Archon Corporation ARHN
August 11, 2006 - 4:06pm EST by
mitc567
2006 2007
Price: 37.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 234 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Gaming
  • Real Estate
  • Sum Of The Parts (SOTP)

Description

Archon Corporation is a $234 million market capitalization gaming and real estate company trading at a nearly 50% discount to its sum of the parts valuation.  ARHN has agreed to sell its most valuable asset, 27 acres on the Las Vegas strip, for $450 million in a transaction due to fully close next year.  The Company has publicly stated that it will elect a 1031 transaction to defer the capital gains on the transaction indefinitely.   Since this is a very simple sum of the parts idea, I detail the valuation below and then describe the Company and its assets in greater detail underneath the chart.  Please note MATT657 wrote this idea up in 2004 and 2003.

 

 

Valuation

 

 

Pioneer Hotel

6x LTM EBITDA

                        17

Investment Property

Cost

                      148

Strip Land

Sale Price

                      450

Total Value

 

                      615

 

 

 

Less: Preferred Stock

 

                        21

Less: Debt

 

                        95

Plus: Cash

 

                        10

Plus: Option Exercise

 

                          7

Value to Equity

 

                      516

 

 

 

Total Share Outstanding

 

                     7.04

Value Per Share

 

 $                73.34

Current Price

 

 $                37.50

Discount

 

49%

 

 

 

 

 

ARHN is an owner and operator of casinos and commercial real estate.  It owns four main assets, 27 acres of land on the Las Vegas strip, two commercial investment properties in Maryland and Massachusetts, and the Pioneer Casino in Laughlin, Nevada. 

 

LAND (27 ACRES ON LAS VEGAS BOULEVARD)

 

The 27 acres is the land that was left over after it sold the Hacienda and Sahara Hotel to Circus Circus for $204 million in 1995.  ARHN put the property up for sale last year and received and accepted a bid of $450 million from LVTI.  The $450 million is structured as on option to purchase the land as follows: $5 million upon signing, $40 million on the later of September 22, 2006 or the date ARHN delivers a notice of mailing of its information statement to shareholders.  The deal is already pre-approved by shareholders since the Lowden family controls over 75% of the common stock.  The remaining $400 million will be paid 12 months from the date of the receipt of the $40 million second payment.  If it is delayed, the buyer will pay $2.2 million per month for up to 6 more months or until the option is exercised or given up.  The buyer is a partnership (LVTI) set up by Christopher Milam, a Austin Texas based real estate developer and principal of IDM Properties, LP.  There is no financing contingency in the deal.  ARHN has disclosed in its preliminary information statement issued August 10th, that it intends to use NOL’s to cover the tax consequences of the $45 million and to use a 1031 election to defer the tax effect of the remaining $400 million purchase price.

 

If the 1031 election was not done ARHN would pay a 35% tax on taxable proceeds of about $385 million, giving it a net value of $250 million.  This would take the resulting total value for ARHN down to $45.00 per share or an 18% premium to ARHN’s current share price.

 

INVESTMENT PROPERTIES IN MARYLAND AND MASSACHUSETTS

 

ARHN used some of the proceeds from the $205 million sale of the Santa Fe Hotel to Station Casinos in 2001 to purchase two commercial investment properties on the east coast of the United States.  These properties were purchased under section 1031 of the Revenue Code to defer the long term gains associated with the sale of the Santa Fe.  For the sake of simplicity in valuing the properties I used their total purchase prices.  I have pasted their description from the recent 10-K.

 

The Company’s investment property in Dorchester, Massachusetts is located on 12 acres and includes several buildings with approximately 425,000 square feet of commercial office space. The property was acquired for approximately $82.4 million plus $0.5 million in debt issuance costs. The Company paid $5.6 million in cash and assumed $77.3 million in non-recourse debt associated with the property. The property is under a net lease through 2020 with a single tenant with an investment grade credit rating. Under the lease, the tenant is responsible for substantially all obligations related to the property.

 

The Company’s investment property in Gaithersburg, Maryland is located on 55 acres and includes one building with approximately 342,000 square feet of commercial office space. The property was acquired for $62.6 million, plus debt issuance costs of $2.7 million. The Company paid $9.9 million in cash and issued $55.4 million in non-recourse first mortgage indebtedness. The building is located on approximately 20 acres of the property. The property is under a net lease through 2014 with a single tenant with an investment grade credit rating. Under the lease, the tenant is responsible for substantially all obligations related to the property.

 

 

PIONEER HOTEL

 

This property is located on approximately 12 acres of land, with Colorado River frontage of approximately 770 feet, and is situated near the center of Laughlin’s Casino Drive.  It was acquired in December 2003 for $35.6 million ($23 million net of restricted cash) from GE.  Small casino properties sell to buyers for about 6x trailing 12 months EBITDA.  Pioneer LTM EBITDA was $2.9 million, giving this property a value of $17 million.

 

 

Risks

 

LVTI was the high bidder ($16.67 million per acre) and should they decide to back out for the 1st two option payments then ARHN will have to go to the second highest bidder.  Las Vegas Boulevard real estate has been hot and with recent sales of Aztar (estimated to be receiving $20 - 25 million per acre) and Riviera (estimated to be receiving $10 - $15 million per acre) I believe other bidders would be willing to purchase the land at price substantially close to what ARHN received from LVTI.

Catalyst

1. Second option payment to ARHN
2. Third option payment to ARHN
3. Company repurchase of preferred and common shares.
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