May 29, 2006

Las Vegas real estate prices dampen merger talk

By Paritosh Bansal

NEW YORK (Reuters) - Taking a gamble on Las Vegas is
getting expensive these days.

Several casino companies are looking for ways to enter the
largest U.S. gambling market, but doing so has become too
costly after some pricey deals for Las Vegas properties.

"We were very interested in Las Vegas until the price got
so high," Trump Entertainment Resorts Inc. Chief Executive
James Perry told Reuters in a recent interview. "We don't see
... having an opportunity there in the short term."

Deals such as the buyout of Aztar Corp. by closely held
Columbia Sussex Corp. for more than $1.9 billion and the
acquisition of Hard Rock Hotel & Casino by Morgans Hotel Group
Co. for $770 million sent shivers down the spines of other
companies hoping to enter Las Vegas.

Aztar, which owns 34 acres of land on the Las Vegas Strip,
saw a fierce two-month bidding war that involved as many as
four suitors.

Columbia won. But it could be paying more than $30 million
an acre just for the land, the highest price ever for a parcel
of that size in Las Vegas, according to Deutsche Bank analyst
Marc Falcone.

"The costs are getting to be prohibitive," Penn National
Gaming Inc. Chief Executive Peter Carlino said in a recent

"The numbers are out of control over there," Carlino said,
referring to the Hard Rock deal. "They are paying way too much
for that for our taste."


A limited amount of available real estate on the Strip,
coupled with the ever increasing popularity of the gambling
mecca, is helping boost prices.

"Land is not available in that area," said Peter Dunay,
chief investment strategist at Leeb Group. "So it is very
competitive and very tough."

Things have gotten worse as private companies with deep
pockets turn to the gaming industry, which offers stable cash
flows and high returns.

"There's a lot of money around right now ... looking for a
place to land, and gaming seems to be one of the places they
want to go," Perry said.

When shareholders in companies that own casinos in Las
Vegas see other deals, they too want more.

Last month, when casino operator Riviera Holdings Corp.
agreed to go private in a $211.5 million buyout, one large
shareholder opposed the deal, saying it undervalued the
company's land on the Las Vegas Strip.

But there is a limit to how much public companies are
willing to pay for a piece of the action.

Pinnacle Entertainment Inc., which started the bidding war
over Aztar with an initial offer of $38 per share, bowed out of
the contest when Columbia bid $54 per share. Ameristar Casinos
Inc., another bidder, quit when offers started pushing $50 per


Still, the lure of Las Vegas is too powerful for companies
to completely ignore.

The city offers a stable regulatory environment and its
fame as an entertainment destination is so widespread that it
affects competition even in regional markets, Calyon Securities
analyst Smedes Rose said.

Harrah's Entertainment Inc., the world's largest gaming
operator by revenue, promotes its casinos in smaller markets
through offers such as discounts at its Las Vegas properties --
a competitive edge that companies such as Pinnacle want.

Having a casino in Las Vegas also boosts the value of a
company's brand, Dunay said. "It's a prestige thing to say that
I own a casino on the Strip."

Pinnacle, Trump and Penn National all continue to look for
ways to get into Las Vegas.

Trump's Perry said he would be open to talking with Morgans
Hotel, which would like a partner to run the casino, as well as
any other opportunity that may arise.

Penn's Carlino said his company would also continue to look
for a point of entry, such as a joint venture.

But he added, "That's going to be tough."