How a Leading Casino Operator Navigates Mergers, Acquisitions, and Special Dividends

Monarch Casino shows discretion in mergers and acquisitions.
Analyst suggests the possibility of another special dividend if acquisitions do not materialise in two years.

Monarch Casino & Resort (NASDAQ: MCRI) has had a remarkable year, demonstrating the immense potential of a successful casino operator through an impressive 30.43% increase in stock value. By outperforming the S&P 500 by a ratio of over 2 to 1, the company has proven that a strategic and selective approach towards mergers and acquisitions is key to driving high-level growth in the gaming industry.

Currently, Monarch maintains a portfolio consisting solely of two properties: the Atlantis in Reno and its eponymous property in Black Hawk, Colorado. As a result, the company is one of the smallest publicly traded casino operators in the United States, which perpetually raises queries regarding potential expansion opportunities.

In a recent report by analyst Barry Jonas from Truist Securities, it was revealed that the leadership at Monarch remains highly deliberate when considering potential acquisitions. Nonetheless, they have indicated a willingness to expand their holdings if these acquisitions meet specific criteria.

Acquisition Criteria

The company is focusing on:

Properties for which they would also own the real estate.
Targets located in fundamentally strong and growing markets, with robust regulations.
Regions that do not permit online gambling.

This year, Black Hawk has joined the National Association Against Internet Gambling (NAAG), making it the first casino municipality in the country to do so. As a result, states such as Connecticut, Delaware, Michigan, New Jersey, Pennsylvania, Rhode Island, and West Virginia are off the table for any potential acquisitions Monarch may consider.

Alternatives Beyond M&A

If Monarch is unable to identify suitable acquisition targets, the company possesses other strategies to maintain investor interest. According to Jonas, should no deals materialise within the next two years, the regional casino operator could distribute another special dividend along with its regular quarterly payouts and “opportunistic” share buybacks. Jonas restates his “buy” recommendation and has set a price target of $120 for the shares.

Additionally, there has been prior interest from other buyers looking to acquire the Reno-based gaming company, yet the management team is under no pressure to sell and is focused on maximising shareholder returns.

Focus on Colorado

Black Hawk is among the fastest-growing casino markets in the United States, and given Denver’s historical prominence as a feeder market for Las Vegas, Monarch has ample opportunity to increase its market share in Colorado by attracting more local patrons. However, due to land use restrictions, expanding their properties in the state may prove challenging.

Still, Jonas indicated that “the leadership will explore all market opportunities, including mergers and acquisitions.” The critical question is whether other Black Hawk operators like Bally’s, Caesars, Century Casinos, and Penn Entertainment would be amenable to selling, especially since, like Monarch, they recognise that Black Hawk is one of the most attractive gaming jurisdictions in the Western United States, second only to Las Vegas.

In conclusion, Monarch Casino stays true to its cautious and selective growth strategy, weighing potential acquisitions against solid business fundamentals. With strong investor interest and various avenues for sustaining growth and investor engagement, the future looks bright for this modestly sized gaming operator.