Acquisition and Preliminary Purchase Accounting

3 Months Ended

Mar. 31, 2016

Acquisition and Preliminary Purchase Accounting.

Acquisition and Preliminary Purchase Accounting

Note 2. Acquisition and Preliminary Purchase Accounting

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 the update of a final valuation report from third-party valuation specialists resulting from the final determination of the income tax implications of the Acquisition on the fair values, and the finalization and approval by all parties of the purchase price allocation including 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 Net Working Capital (as defined in the Purchase and Sale Agreement). The preliminary working capital adjustment was $8.0 million.

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 March 31, 2016 (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 the 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 and other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented the fair value of those items at the Acquisition, 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.

Trademarks 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.

Unaudited Pro Forma Information

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

	For the Quarter Ended
	March 31, 2015
Net revenues	$	211,793
Net loss		(5,543)
Net loss per common share:
Basic	$	(0.12)
Diluted	$	(0.12)
Weighted shares outstanding:
Basic		46,550,042
Diluted		46,550,042

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, 2015, nor are they indicative of the results of operations for future periods. The pro forma amounts include the historical operating results of the Company, the Silver Legacy and Circus Reno prior to the Acquisition, with adjustments directly attributable to the Acquisition.