CORPORATE FOCUS—Pinnacle Entertainment Inc

The fate of Glendale-based casino operator Pinnacle Entertainment Inc. (formerly Hollywood Park Inc.) is all but sealed. Company shareholders will vote Sept. 19 on a proposed acquisition by Harveys Casino Resorts of Nevada that, if fully approved, will make Pinnacle part of the privately held company later this year. Pinnacle officials expect shareholders to approve the deal. Pinnacle’s stock has been riding near its high, trading around $21 since the March announcement that Harveys would offer $24 a share in cash to buy the company. “The stock is currently trading up on the merger news,” said Pinnacle Chief Financial Officer Bruce Hinckley. “(On) The Street, everyone is basically waiting to see if the merger closes.” Analysts and company officials expect the deal to close. But before it does, both sides have several hurdles left to clear. By far the biggest challenge will be for Harveys’ parent company, Los Angeles-based Colony Capital LLC, to raise $1.4 billion in the coming months to fund the merger. Analyst Michael Crawford with B. Riley & Co. said he believes Colony can pull it off. “That’s not expected to be a major impediment,” Crawford said. The other obstacle is the opening of Pinnacle’s newest outlet, Belterra Resort and Casino, a riverboat gambling parlor to be based in Indiana. The resort was expected to open Aug. 31, but disaster struck. As the Alabama-built riverboat was heading up the Mississippi River to its new home, it hit a cement barge, cutting an 80-foot gash through the operations room and severing computer wires for the casino. The Belterra is now in New Orleans being repaired, and Pinnacle expects to open the casino Oct. 31. As part of the merger agreement, Belterra was supposed to be opened by Sept. 15, but Hinckley said Harveys is expected to allow the changed timeframe. Still, the Belterra crash could stop the merger, Crawford said. “It gives Harveys the opportunity to walk away,” he said. “I don’t think they will, because Pinnacle is doing so good.” Indeed, Pinnacle has seen its fortunes rise over the past year as it exited the horseracing business and focused more on its casino operations. For the second quarter ended June 30, Pinnacle reported net income of $26.2 million (31 cents per share), compared with net income of $9.7 million (12 cents) the like period a year ago. Revenues were $160 million vs. $199.5 million. Analyst Harry Curtis of Robertson Stephens expects the company to see long-term earnings growth of 15 percent a year over the next three years, according to a report he released in August. In 1999, Pinnacle sold Hollywood Park to Churchill Downs, and earlier this year the company sold its sole remaining racetrack in Phoenix. After the sale of Hollywood Park, the company changed its name to Pinnacle Entertainment and became strictly a casino owner. Pinnacle was started in the 1930s, and focused on racetracks until the late 1970s when it bought three Boomtown casinos. In 1998, with a new management team on board, officials decided to strategically shift course from horseracing to casino gaming. “It was a better opportunity for shareholders,” Hinckley said. “It’s more of a growth industry.” Since 1998, the company has expanded its casino offerings. It now has casinos in Nevada, Louisiana, Mississippi and Argentina. The company is also in line to receive a third gaming license from the state of Louisiana, the final license to be issued in the state. If Pinnacle is awarded the license, it will open a casino in Lake Charles. Harveys operates casinos in Nevada, Colorado and Iowa. Both companies must be licensed by states in which the other is licensed before the merger can be approved. Hinckley said he expects the merger to close in November or December. Analysts polled by Zacks Investment Research give the company promising ratings. Two analysts rate it a strong buy, two a moderate buy and one a hold. The mixed reviews are in part due to the uncertainty of the impending merger. Crawford of B. Riley rates the stock “market outperform” based on its buyout price. “We like the company, but the upside is kind of capped,” he said. Shareholders are also likely to get an additional $1 for each share when Pinnacle sells 97 acres it owns in Inglewood to Casden Properties for $63 million in cash, a deal expected to close by the end of this month. “It’s a pretty attractive spread,” Crawford said.