Majestic Research

Gaming Wire

Boyd Gaming Selling South Coast: Coast Founder to Purchase Struggling New Resort

By Rod Smith
Published: July 26, 2006

Boyd Gaming Corp. Tuesday announced it has reached an agreement to sell its newest hotel-casino, the 1,350-room South Coast, to the man who built it.

The resort on Las Vegas Boulevard south of McCarran International Airport will be sold to Michael Gaughan, founder and former operator of Coast Casinos, which Boyd Gaming acquired two years ago in a $1.3 billion merger.

The sale is expected to close in the second half of 2006, pending regulatory approval.  It will be sold for a yet-to-be determined price equal to the net proceeds from the sale of approximately 15.8 million shares of Boyd Gaming stock owned by Gaughan.

No ceiling price was set and the minimum price was not disclosed.

Based on today’s closing price of $36.49 for Boyd stock, the resort would sell for about $576 million, which, coincidently, Boyd Gaming President Keith Smith said was the book value for South Coast.  The original construction cost was about $600 million.

“If you go by what the place cost to build, I’m getting a good deal. If you go by the (operating profit), Boyd’s getting a good deal,” Gaughan, 63, told The Associated Press.  He said he expected the property to turn an operating profit of about $40 million for the year.

“I’ll straighten this place out,” Gaughan said.  “I’ve kind of been too far removed from it. I’ve gotten lazy. It’s time to go back to work.”

Boyd Gaming Chairman Bill Boyd said that Gaughan met with him about six weeks ago and said he did not enjoy the corporate life he has led since the merger and wanted to return to running his own business.

“We felt (selling) South Coast made a lot of sense, we had a fairness opinion and we proceeded to do it.  It’s something that’s fair to both of us,” Boyd said.

However, Boyd Gaming President Keith Smith said during a Tuesday conference call to announce the company’s second-quarter earnings that it is no secret that business at South Coast has been soft since it opened in December.

In its first six months, the property generated $16 million in cash flow, or earnings before interest, depreciation, taxes and amortization.

“The success of the South Coast is several years down the line as far as return on investment is concerned, so we were satisfied to give it up for a fair price,” Boyd said.

Analysts were skeptical about Boyd Gaming’s motivations for selling the South Coast.

They pointed out that another former Coast Casinos property now owned by Boyd, The Orleans, also got off to a rocky start.  Boyd Gaming is keeping The Orleans, which has improved its business since the merger.

Smith, however, said the situations were not comparable because Boyd Gaming has new, strategic developments under way since the merger and Gaughan came up with an offer that was difficult to refuse.

Matthew Jacob, senior gaming analyst with Wall Street-based Majestic Research, however, questioned whether Boyd Gaming is getting the best price for the South Coast or if this is the best time to be selling it.

“The problems that they have been facing seem short-term, such as roadway access,” he said. “But in six months, you should see the property ramp up some. The results so far may not be indicative (of how the property can perform).”

Smith said Boyd Gaming appointed a special internal committee to review the buyout proposal, which determined that the minimum price, which was not disclosed, was fair.

Smith also said that the company was selling South Coast to an insider rather than putting it out to auction because it doubted it could improve on the terms.

But some analysts also expressed skepticism about the strength of the locals gaming market.

Jacob, for instance, said the Las Vegas locals market seems to be slowing down.

“It has grown, driven by the opening of South Coast and Red Rock (Resort), but when you back those two out of the market, there seems actually to have been declines,” he said.  “That’s true for both Boyd (Gaming) and Station (Casinos, owner of Red Rock).  On a same store basis, it looks as if the market is actually declining.  It seems weak consumer spending trends may be affecting locals casinos’ operations.”

Boyd Gaming Chief Financial Officer Paul Chakmak conceded that there has been a significant increase in the capacity in the Las Vegas locals market this year, referring to the opening of Red Rock Resort.

However, he and Smith said that had little to do with the decision to sell South Coast.

Chakmak said the market has started absorbing the added capacity and noted that no other locals casinos are set to open until 2009.

The problem with keeping the south Strip resort, Smith said, was that it will take years to ramp up South Coast’s performance, while other locals casinos are being developed in the area and Boyd Gaming is focused on other ventures, including its $4 billion Echelon Place project that will be built on the site of the Stardust.  Boyd Gaming is also planning a North Coast hotel-casino in North Las Vegas.

The other ventures he referred to include Anthony Marnell III’s M Resort on the southeast corner of Las Vegas Boulevard and St. Rose Parkway and the Southern Highlands hotel-casino between Interstate 15 and Las Vegas Boulevard South, opposite Southern Highlands but on the other side of the freeway.

In addition, Station Casinos, which opened Red Rock Resort, owns 40 acres zoned for hotel-casino development one block south of South Coast.

Gaughan also owns the slot operations at McCarran International, which are privately owned and do not report results, but which are said to be tremendously successful.

Also on Tuesday, Boyd Gaming announced that in the second quarter of 2006, it had revenue of $264.4 million, up 15.8 percent from $228.3 million a year earlier.

The company also had cash flow of $167.3 million, up 5 percent from $159.2 million.

And it reported net income of $10.2 million, or 11 cents per share, down 79 percent from $48.6 million, or 54 cents per share, in the second quarter of 2005.

Adjusted earnings for the second quarter 2006 were $42.5 million, or $0.47 per share, as compared to adjusted earnings for the same quarter 2005 of $50.3 million, or $0.56 per share, taking into account expensed stock options; write-downs and other charges, mainly related to the retirement of the original gaming vessel at Blue Chip; and preopening expenses related to Echelon Place and Borgata’s public space expansion project.