Majestic Research

Associated Press

Boyd Gaming to Sell Underperforming South Coast Casino

By Ryan Nakashima
Published: July 26, 2006

LAS VEGAS (AP) - Boyd Gaming Corp. said Tuesday that it was disappointed in the performance of its newest Las Vegas casino and it will sell the seven-month-old South Coast property to Michael Gaughan, the founder of the Coast Casinos chain it merged with two years ago.

The announcement, combined with Boyd’s 79 percent drop in second-quarter net income and less-than-expected profits from chief rival Station Casinos Inc., stoked analysts’ fears of weakening demand for gambling among Las Vegas residents.

“I think there’s concern that, from early indications, that the market growth is slowing,” said analyst Matthew Jacob of Majestic Research.

Boyd’s announcement of the sale of the 600-room South Coast Hotel & Casino came less than a year after it opened in December at a cost of about $583 million.  The property five miles south of the Las Vegas Strip has attempted to cater to horse lovers with its 1,200-stall equestrian center.

“Clearly, none of us can say that it met our expectations out of the box,” chief financial officer Paul Chakmak said in a conference call with analysts. “Time will tell what ultimately that property can do. But ... this transaction is a commentary on where we see it over the course of the next few years.”

Revenue at the property suffered from “continued softness,” the company said.  One problem has been the lack of an offramp from the highway that connects Las Vegas and Los Angeles.  The ramp is still more than a year from completion.

Gaughan agreed to pay Boyd an amount equal to the net proceeds from the sale of 15.8 million Boyd shares, divesting him of his entire 17.7 percent stake in Boyd.  At Tuesday’s closing price of $36.49, those shares were worth $576.5 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.”

After the announcement at the close of the market, Boyd shares fell 99 cents or 2.7 percent to $35.50.

Boyd said second-quarter profit tumbled 79 percent to $10.2 million, or 11 cents per share, on higher preopening expenses and write downs related to the retirement of one of its original gambling boats.  Las Vegas-based Boyd Gaming operates 19 casino entertainment properties in six states and jointly owns the Borgata in Atlantic City, N.J.

Revenue increased 10 percent to $610.9 million from $554.3 million.

On average, analysts polled by Thomson Financial were looking for earnings of 57 cents per share on sales of $623.4 million.

Station Casinos Inc., which owns and operates about a dozen neighborhood or “locals” casinos in the Las Vegas area, announced its second-quarter profit came in below expectations due to higher costs, sending its share price down more than 5 percent.

During the quarter in which Station opened the $1 billion Red Rock Casino, Resort and Spa some 10 miles west of the Las Vegas Strip, net income fell 34 percent to $26.8 million, or 44 cents per share, from a year earlier.

Adjusted earnings were $37.3 million, or 61 cents per share, below the average expectation of analysts polled by Thomson Financial of 63 cents per share.

Revenue climbed 25 percent to $341.8 million from a year ago, but also was shy of analysts’ expectations of $342.3 million.

Goldman Sachs analyst Steven Kent called the quarter “disappointing.”

“Revenues were below guidance indicating to us that it is taking longer for the Vegas locals market to absorb new capacity,” he said in a research note.

Total operating costs and expenses hurt results, increasing 35 percent to $265.2 million.

Interest expenses jumped 119 percent to $41.3 million, mostly due to financing the buyback of 10 million shares, chief financial officer Glenn Christenson said.

The company bought back shares at an average price of $72.97, but since peaking at $80.32 on April 5, Station shares have sunk some 23 percent.  Shares closed down $2.95, or 4.9 percent, at $56.95 on the New York Stock Exchange.