Patient parent of Atlantis finally makes its diversification move

For months, John Farahi had hinted that Monarch Casino & Resort was looking to expand its presence beyond Reno.

But through those months, he left no doubt that the company, publicly held owner of Reno's Atlantis Casino Resort Spa, wasn't about to overpay for diversification.

The company's pending $76 million acquisition of Riviera Black Hawk, a casino in the mountains of Colorado 40 miles west of Denver, appears to meet both standards.

And a second step by the company puts it in position to expand Riviera Black Hawk.

Farahi, co-chairman and chief executive officer of Monarch, said last week that Monarch executives long have been analyzing potential markets where the company could diversify and reduce its exclusive reliance on the northern Nevada gaming and tourism market.

A couple of years ago, they began to focus on the Black Hawk casino properties, whose primary feeder markets in Denver are both relatively young and relatively prosperous.

"We feel that the market is very viable," Farahi said.

The second piece of Monarch's strategy began to come into place in mid-2010, when Las Vegas-based Riviera Holdings Inc. filed for Chapter 11 bankruptcy reorganization. The company's signature property in Las Vegas has been battered by the recession, but the Colorado property has held up well.

Andy Choy, chief executive officer of Riviera Holdings, said his company looked to sell the Colorado operation because it wants to focus its efforts on the Las Vegas property.

The $76 million that Monarch will pay for the Colorado property is less than the $79.3 million value that Riviera Holdings set on its assets at the end of June.

In the second quarter, the Colorado casino earned $2.4 million on revenues of $9.9 million. For the twelve months ended August 31, Riviera Black Hawk had net revenue of $39.6 million and earned $10.3 million meaning that Monarch paid about 7.5 times earnings.

Farahi said Monarch's management team sees potential to build the market share for Riviera Black Hawk, which has seen minimal new investment since the bankruptcy filing by its parent.

Riveria Holdings, which emerged from its bankruptcy reorganization about a year ago, says it invested only $19,000 in the property during the second quarter.

"We feel very confident we can bring much-needed resources to the facility," Farahi said.

Riviera Black Hawk has about 10 percent of the slots market in the Colorado town. Its previous owners said profits calculated before taxes and depreciation were running just a hair under 24 percent at mid-year.

The Colorado casino includes approximately 750 slot machines, eight table games, a 250-seat buffet restaurant that generated about $1 million in sales in the second quarter and a parking structure with approximately 500 spaces.

By comparison, Atlantis offers about 1,450 slot and video poker machines, 38 table games and eight restaurants.

The biggest difference: The Atlantis has 824 hotel rooms and suites. Riviera Blackhawk has none.

Monarch executives are quiet about their plans if any to add hotel facilities to their new acquisition.

But the company said last week that it nailed down an option to buy 1.5 acres next to the Colorado casino, enough land to allow a doubling of the property's footprint. Monarch would pay $6 million plus $2.3 million to improve a nearby street when it exercises the option.

Monarch will finance the acquisition through a loan from a syndicate of banks led by Wells Fargo. Macquarie Capital was the financial advisor to Monarch in the transaction.

As of June 30, Monarch had about $17 million outstanding on its existing loans. It said the terms to borrow money for the Colorado acquisition will be similar to those on the existing debt.

The company's minimal debt gave it the financial strength for an acquisition, and Farahi said the company's executives were satisfied that Atlantis is running well after recent upgrades.

He vowed the company won't let the Colorado acquisition distract it from the Atlantis.

"We will never take our eye off the ball in Reno. That is the mother ship. It got us to where we are today," he said.

The Black Hawk acquisition is expected to close by the middle of next year after regulatory approvals.