Note 3. Acquisition and Preliminary Purchase Accounting

Purchase of Silver Legacy and Circus Reno

On November 24, 2015, the Company acquired all of the assets and properties of Circus Reno and the 50% membership interest in the Silver Legacy Joint Venture owned by Galleon, Inc. The total estimated purchase consideration is $224.9 million. The purchase consideration and allocation are still considered preliminary pending receipt of a final valuation report from third-party valuation specialists, the final determination of the income tax implications of the acquisition and fair values, and the finalization and approval by all parties of the purchase price allocation and working capital adjustments required under the Purchase and Sale Agreement.


Purchase consideration calculation (dollars in thousands)	Silver Legacy		Circus Reno		Total
Cash consideration paid by ERI for MGM’s 50% equity interest and MGM’s member note	$	56,500	$	16,000	$	72,500
Fair value of ERI’s preexisting 50% equity interest		56,500		—		56,500
Settlement of Silver Legacy’s long term debt(1)		87,854		—		87,854
Closing Silver Legacy and Circus Reno net working capital(2)		6,124		1,916		8,040
Purchase consideration	$	206,978	$	17,916	$	224,894

(1) Represents $5.0 million of short-term debt, $75.5 million of long-term debt, the remaining 50% of the $11.5 million of member notes (net of discount), and accrued interest.

(2) Per the Purchase and Sale Agreement, the purchase price was $72.5 million plus the Final Closing Circus Reno Net Working Capital (as defined in the Purchase and Sale Agreement). The preliminary working capital adjustment was $8.0 million and is subject to final approval and possible adjustment.

The transaction was accounted for using the acquisition method. Accordingly, goodwill if any, will be measured as the excess of the total consideration over the amounts assigned to the identifiable assets acquired and liabilities assumed.

Preliminary Purchase Price Allocation – Silver Legacy and Circus Reno

The following table summarizes the preliminary allocation of the estimated purchase consideration to the identifiable assets acquired and liabilities assumed in the Circus Reno/Silver Legacy Purchase. The fair values were based on management’s analysis, including preliminary work performed by third‑party valuation specialists. The following table summarizes the preliminary purchase price allocation of the acquired assets and assumed liabilities as of December 31, 2015 (dollars in thousands):


	Silver Legacy		Circus Reno		Total
Current and other assets, net	$	21,625	$	2,115	$	23,740
Property and equipment		169,544		14,801		184,345
Intangible assets(1)		5,000		1,000		6,000
Other noncurrent assets		10,809		—		10,809
Net assets acquired	$	206,978	$	17,916	$	224,894

(1) Intangible assets consist of trademarks which are non amortizable and loyalty programs which are amortized over one year.

Fair valuation methods used for the identifiable net assets acquired in that acquisition make use of quoted prices in active markets and discounted cash flows using current interest rates and are provisional pending development of a final valuation.

Trade receivables and payables, inventory as well as other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented the fair value of those items at December 31, 2015, based on management’s judgments and estimates.

The fair value estimate of property and equipment utilized a combination of the cost and market approaches, depending on the characteristics of the asset classification. The fair value of land was determined using the market approach, which considers sales of comparable assets and applies compensating factors for any differences specific to the particular assets. With respect to personal property components of the assets (gaming equipment, furniture, fixtures and equipment, computers, and vehicles) the cost approach was used, which is based on replacement or reproduction costs of the asset. Building and site improvements were valued using the cost approach using a direct cost model built on estimates of replacement cost.

Trademark were valued using the relief‑from‑royalty method. The loyalty program was valued using a comparative business valuation method. Management has assigned trademarks an indefinite useful life, in accordance with its review of applicable guidance of ASC Topic No. 350, Intangibles—Goodwill and Other. The standard required management to consider, among other things, the expected use of the asset, the expected useful life of other related asset or asset group, any legal, regulatory, or contractual provisions that may limit the useful life, the Company’s own historical experience in renewing similar arrangements, the effects of obsolescence, demand and other economic factors, and the maintenance expenditures required to obtain the expected cash flows. In that analysis, management determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful lives of these intangible assets. The loyalty program is being amortized on a straight‑line basis over a one year useful life.

For the period from the Acquisition Date through December 31, 2015, the Silver Legacy generated net revenue of $13.5 million and a net loss of $0.3 million. Circus Reno generated net revenues of $8.3 million and net income of $1.4 million during the same period.

Unaudited Pro Forma Information

The following unaudited pro forma information presents the results of operations of the Company for the years ended December 31, 2015 and 2014, as if the Merger and Acquisition had both occurred on January 1, 2014 (in thousands except per share data).


	For the years ended December 31,
	2015		2014
Net revenues	$	901,455	$	908,415
Net income		97,783		40,552
Net income per common share:
Basic	$	2.10	$	0.87
Diluted	$	2.08	$	0.87
Weighted shares outstanding:
Basic		46,550,042		46,426,714
Diluted		47,008,980		46,509,008

These pro forma results do not necessarily represent the results of operations that would have been achieved if the acquisition had taken place on January 1, 2014, nor are they indicative of the results of operations for future periods. The pro forma amounts include the historical operating results of the Company, MTR Gaming, the Silver Legacy and Circus Reno prior to the Merger and Acquisition, with adjustments directly attributable to the Merger and Acquisition.

MTR Gaming Merger

Consideration Transferred

The total consideration paid was $103.0 million. The purchase consideration in a reverse acquisition is determined with reference to the value of equity that the accounting acquirer, HoldCo, would have had to issue to the owners of the accounting acquiree, MTR Gaming, to give them the same percentage interest in the combined entity. However, in a reverse acquisition between a public company as the legal acquirer and a private company as the accounting acquirer, the fair value of the legal acquirer’s publicly traded stock generally is a more reliable determination of the fair value of the purchase consideration than the fair value of the accounting acquirer’s untraded equity security, and, as such, is generally used in calculating the purchase consideration. Accordingly, the following table provides the calculation of the purchase price using the fair value of the outstanding common stock of MTR Gaming based on the closing stock price of $4.43 on the Merger Date, as well as a reconciliation of the total shares outstanding on the Merger Date.

Final Purchase Price Allocation

The following table summarizes the fair values of the assets acquired and liabilities assumed at the Merger Date. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. The following table summarizes the final purchase price allocation of the acquired assets and assumed liabilities as recorded at fair value on the Merger Date (in thousands):


Current and other assets	$	75,031
Property and equipment		289,211
Goodwill		66,826
Intangible assets (1)		473,000
Other noncurrent assets		20,381
Total assets		924,449
Current liabilities		46,446
Long-term debt (2)		624,877
Deferred income taxes (3)		143,104
Other noncurrent liabilities		7,011
Total liabilities assumed		821,438
Net assets acquired	$	103,011

(1)

Intangible assets consist of gaming licenses, trade names and loyalty programs.

(2)

Long-term debt was comprised of MTR Second Lien Notes totaling $570.7 million.

(3)

Deferred tax liabilities were derived based on fair value adjustments for property and equipment, identified intangibles, deferred financing costs, certain long term liabilities and long-term debt.

Goodwill, the excess of the purchase price of acquiring MTR Gaming over the fair market value of the net assets acquired, in the amount of $66.8 million was recorded as of the Merger Date. The Company considers the goodwill to represent benefits expected to be realized as a result of the Merger.