Monday, August 19, 2013

Tropicana Entertainment Buys Lumiere Place from Pinnacle

Tropicana Entertainment is the majority owned gambling unit of Icahn Enterprises that trades over the counter under the symbol TPCA.  The quick summary thesis is as follows: (1) Tropicana has a large net cash position, (2) Carl Icahn owns 68% of the company and has a strong track record in the gaming industry, (3) A small float and an OTC listing creates an opportunity for individual investors as its equity is ignored and illiquid, (4) the regional casino industry was over built in the 2000s and is generally unloved by investors.

Lumiere Place
On Friday, Tropicana used the majority of their net cash position and available liquidity to purchase the Lumiere Place casino and attached hotels/restaurants in downtown St. Louis from Pinnacle Entertainment for $260 million.  As part of the Pinnacle's purchase of Ameristar (for over 8x EBITDA), Pinnacle came to an agreement with the FTC to sell one of the combined Pinnacle/Ameristar's three casino properties in St. Louis that controlled 60% of the market share which was a concern for regulators.

Opened in the beginning of 2008 at the height of the casino building bubble, Lumiere Place is an upscale casino located across from the Edward Jones Dome and America's Center convention center near the Gateway Arch.  In addition to the 2000 slot machines and 68 table games, the Lumiere Place property includes two hotel properties in the Four Seasons Hotel St. Louis and the HoteLumiere, plus additional restaurant and retail space.  Pinnacle has positioned Lumiere Place as a luxury brand that is less focused on the slot/retail gambler and more focused on table games and non-gambling related revenue which is a departure from Tropicana's current core consumer (I believe should be seen as a positive).

Pinnacle Entertainment's Sept 2012 Investor Presentation
In total, approximately $600 million has been invested in the project since it opened 5 years ago, and its currently on the books for $401 million as of June 30th.  While Lumiere is probably worth far less than $600 million today, Tropicana clearly purchased it for less than replacement cost.  Pinnacle has previously disclosed an annualized EBITDA of $34 million for Lumiere, at a $260 million purchase price, the EV/EBITDA multiple is 7.5x, just below what the average casino operator is trading today of 8-9x.

As of 6/30, Tropicana had $241 million in cash and $170 million in debt, for a net cash position of $71 million.  The $13 million in interest payments on the term loan facility versus the minimal interest income from the cash has been a drag on earnings.  Tropicana has the option to increase their term loan by $75 million and has an used $15 million letter of credit facility giving it plenty of room to make the Lumiere purchase, but not a lot more given their annual capital expenditure needs (which currently roughly match cash flow from operations).  This purchase seems about the perfect size given Tropicana's balance sheet, meaningful but not a stretch.

Pro Forma Valuation
While I continue to think that the EV/EBITDA ratio is best for the gambling industry due to the varying capital structures, the purchase of Lumiere Place should also make Tropicana look cheaper on a more traditional P/E basis as the idle cash and term loan (which have a drag on earnings versus being cancelled out looking at it from an EV/EBITDA basis) will be invested in a productive income generating asset.

But looking at the "new" Tropicana, I come up with the following back of the envelope valuation:

Tropicana's current core = $84 million
Lumiere Place = $34 million
Total = $118 million

Enterprise Value
Market capitalization of the equity = $405 million
Net Debt = $189 million (current cash is $241 million, so take the $170 million in debt and add the additional $19 million)
Total = $593 million

EV/EBITDA = 5.02x

Icahn Enterprises currently values (for the purposes of their non-GAAP NAV) their 68% pre-Lumiere stake at $566 million, or 9x EBITDA.  Using that same 9x EBITDA valuation for the post-Lumiere Tropicana, and the equity should be valued at $873 million versus a market cap of $405 million today, so the market is giving you almost a 55% discount to become a minority shareholder in a company controlled by one of this era's top investors, seems like a good deal to me.

Disclosure: I own shares of TPCA


  1. How do you get $93 million for TPCA core EBITDA? My calc is closer to $83 million.

    1. I used IEH's valuation and backed out what they're using for EBITDA. $566/0.679 = $833.5/9 = $92.6 million. Through the first six months, Tropicana has EBITDA of $44.26 million, and given the third quarter is usually the strongest, the $92.6 million number seems attainable.

  2. You are making a mistake here by ignoring the net cash position. Should be 566/.679=834-72=762/9=84.6 which is much closer to the numbers they have been reporting.

    1. Ah, you're right, good catch, I'll update my numbers.