With money to spend, Tilman Fertitta's company looks for opportunities
A booming casino industry, a lack of attractive restaurant merger targets and $400 million in cash has Landry's Restaurants prowling the Las Vegas Strip in search of its next acquisition.
The company hasn't formally announced plans to get into gaming, but Landry's Chief Executive Officer Tilman Fertitta has made no secret of his interest.
At a recent analyst conference in New York, he lamented the shortage of good merger deals in the restaurant industry. And in a recent conference call, he said the company would consider buying a casino "... but it would have to be the right deal."
With $400 million raised just this week through a debt offering, the company is now well-armed to go hunting for that right deal.
There are many individual casinos on the market, the result of a merger spree among the nation's biggest gaming companies. There are also a handful of small, publicly traded gaming companies that would fit in Landry's price range.
One of those companies saw its stock price surge Wednesday in reaction to takeover speculation. Riviera Holdings, owner of the Riviera Hotel & Casino on the Las Vegas Strip and the Black Hawk Casino in Colorado, saw its stock climb $6.35 to close at $41.80.
Riviera and Landry's officials would not comment on the takeover speculation.
Classic Las Vegas brand
Whether or not Riviera is a target for a Landry's takeover, it may be the kind of investment Landry's and Fertitta could grow to love.
For starters, the company owns one of the classic brands on the Strip, the Riviera Hotel & Casino. Built in the 1950s, the Riviera has 110,000 square feet of casino space, 2,100 guest rooms, a half-dozen restaurants and 160,000 square feet of convention space.
Riviera may also be a good real estate deal. It is on 26 acres on the north end of the Strip near Circus-Circus and the new Wynn Las Vegas development.
Riviera also appears to be in Landry's price range. It reported earnings before interest, tax, depreciation and amortization of $31.5 million in 2003 and may approach $40 million of 2004. With casinos selling for as much as nine times this gauge of earnings, known as EBITDA, the price tag could be about $360 million.
Riviera also presents an operational challenge, something Fertitta does not shy away from. Riviera has been a consistent money loser, with casino revenues flat and income from food, beverage and rooms down. The loss for the first nine months of 2004 was $619,000 on revenue of $153.9 million. It's an improvement from the year before, but is still a lot of red ink.
Long license processEven if Landry's does find a willing seller in Las Vegas or elsewhere, it could take many months for a deal to close. The application and approval process for a gaming license, which Landry's would need to own a casino, can take six months or more.
Since 2000, Landry's has nearly tripled in size. Much of the growth came through aggressive acquisitions, which netted the Rainforest Café, Chart House restaurants, Muer Restaurants and Saltgrass Steak House.
While the company has shown an impressive revenue record, it has its detractors. Some analysts point out that free cash flow, a key measure of operational efficiency, has been negative eight of the 10 past quarters.
The company says much of this is the result of the cost of funding the company's growth and the fact that, unlike other restaurant companies, Landry's tends to own its own real estate -- about $500 million worth at last count.
Industry consolidation
A casino acquisition would take Landry's merging tendencies in a new direction.
Gaming has become a top attraction for investors in the past year, fueled in large part by industry mergers, according to Todd Eilers, a gaming research analyst with Roth Capital Partners.
MGM Mirage announced a $4.9 billion merger with Mandalay Resort Group this year and Harrah's Entertainment is buying Caesars Entertainment for $5.7 billion. Speculation over who will be next has driven up stock prices for small and midsize gaming companies.
Las Vegas land prices are also on the rise, thanks to new developments.
Casinos have stronger earnings growth, higher returns on invested capital and better free cash flow than most other businesses, including restaurants, Eilers said.
Fertitta said it best himself in the recent conference call: "We've looked at the fact that you can go and acquire a casino that produces say $17 million in EBITDA, and it's the same as what it costs to build 50 Joe's Crab Shacks."
Other possible acquisition targets include the individual casinos being spun out of the big mergers, or one of about a half-dozen smaller companies that have casino management contracts or own a few properties. In addition to Riviera, this list includes Lakes Entertainment, Monarch Casino and Resort, the Sands Regent and Century Casinos.
Landry's has connections to Lakes through board member Kenneth Brimmer. He and his wife once worked for the casino company that became Lakes Entertainment. Lakes has a 64 percent stake in the televised World Poker Tournament and has contracts to run four Indian tribe casinos, including one in Eagle Pass in South Texas.
