Boyd to Buy High-Margin Peninsula


Boyd Gaming Corporation (BYD) recently inked a definitive acquisition agreement with Peninsula Gaming, LLC. Per the agreement, Boyd Gaming will acquire Peninsula Gaming for $1.45 billion, by year-end 2012.

Peninsula’s five properties are spread across in three of the country’s most compelling geographic locations that made it a lucrative acquisition target. The properties are Kansas Star Casino near Wichita, Kansas; Diamond Jo Casino in Dubuque, Iowa; Diamond Jo Worth in Northwood, Iowa; Evangeline Downs Racetrack & Casino in Opelousas, Louisiana; and Amelia Belle Casino in Amelia, Louisiana.

The deal is in sync with the Boyd Gaming’s strategy to grow through geographical diversification. The to-be-acquired properties also resonate with the psyche of Boyd Gaming's currently operational portfolio. Once completed, Boyd management anticipates that the acquisition will be accretive to earnings, net of transaction costs as well as enhance free cash flow considerably that will in turn help Boyd to de-lever in the coming days.

Additionally, Boyd management commented that the Peninsula assets operate in flexible markets in the Midwest and Southern zone of the country. Boyd gaming currently has Midwest and Southern operations which are yielding high returns. Hence, the recent acquisition will take Boyd’s presence in that region to a new height.

The region is still under-penetrated by other gaming companies and offers a relatively favorable tax and regulatory environment which help drive EBITDA margins compared to those industry peers doing business in other geographies. We also believe that less stringency in regulatory procedures will facilitate a seamless closure of the transaction.

We view the deal as strategically positive for both parties, given that Peninsula Gaming is being paid an outstanding multiple for its high-yielding portfolio. As of March 31, 2012, Peninsula had a highly levered balance sheet with total long-term liability of $713.8 million and cash and cash equivalents of $47.0 million.

Boyd Gaming will fund the deal with $200.0 million in cash and approximately $1.2 billion in debt at the Peninsula subsidiary. The consideration will also include a note of approximately $144 million provided by Boyd Gaming. Further, the agreement says, Boyd Gaming is entitled to pay some extra in 2016 if Kansas Star's EBITDA exceeds $105 million in 2015. This extra amount would be 7.5 times more EBITDA over $105 million.

Boyd Gaming, which competes with the likes of  Penn National Gaming Inc. (PENN), currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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