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Everywhere you look today, it seems Icahn Enterprises (NASDAQ:IEP) chairman and investing legend Carl Icahn is turning up. One day he's trying to force Netflix (NASDAQ:NFLX) to sell itself to the highest bidder, the next he's trying to buy all of Oshkosh (NYSE:OSK) for himself.

So given how high profile Icahn is these days, it's almost shocking how little attention is paid to his majority owned holdings. IEP itself is quite cheap and Icahn has pitched at as an attractive investment before. However, I think the real undervalued gem in his stable is Tropicana Entertainment (OTCQB:TPCA).

Tropicana consists of two sets of assets: the remains of most of the old Tropicana Entertainment (excluding the Vegas and Atlantic City properties), and the Atlantic City property.

Icahn acquired the remains of Tropicana Entertainment through bankruptcy proceedings. As part of the bankruptcy proceedings, Tropicana Entertainment shed over $2.5 billion of debt, and Icahn acquired almost 50% of the equity. Icahn acquired the Atlantic City Tropicana through the bankruptcy process at the beginning of 2010. He swapped $200m in debt, which he acquired at a steep discount (face value = $1.4B), for control of the casino. That's pretty incredible, given the casino had been expected to fetch bids for up to $1 billion.

Following those deals, Icahn merged the two together and came out of the deal controlling about 50% of TPCA's shares. Since emerging from bankruptcy in late 2010 and resuming trading, TPCA's shares have barely budged, and Icahn has taken full advantage. He's increased his ownership to just shy of 70% in this time frame, including a recent purchase of 730k shares at $13.50 per share.

Icahn clearly sees value where the market does not. What's so incredible about that is we've seen this situation play out before, and it ends with Icahn selling the firm for a huge premium.

In 2000, Icahn acquired the Sands (another Atlantic City casino) out of bankruptcy for $65m. Six years later, he turned around and sold it for a healthy premium of $250-270m (depending on how you treat tax benefits). He was also involved in American Casino and Entertainment Properties, which he sold for $1.3B in Feb. 2008.

So with all that in mind, let's consider valuation. First, it should be noted Tropicana is trading well below replacement cost. The nightclub hub "The Quarter" alone cost $285m to build in 2004, which represents over 90% of Tropicana's ~$310m enterprise value. Book value per share comes in ~$23 per share and well understates how much it would cost to rebuild and re-license all of these casinos.

On the earnings front, Tropicana is trading for 3.5x EV/EBITDA and 0.5x EV/Revenue (both numbers are trailing). Peers Boyd (NYSE:BYD), Caesars (NASDAQ:CZR) and MGM (NYSE:MGM) all trade for 10x EV/EBITDA and 1.75-2.50x EV/Revenue. Simply trading up to peers' levels would imply a share price well over $40 per share. It's true that peers are exposed to "hotter" growth markets than Tropicana, but Tropicana counters that by having the best balance sheet in the business and significant NOLs and tax assets that will shield them from future tax payments (deferred tax assets equal to over $200m, or more than 50% of market cap, that are kept off balance sheet by a valuation allowance).

And while the peers may have exposure to "hotter" markets, Tropicana is likely overdue for some "market tailwinds" at some point. The Atlantic City property did $300m in revenue last year and is on pace to do the same this year, down from $360m in a dismal economy in 2009. The majority of this decline has been caused by competition coming online in Pennsylvania and New York. The good news is that it doesn't appear the news can get much worse: Atlantic City revenues have been steady at these incredibly low levels, and there's no more competition coming online. In other words, the market has already bottomed, and an investment in TPCA is somewhat of a "markets reverting to the mean" bet on their regions.

Tropicana's other markets mainly consist of regional casinos that have limited to no competition in their near radius. There could be significant upside in these properties, as the company delayed several capital improvement projects during their bankruptcy. With a strengthened balance sheet, the company can upgrade these casinos, and would likely see a significant return on its investment. Analysts and former management have suggested that the Atlantic City Tropicana and other properties would significantly benefit from capital upgrades, and Icahn appears to be ready to make that investment, as capex doubled from 2010 to 2011 and is up 50% YTD 2012.

There's also an interesting growth opportunity in their Aruba operation. It is currently operating a temporary casino that it acquired out of bankruptcy in May 2010. The company has plans to turn it into a full-fledged resort, and this could easily develop into a $250m+ per year hotel/casino resort (though it's difficult to put an exact figure on it without seeing their full plans). Given that this is basically a completely free option at today's prices, anything approaching that revenue figure should result in pretty strong upside.

As far as catalysts go, there are plenty. The easiest point to point out is a combination of the Aruba casino opening + capex improvements/market lifts mentioned above leading to big revenue and profits gains. Given the operating leverage of the casino business, market recoveries should lead to a disproportionate increase in profits.

The other obvious catalyst is a sale. Icahn obviously has an established history of selling casinos, so that's likely his end game. However, given the still shaky economy and the depressed state of most of TPCA's markets, I don't think a sale is likely near term. Instead, I think Icahn's likely to make needed capital investments, wait for the markets to turn and properties to improve, and then sell for a huge profit. The company also has 3.6m warrants outstanding that expire towards the end of 2014. The strike price is in the mid-50s, so they're not that concerning to today's investor, but it wouldn't surprise me to see Icahn wait till the warrants expire and shareholders get to keep all of the proceeds of a sale before looking into selling.

In fact, I think it's more likely that, in the near term, Icahn goes the other way and buys more underperforming casinos in anticipation of an eventual turn around. The company recently refinanced $90m of outstanding debt with a $175m line of credit. While the refinancing significantly reduced their interest rate, I think it's pretty interesting, because the company had absolutely no need to refinance the debt. Prior to refinancing, Tropicana had $150m in cash on its balance sheet vs. $100m in debt. Post refinancing, they have $250m in cash vs. $170m in debt. Given that Icahn chose to raise cash instead of pay down debt, it seems likely Icahn sees value in the sector and is on the prowl for an acquisition.

Normally, a potential acquisition would be a concern. But given the company's tax assets and Icahn's history in the sector, I think it's fair to say that any acquisition would be at worst value neutral and likely quite accretive. Absent that, I also wouldn't be surprised to see Icahn announce a big share repurchase or simply buy the whole company himself; he could easily buy out minority shareholders with just the cash on Tropicana's balance sheet, and IEP is insanely cash rich following some big victories/IPOs, so there would be absolutely no financing problem.

Are there concerns here? Sure.

First, Icahn owns 70% of the equity. For better or worse, you're married to his decisions, and he could disadvantage minority shareholders with a super cheap takeout of some form, but I think it's much more likely that the end game is a sale in which all shareholders benefit.

Second, the casino market is tough. As I mentioned in my post on TWOC (another over the counter casino stock trading at a huge discount), it seems the first thing politicians think when they need new money is 1) "tax the casinos more" or 2) "sell another casino license", so you're exposed to a good bit of political risk. In addition, a lot of the costs are fixed, so if you're convinced the economy is heading south, this probably isn't the stock for you.

All that said, the valuation more than makes up for the risk. Assuming Icahn can sell for 10x EBITDA in the middle of 2015, and EBITDA grows and revenue grows modestly in the meantime, shareholders at today's prices will realize at least a triple. If the company experiences any success from investment in their properties, building out the Aruba properties, or acquiring other casinos, it's not impossible to see a competitor acquiring them for over $70. While that may seem extreme given today's share price of $15, it would still be well below the valuations Tropicana was looking at before declaring bankruptcy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCQB:TPCA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.