upped the ante in its battle for the fast-growing local Las Vegas gambling market, announcing the purchase of closely-held
in a cash and stock deal valued at $820 million.
Before the start of trading on Monday, Boyd announced that it would pay $495 million in cash, $325 million in stock and assume $460 million in debt to buy Coast, which will become a wholly owned subsidiary of Boyd. The deal, which Boyd called a "transforming combination" and said was immediately accretive to earnings per share, will add Coast's four Las Vegas casinos -- Barbary Coast, Suncoast, The Orleans and the Gold Coast -- to Boyd's Stardust and Sam's Town casinos.
"With Coast, Boyd becomes a leader in the highly coveted Las Vegas locals sector while maintaining its significant presence in gaming throughout the United States," said William Boyd, chairman and CEO of Boyd Gaming.
Boyd estimated that it paid 7.4 times Coast's estimated 2004 earnings before interest, taxes, depreciation and amortization and said the combined companies would net $2 billion in revenue in fiscal 2004. Before the acquisition, analysts expected the casino operation to have revenue of $1.35 billion in fiscal 2004.
Of the 17 casinos in Boyd's portfolio, seven will be based in Las Vegas, consolidating the company's focus on local gamblers. Once the merger is complete, Boyd said that half of its pro forma EBIDTA will come from its Nevada operations, which compete against
, the number one operator with 35% share of the Las Vegas local market, according to Lehman Brothers research.
By purchasing Coast, which has a 20% share market and is the number two operator in the locals market, Boyd is ratcheting up the competition against Station. With renovations and expansion planned for a number of off-Strip properties, the local market has become an increasingly lucrative space as the population of Las Vegas continues to soar. According to research from the Las Vegas Convention and Visitors Authority, local gamblers spent 33% more over a two-year span in 2001 and 2002 than they did in 1999 and 2000.
Recently, Station has become something of a Wall Street darling. After raising earnings guidance and releasing earnings that topped Wall Street expectations less than two weeks ago, Station Casinos was upgraded by CIBC, Morgan Stanley and Wells Fargo, citing the strong Las Vegas market as a catalyst for future upside. Shares are up 11.7% since the earnings release.
On Monday, it was Boyd's turn to shine. J.P. Morgan analyst Harry Curtis cheered the merger with Station, upgrading Boyd to neutral from underweight, telling investors the deal would add 5 cents to 7 cents to the company's 2004 EPS. "The acquisition of Coast diversifies Boyd's cash flow and increases EBITDA concentration in the attractive Las Vegas locals market," he said, in a note.
Shares of Boyd Gaming rose 81 cents, or 4.2%, to $20.02, while shares of Station Casinos were up 59 cents, or 1.6%, to $36.79.
The move is part of an acquisition spree by Boyd, which spent $190 million on Jan. 21 to buy
( HET) riverboat casino in Shreveport, La. When all the deals close, Boyd will operate 17 casinos, including the Shreveport casino and Coast's planned South Coast casino, which is expected to break ground in the spring.
But while analysts credit Boyd for not overpaying, concerns linger that the new properties only make the casino operator larger and any gains will be offset by increased capital expenditures down the road.
"The acquisition expands Boyd's asset base, but does not represent a cohesive strategy. The only real benefit we see from the acquisition is that Boyd will be a larger company, given that it is paying full value," said W. Todd Scott, gaming analyst at Morgan Stanley.