NEW YORK (AP) -- An RBC Capital Markets analyst raised his rating and price target for Pinnacle Entertainment Inc. on Thursday, saying its pending acquisition of Ameristar Casinos Inc. should help its business in multiple ways.
THE SPARK: The analyst John Kempf lifted Pinnacle to "Outperform" from "Sector Perform" and boosted its price target to $24 from $18.
THE BACKGROUND: Pinnacle and Ameristar announced the roughly $869 million deal — or $2.8 billion including debt — last year. The transaction could possibly more than double Pinnacle's size.
Pinnacle owns seven U.S. casinos and a racetrack, and has another casino under development. The Las Vegas company operates in Louisiana, Missouri and Indiana. Ameristar, also based in Las Vegas, has eight casinos in the United States, including Missouri, Iowa, Colorado, Mississippi, Indiana and Nevada.
Last week the Mississippi Gaming Commission unanimously approved the proposed deal. It has the approval of both companies' boards, but still faces further regulatory approval before it can be completed. Pinnacle said last week that the acquisition is on track to close in its third quarter.
THE ANALYSIS: Kempf said in a client note that the deal could diversify Pinnacle's geographic reach, as well as produce "robust" free cash flow. While Pinnacle currently gets 90 percent of its adjusted earnings from two states — putting it at risk to changes in state gaming tax rates and regulations — the analyst says that after the acquisition closes that will drop to 61 percent. The buyout also will see Pinnacle's gaming market exposure increase to 13 from 6.
"Diversification providers for greater stability in cash flow," Kempf wrote.
The analyst says that Pinnacle will likely be able to finance the deal at relatively cheap rates, which would help the transaction add further to its financials. He anticipates the company using initial free cash flow to reduce debt, but says it will probably be able to resume returning capital to stockholders and look to buy more assets.
A representative for Pinnacle did not immediately respond to an email seeking comment.
SHARE ACTON: Up 79 cents, or 4.2 percent, to $19.74 in afternoon trading. The stock has traded between $8.89 and $21.19 over the last year. Shares gained 20 percent for the year to date.