Gaming Growth Slows, Acquisitions Become Focus

The high yield gaming sector finally appears to be hitting the end of the explosive growth that characterized the industry over the past couple of years, forcing the issuers to look more closely at acquisitions instead of internal growth.

The stocks are up dramatically for some in the industry, including some of the high yield issuers, according to gaming sources.

Building original projects is coming to an end, said Jefferies & Co. gaming analyst Ray Cheeseman. Instead of boosting existing cash flows, companies will look to buy new streams of revenue. "Now what happens? You can't find new projects so you start buying each other," he said.

But there are some good deals to be had by acquirers that will increase market share and cash flows. Some properties have been sold recently for a multiple of six and seven times cash flow, which can be an attractive deal, Cheeseman said.

"This is a 30% [margin] business when it's done right... you should make that [acquisition] every day you go to work," he said.

Furthermore, when an issuer is earning 30%, or even 20%, and it can issue bonds and 9%, it's a good play for the investors, said a portfolio manager.

In general, the gaming sector has been hot in 1999, with investors raking in the biggest winnings.

Illinois-based Argosy Gaming reported record earnings, revenues and cash flow recently for its third fiscal quarter and for the nine months ending Sept. 30. And even more to the point, its stock price has increased more than 400% to close at press time at $16.69. At this time last year, the stock was at $2.25 a share.

Elsewhere, the industry has already seen some recent acquisitions, such as Isle of Capri announcing that it will buy Lady Luck Gaming for about $258 million. The price, at $12 per share, is a 48% premium over the close of Lady Luck's stock at the time of the announcement in October. And two months before that, Lady Luck agreed to buy a riverboat complex from Sodak Gaming in Iowa for $41.7 million.