh, Cleveland, Detroit and Cincinnati. The Peninsula Gaming folks who sold out to Boyd are back as Peninsula Pacific.

There are plenty of individual properties that could come on the market, ranging from Cosmopolitan and Caesars-owned Rio in Las Vegas to the former Revel, which is about to reopen as Ocean Resort in Atlantic City, to riverboats in Indiana and Louisiana that might look more attractive, as gaming laws in those states are liberalized.

The list goes on, and it is long, even if a mega-merger is unlikely. And with the ability of REITs to facilitate sales at higher valuations than before, there are plenty of ways for investors to play the gaming consolidation game.

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