Aztar Gets Dibs on Hot Property and Stock Jumps

Aztar (AZR) stock jumped Tuesday after the Phoenix-based casino company said it had negotiated an option that could give it full control of one of the most valuable pieces of land on the Las Vegas Strip.

Aztar already owns 50% of the land and 50% of the hotel on the 34-acre parcel, which is located at the southeast corner of Tropicana Avenue and the Strip, across from the MGM Grand. Chicago's Jaffe family owns the other half of the land and hotel. The option gives Aztar up to 18 months to buy out the Jaffe family for $120 million, or $7 million per acre, including the hotel. The news pushed Aztar up 1, or 12.5%, to 9, on much-heavier-than-normal volume.

The move will enable Aztar to redevelop -- or simply demolish and rebuild -- the Tropicana hotel-casino, which now sits on the land. Outshined by its nicer, newer neighbors, the 2,000-room Trop is barely profitable. But without full control of the property, Aztar has been unwilling to spend the hundreds of millions of dollars necessary to build a resort capable of competing with the MGM and other new Strip casinos.

"It's good news for Aztar. It secures the purchase rights to that very important parcel of land," Salomon Smith Barney analyst Bruce Turner says. (His firm has not done any recent underwriting for Aztar.)

Aztar, which is already struggling under a heavy debt load, also said it had hired Goldman Sachs to help it find a joint venture partner to redevelop the property. Aztar spokesman Joe Cole said the company would consider any offer.

One analyst said Tuesday's announcement made Aztar an immediate takeover candidate. "Basically this helps put the company in play to be taken over," the analyst said. "They have got themselves in a position that they're going to be selling the company." The theory is that the option resolves any control issues that could have made a buyer wary.

The analyst also noted that Aztar's total equity market capitalization is now about $415 million, and the company has another $560 million in debt. That puts the total value of the company at $975 million, roughly seven times its expected 1998 cash flow. In contrast, takeover bids for Showboat (SBO) and Station Casinos (STN) recently valued those companies at more than nine times cash flow -- a significant premium to Aztar's current price.

But Turner isn't so sure that Aztar will be hot takeover bait. He notes that Aztar's other assets, which include casinos in Atlantic City and Missouri, aren't exactly hot properties. "Would you rather have half of a redevelopment or all of the company?" he asked.

Aside from Aztar, another winner Tuesday was Mario Gabelli, whose funds own more than 10% of the company and have been buying more recently, according to Securities and Exchange Commission filings. For more on Gabelli's active hand lately, click here.

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