Boyd-Coast deal creates gambling powerhouse

Monday, Feb. 9, 2004 | 11:04 a.m.

Boyd Gaming Corp. and Coast Casinos Inc. today announced a merger agreement worth $1.3 billion that is expected to strengthen the companies' presence in the lucrative Las Vegas locals casino market. The deal also brings together two executives from pioneering families whose fathers were casino partners about 40 years ago.

Under the agreement, Coast will become a subsidiary of Boyd Gaming and will operate independently under existing Coast management. Both companies are expected to retain rank-and-file employees as well as management jobs.

"We will look to keep all employees at Coast and Boyd and they will operate as they have in the past," Boyd Gaming President Don Snyder said. "These are very well-run properties. We run a lean organization and we feel very good about how they are positioned to compete."

"This isn't a merger that's geared toward lots of cost savings," Coast President Harlan Braaten said. "In years to come we will take advantage of learning about each other ... so that collectively we do things that are most appropriate for the company as a whole."

Union contracts at Boyd's three downtown casinos as well as Boyd's Stardust and Coast's Barbary Coast casinos on the Strip will remain in place. Boyd's Sam's Town locals casino on Boulder Highway, along with Coast's other properties, will remain non-union.

Coast shareholders will receive about $495 million in cash and Boyd will issue about 19.4 million shares worth about $325 million to Coast shareholders. In addition, Boyd will assume about $460 million of Coast debt.

The deal, subject to shareholder and regulatory approvals, is expected to be complete by mid-2004. Shareholders of Coast, representing about 56 percent of the voting power of Coast shares, have agreed for a period of two years to vote their shares in favor of the Boyd merger and against any other combination. The Boyd family will own about 37 percent of the new company, while the Gaughan family will own another 18 or so percent.

The combination will create a family of 17 casinos and a combined 25,500 employees, including Coast's 7,500 or so employees and Boyd's staff of about 18,000 nationwide. Boyd's Sam's Town on Boulder Highway will join Coast Casino's three local properties, Gold Coast, Suncoast and the recently expanded Orleans, to "create a significant presence in the dynamic growing Las Vegas locals sector," the companies said. Coast isn't a player downtown, where Boyd is a big operator.

The deal is expected to have little effect on Station Casinos Inc., the No. 1 locals casino operator, because Boyd and Coast are similar operators, Lehman Brothers gaming analyst Joyce Minor said.

Station has about 35 percent of the locals market, while Coast is No. 2 at about 20 percent, she said.

Coast Casinos had submitted paperwork to take the company public more than two years ago but put the process on hold, citing depressed U.S. stock prices and a lagging economy. That fueled speculation that the company would instead be bought up by companies aiming to get a piece of the locals market. The company more than a year ago denied reports that it was in discussions with Harrah's Entertainment Inc., which had expressed interest in locals casinos.

Several companies have courted Coast Casinos over the past two to three years, Braaten said. "Most were pretty informal and obviously (Boyd) is a company that Michael (Gaughan) is very comfortable with," he said. Michael Gaughan is CEO of Coast.

The deal is a "missed opportunity for Harrah's to acquire these highly sought-after properties," Minor said.

Several development projects under way at both companies will continue as planned, executives said. Boyd recently announced plans to purchase Harrah's Shreveport, La., from Harrah's Entertainment Inc. and also is expanding its Blue Chip riverboat casino in northern Indiana and its Delta Downs racino in Louisiana. Last week, the company said it had begun design work on an expansion of the Borgata, a megaresort joint venture with MGM MIRAGE that opened last year in Atlantic City. It also anticipates redeveloping the Stardust at some point after Wynn Las Vegas opens on the Strip.

Coast expects to begin construction on its South Coast casino south of Las Vegas in the second quarter of this year and is pursuing an expansion at The Orleans. The company also owns a majority interest in entities pursuing casino initiatives in Nebraska and Indiana.

The Nebraska opportunity "is so far down the road that it doesn't factor into our thinking at all" and the Indiana prospect is a "long way off" as well, Snyder said.

Land in North Las Vegas that recently obtained zoning for a casino is owned by Gaughan's father Jackie Gaughan and isn't part of the transaction, executives said.

Both companies have more recently developed slot player loyalty clubs than Station Casinos, which has for years offered cards that allow gamblers to rack up points companywide. Boyd Chief Operating Officer Keith Smith said the companies haven't discussed particulars for a potential Boyd-Coast card, which could make sense, he said.

Shares of Boyd Gaming jumped $1.43 per share to $20.64 in early trading today. Coast Casinos' stock is not publicly traded, but its debt is publicly held.

Analysts applauded the transaction.

The deal gives Boyd "a strong brand which has just invested a lot of money in, assets that are in top shape, Jefferies & Co. bond analyst Ray Cheesman said. "They paid right and the assets are right."

The combination of debt and stock is conservatively structured, allowing the combined company to lower its borrowing costs while its cash flow rises, he said.

"We view this deal very positively for (Boyd) as it transforms the company into more of a Las Vegas locals operator, the strongest gaming market in the U.S. in our view," Minor added.

Coast and Boyd executives said they began talking about a possible combination about 18 months ago, with those discussions heating up in the past few weeks.

The locals market "is a market that we and others feel very good about," Snyder said. "It's absolutely the right transaction at the right time for both companies."

"Our fathers knew each other since the 1940s and we've got a real comfort level together," Boyd Gaming Chief Executive Officer Bill Boyd said. "It was kind of a natural fit for Coast to become married, so to speak."

Gaughan will continue to run Coast and remain a significant shareholder in the combined company, executives said. Gaughan is not under contract but has expressed the desire to "stay on indefinitely," Snyder said.

He will not be winding down his role at the company, Braaten said.

"We're moving forward with quite a few construction projects (at Coast) and Michael is very hands on in that part of the business," he said. "He's going to be a very busy person for a long time."

Boyd Gaming's Board of Directors will expand from 11 to 13 directors, while Coast will have the right to designate three directors, including Gaughan.