Through TheFly's Eyes: Pinnacle Entertainment, Inc/Aztar Corporation
from Theflyonthewall.com






On March 13, Pinnacle (PNK) announced that it would acquire Aztar Corporation (AZR) for $2.1B, or $38 a share after both boards unanimously approved the deal. The bid represented a 24% premium over Aztar’s previous closing price. Several reports say that private equity firm Colony Capital may have entered the picture with a $41 a share offer for Aztar. If the reports prove true, Pinnacle is left with two options: to counter the Colony offer, or to collect a $55M break up fee from Aztar.

JPMorgan, which rates Pinnacle an Overweight, believes if the offer by Colony Capital is true, it limits Pinnacle’s near-term upside because of the possibility of a counter offer. However, Citigroup Smith Barney feels the synergies may be greater for Colony, “as it operates in both Las Vegas and Atlantic City.” As for the effect on Aztar, firms do not seem too excited by the thought of a bidding war. Calyon Securities believes that a counter offer from Pinnacle is not out of the question, and has raised its price target to $41 from $38, but still rates Aztar a Neutral. Jeffries & Company also maintained their Hold rating after hearing rumors of Colony topping Pinnacle’s bid.

Our options strategist concurs with this lack of excitement, stating that Aztar’s August option implied volatility of 16 is at the low end of its 26-week range, which suggests the likelihood of Aztar trading below $37 or above $44 over the next five months is low.

The takeover talk sent the casino/gaming sector modestly higher in mid-day trading Friday, as dealmakers contemplated the next moving in this potential buyout/takeover saga. Aztar was up 10c to $42.90, MGM Mirage (MGM) was up 8c to $43.05, Harrah’s (HET) rose 20c to $78.75, and Wynn Resorts (WYNN) was down 60c to $76.35. Meanwhile Pinnacle Entertainment (PNK), which earlier this month signed a merger agreement with Aztar, fell 90c to $28.35, apparently as Wall Street factored-in Pinnacle’s chances of completing its proposed deal. Moreover, Wall Street’s stance basically reflects one of a field of observers studying a chess game: there was talk that Pinnacle may now move to sweeten offer to Aztar, triggering a bidding war. Another take has Pinnacle relinquishing its interest in buying Aztar, which industry officials agree has underperformed financially, in favor of courting another casino/gaming target. Pinnacle, as expected, was mum on the matter, communicating nothing beyond the fact that it has a signed merger agreement with Aztar. Which ever way the Colony Capital LLC / Aztar bid plays out, the issue has underscored a paradoxical, but ever-more-common dimension of investment, and corporate practice in the United States: that a company, by underperforming, or operating at less than an efficient level, can in fact place itself in a position where it would want to be - in a position to be bought for a favorable price. Unless both potential buyers back away from Aztar, it will be the underperformer Aztar who will be in a position to declare “check-mate.”

Our Technical analyst notes that the stock broke out of a pattern market technicians call a "Bullish Ascending Triangle." This, as can be seen on the chart, is a triangle with a flattish top (in this case only two price levels established it which is unusual, shown by the red resistance line) and an ascending (green) support line. The base of the triangle, shown by the dashed green line, is used as a rough measure of where price could potentially go. This line is added to the coordinate on the triangle where price broke out and gives us a suggested price target of $47. This breakout was "confirmed" (made more convincing) by the very large volume spike that accompanied it. Support now becomes at minimum the top of the gap-up in order for the pattern to stay promising (roughly at the $38 dollar level). It would not be a bullish development if price came back down to the triangle top at this stage.

As for Pinnacle’s technicals, he stock has been moving in a strongly bullish pattern now for some time, moving in fact in a progressively wider range of swings (more volatile) over time. We want to look particularly at the channel the stock is trading in (on chart, upward sloping box-shape) and the uptrend line. We can see today that the stock is coming very close to hitting its uptrend line. Breaks of uptrend lines are bearish. The channel is a bit further below and a break of that line would probably be very bearish. Why? Because it is often the case a trendline can be broken and the stock recover from there. With both the bullish price channel and the uptrend line broken the stock would be in greater danger of further decline. Support today is at $28.00, $27.55 and the channel low at $27.32. Resistance is at $28.60, $29.10 and the midpoint of the channel at $29.47. It would be more bullish if the stock could rally from here and stay above the midpoint.


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