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US casino operator Pinnacle takes US$95 million stake in Asian Coast Development

Wednesday, 01 June 2011 11:51
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An operator of US regional casinos has managed to do something that the mighty Caesars Entertainment—formerly Harrah’s—has so far signally failed to do. That is, establish a deal for a gaming operation in Asia.

Pinnacle Entertainment Inc has acquired for US$95 million a 26% equity interest in Asian Coast Development Ltd (ACDL), the owner and developer of the Ho Tram Strip—a five-resort integrated gaming project to be developed on the coast of southern Vietnam.

Pinnacle will not be a silent or ‘sleeping’ partner in this Asian project. It will actively manage the second of five resorts scheduled under the master plan for Ho Tram. It also has a clear incentive to contribute to the success of the whole development because it will be entitled to a share of the revenue streams of the whole project proportionate to its equity stake in ACDL.

The US market positioning of Pinnacle Entertainment Inc may have been a contributing factor in achieving the right ‘fit’ with the Ho Tram project—a development that already includes the Las Vegas giant MGM Resorts International as a branding and management partner. Pinnacle operates seven casinos in Louisiana, Missouri, Indiana and Nevada, plus a racetrack in Ohio. The company is also developing a further casino and hotel in Baton Rouge, Louisiana due to open in the summer of 2012. While Pinnacle is a strong regional brand in the United States, it is not yet a global brand in the manner of MGM and Caesars.

Lloyd Nathan, the CEO of ACDL, was the key executive in brokering the deal with Pinnacle. He described the situation as follows: “The chemistry with Pinnacle was right from the very beginning. These are great guys. We’ve enjoyed dealing with them from the day we met them.

“We are philosophically aligned in terms of operational efficiencies, appropriate governance, and they absolutely share our broad vision for Vietnam and Asia. Their management team, led by their CEO Anthony Sanfilippo, is first rate. And having that first rate experience, and their proportional representation on our board, only enhances our plans for growth.”

It’s not easy to set precise financial markers in terms of how much the equity deal could be worth to Pinnacle in a fledgling market such as Vietnam. It seems likely however that Pinnacle’s investment will prove an efficient deployment of capital compared to opportunities in US domestic markets.

Union Gaming Research said in a note to investors: “Assuming a typical management contract (2% of revenues and 5% of EBITDA) and a healthy return profile of 25% plus (management expects gaming tax rate to be favourable and closer to that of Singapore than Macau), we estimate Pinnacle’s management fee income from the second integrated resort could be in the range of approximately US$13 million to US$16 million in 2015 dollars. In addition to the management contract, Pinnacle will be eligible to receive income share from ultimately all five of ACDL’s gaming and nongaming properties on the Ho Tram Strip.”

That final sentence is a key part of the equation. Management income from the second of Ho Tram’s five resorts is the bread and butter. Income share on the whole project is the potential jam.

The entire Ho Tram project has a price tag of US$4.2 billion. The first phase of the first resort has an approximate cost of US$430 million. So Pinnacle’s equity contribution of US$95 million represents about 22% of that capital cost.

“The split on funding is approximately 50:50 debt to equity,” says Mr Nathan.

“There’s a syndicate of Vietnamese banks providing the debt, and Harbinger Capital Partners and Pinnacle are providing the equity.”

The second resort to be built at Ho Tram will have a brand identity developed collaboratively by ACDL and Pinnacle.

“That brand will initially be for Vietnam, but we will be looking at the possibility of expanding further into Asia,” says Mr Nathan.

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