Some casinos might be for sale, but pricing them is tricky business

After years of limited opportunities to buy and sell casinos, the topsy-turvy economy has opened the door for entrepreneurs to make unprecedented offers for choice properties in Las Vegas.

With four of Las Vegas’ six largest — and debt-ridden — gaming giants scrambling for cash, opportunistic buyers are waiting for the perfect moment to pounce.

With some potential sellers, that moment may be now, while they are attempting to negotiate with lenders, or later, when these companies will be more deeply indebted but may have bankruptcy protection.

Either way, there is one fundamental question: What are casinos worth these days?

That’s always been difficult to answer because each casino is a unique kingdom, with its own earning power and strengths and weaknesses.

While assigning a premium to casinos in the nation’s gambling capital, analysts historically valued properties based on what they earned in the past. Relying on old data worked well as long as earnings to pay down loans stayed the same or increased. That approach doesn’t work when earnings decline rapidly. Theoretically speaking, a bank interested in financing a casino purchase would lend the money based on what the casino is able to generate going forward rather than how it performed in the past, when the economy wasn’t as bad.

Looking forward rather than backward means a lot of guesswork, with optimistic guesses from sellers and pessimistic ones from buyers.

“What happened last year isn’t indicative of the future,” CB Richard Ellis analyst Jacob Oberman said. “It’s going to be difficult to agree on price.”

There is one comparable available for deal-makers: MGM Mirage is selling Treasure Island to Phil Ruffin for USD 775 million, setting a recession-era bar for real estate in Las Vegas. Ruffin used cash from the USD 1.2 billion sale of his New Frontier in 2007 — the most expensive land deal in Las Vegas history.

Treasure Island went for about seven times its earnings over the past 12 months, a seemingly good price for MGM Mirage in today’s economy given that big casinos sold for 10 times annual earnings during the real estate boom, analysts said. Those prices had been inflated by private equity firms during the buying spree leading up to mid-2007, when credit was cheap.

Even in today’s dollars, Boyd Gaming’s recent USD 950 million offer for the majority of Station Casinos properties sounds like a lowball offer, though that’s not unusual at the start of a negotiation. (Station has rejected Boyd’s offer for six of Station’s 10 major Las Vegas casinos, plus a few smaller ones, in favor of continuing negotiations with lenders to restructure the company’s debt in a Chapter 11 bankruptcy protection filing.)

The USD 950 million offer was based on Boyd’s best guess at its main competitor’s earnings — which is anything but definitive. Arriving at a definitive figure would require Station to open its financial books to its main competitor — a prospect that probably doesn’t appeal to either Station owners or lenders who might end up controlling the company.

MGM Mirage, at risk of defaulting on its bank loan, is also in a difficult spot. That’s good for potential buyers who are interested in acquiring the company’s prized Bellagio — one of the Strip’s most profitable properties.

Some experts say the company would need to sell the Bellagio for more than USD 3 billion to get meaningful debt relief. That’s more than seven times the property’s historical earnings. If the Bellagio earns less this year, as expected, MGM Mirage risks getting less debt relief in a sale. If MGM Mirage plays hard, the buyer risks acquiring the property at a higher multiple of earnings.

And so the poker game, and guesswork, begins.