Thanks to the rising demand for online poker and higher consumer spending on commercial casino gaming, the revenues of the gambling industry have increased in recent years. Due to poor margins, however, the losses on the income statements of most industry players are also increasing. Their debt-to-equity ratios are also worsening over time. To counteract this situation, many companies are selling off their assets to repay their debts. Pinnacle Entertainment, Inc (NYSE:PNK) and its two competitors, Caesars Entertainment Corp (NASDAQ:CZR), and Boyd Gaming Corporation (NYSE:BYD) have recently sold their assets. Today, I will dig out the effects of the spinoffs made by these three players.
Pinnacle Entertainment, Inc (NYSE:PNK) has announced it will make two divestitures. The company has entered into a definitive agreement to sell off its Lumiere Place Casino and Hotels for approximately $260 million. The book carrying value of these hotels and casinos was $401.5 million as of June 30. The company has incurred a loss of $141.5 million, and the per-share loss from this transaction is around $2.40.
The company also decided to sell all the equity interests of its Ameristar Casino lake development project to Golden Nugget, with Golden Nugget completing the lake development project once the sale is final. Golden Nugget will pay total consideration equal to all cash expenditures on the development of the project. It will also pay outstanding payables related to this project, less a $37 million credit.
The proceeds from both these divestitures will be used to repay debt and reduce leverage for the company. The company’s current debt-to-equity ratio is 4, which is higher than the industry average of 3.3. The divestiture of Ameristar’s Lake Charles project will eliminate future capital expenditure. This increase in expenditure was expected to enhance free cash flow generation, accelerate debt repayment, and further reduce leverage. This shows that both these transactions have brought some losses for Pinnacle Entertainment, Inc (NYSE:PNK).
Besides the divestitures, Pinnacle Entertainment, Inc (NYSE:PNK) has also completed the acquisition of Ameristar Casinos. This will lower the risk of the company’s portfolio by expanding its operations into more than double their current geographic regions. The new geographic regions will be Council Bluffs, Black Hawk, Vicksburg, Nevada Regional, Kansas City and Greater Chicago, which are some of the nation’s best gaming markets. After the acquisition, Pinnacle Entertainment, Inc (NYSE:PNK)’s properties would grow by 100%.
This increased operational and geographical diversity in best gaming markets is expected to bring annual synergies of at least $40 million per year with per-share synergies of around $0.68 per year. The acquisition will complement Pinnacle Entertainment, Inc (NYSE:PNK)’s existing portfolio, growing its revenues and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by 101.9% and 140.2%, respectively. The adjusted EBITDA margin would improve by 4.4%. The pro forma discretionary cash flows are expected to increase by 61.5%.