Penn nabs the Trop; Smog City

After years of hinting, feinting and fanning the flames of speculation, Penn National Gaming went out and bought its long-desired Strip casino: Tropicana Resort & Casino. The old gal has had difficulties keeping up with the times but Union Gaming analyst Chris Jones called the purchase “an absolutely massive deal for Penn National.” The company’s loyalty-program customers will no longer have to stay 10 miles south of the Strip, at M Resort, which CBRE Group broker Michael Parks called “not the Vegas experience a lot of out-of-town people are looking for.” CEO Alex Yemenidjian and owner Onex Corp. bought the Trop in 2011 for $250 million and, factoring in $180 million in renovations, will lose money on the $360 million acquisition. Profit was always elusive for the 58-year-old casino, even if Yemenidjian steadily narrowed losses.

Penn’s official take on the value-conscious purchase was that it would allow the company to operate a “premier Strip asset at an attractive price of entry … we have spent the past several years reviewing an acquisition of numerous gaming assets in Las Vegas. The Tropicana is a quality facility that can serve as an attractive destination offering for current Penn National customers, which further enhances our strong competitive position in the regional gaming markets in which we operate across the United States.” It’s certainly a better choice than Penn’s $50 million bid on Fontainebleau, a mistake from which Carl  Icahn rescued them.

The company’s first move will be to overhaul the technological infrastructure at the Trop and integrate with Penn’s Marquee Rewards program. After that, a second phase will contemplate adding retail and perhaps even additional hotel rooms. (Where, I wonder?) “The scope, budget and timing of any such expansion and improvements will be determined based upon Penn National’s initial operation of the property and customer demand for additional amenities,” said Penn CEO Timothy Wilmott. The latter (right) particularly likes the Trop’s location, including its proximity to MGM Resorts International‘s new arena, which is progressing rapidly.

Penn, which will fund the purchase with a mixture of credit and cash on hand, says that REIT Gaming & Leisure Properties will have no role in the transaction. While surprised by the purchase, Deutsche Bank analyst Carlo Santarelli said it “does fulfill management’s previously articulated goal of establishing a Strip presence and is likely to be a real test of the value of a regional network for a stand-alone Strip property.” He put the value of the deal at $10 million an acre. Santarelli’s J.P. Morgan counterpart, Joseph Greff, estimated the cost of the acquisition at a premium $10X cash flow. Penn inherits an 80% occupancy rate and $41 million in 2014 casino revenue (up 7% from the previous year).

“Our sense is that this was not a competitive process with multiple bidders,” wrote Greff. “We think there is an opportunity to use its existing regional database, benefit from additional capex, and rationalize the property’s costs (e.g., shared costs with M Resorts) to bring this to a sub 10x multiple (likely over a two-year time frame).” Considering the amount of money that Onex poured into the Trop, revolutioning its look over a four-year period, it’s surprising (and a little disheartening) that Penn will have to make further capex infusions. But perhaps that also means that days of better management are now at hand.

Even so, Wilmott had nothing but kind words for Onex: “The rooms are in good shape, the public areas are in good shape. We can hit the ground running.”

* If you’re looking to improve your health with a visit to Las Vegas or Henderson, you’ve come to the wrong place. The American Lung Association gives both cities an “F” for air quality. “It is disappointing to see an increase in ozone, short-term particle pollution and year-round particles from last year. These increases have resulted in our area being in the top ten ozone polluted areas in the United States, being tied for ninth on the list,” wrote Kristina Crawford, the ALA’s executive director for Nevada. “As we go into our hotter months, we can expect to see an increase in ozone and particle pollution, we need stronger air quality standards to help limit pollution and increase our air quality in order to product the health of our community.” So visit Vegas by all means … just don’t breathe the air.