Penn Gaming Acquisition Not a Gamble

Just before the credit crisis hit last year on June 15, 2007, Penn National Gaming (PENN) agreed to be acquired in an all-cash deal by Fortress Investment Group and Centerbridge Partners for $67 per share with an expected completion date of June 15, 2008 and financing arranged by Wachovia and Deutsche Bank. The $8.9 billion deal ($6.1B equity plus $2.8B debt) has a $200 million reverse termination fee as well as a specific performance clause.

Penn Gaming is currently trading at a 38% discount to the deal price showing that most investors are not expecting the deal to close (On June 14 ,2007, this stock was selling for $51/share). However, my opinion is that the deal has a better than 50% chance of closing on the current terms. Penn has already received shareholder approval on the deal and Fortress has repeatedly stated that they are committed to the deal. In addition, the same concerns were levied just a couple months ago in the gaming sector with the acquisition of Harrah's which closed (although it was roughly 1 month later than had been expected) and even with Station.

I would point to an article posted on the New York Times which does a good job of explaining some of the legal issues if the financing group were to back out. In addition, Penn has been able to gain gaming approvals for the acquisition from New Mexico, West Virginia, Ohio and New Jersey with several additional states expected to rule in the next few days. The state of Mississippi will be deciding on approval on April 17, and Indiana is currently conducting a background check on Fortress prior to approval. Louisiana will be voting either on April 21 or May 17 (the final agenda is not yet available for the Gaming Commission). Pennsylvania will be reviewing the merger tomorrow on April 16. The other states to have decisions made include Colorado, Florida, Illinois, Iowa, Maine, Missouri as well as in Canada the province of Ontario.

Financially, the company continues to generate strong cash flows and has thus far had good receipts from their newest property in Pennsylvania. Even if the deal with Fortress were not to consummate, the stock is trading at a relatively attractive forward P/E of about 16 with strong cash flows, so although their is some downside it is in my opinion significantly lower than the upside if the deal is to occur with the present terms.

PENN is bucketed as an opportunistic position within my portfolio at this time with a roughly 4% weight. To see some of my other holdings including a couple of positions that were up by double digit percentages today please go to: www.vestopia.com/danw.

Disclosure: that I am long on this position in my portfolio.

Comments

[User 42641:]

Wholeheartedly agree -- see the excellent Lehman note on this merger arbitrage.

2008 Apr 18 10:12 AM

[mungermunger:]

If FIG is not buying stock at at $42!!, then they are not buying this company at $67! This deal has to be in limbo in my opinion... any thoughts?

2008 May 16 10:53 AM

[Donpow:]

Dan, what do you thinkof the NYT article re the Penn yesterday? Have you changed your opinio of the stock?

2008 May 21 08:57 AM

[Dan Weiss:]

I actually made a post yesterday to my subscribers over at Vestopia but the gist of it is that I remain positive on the shares. By my estimations there is roughly a 20% chance that no deal is done with even odds among the remaining 80% of a deal done at current prices or at a reduced price (most likely in the $58-61 range). PENN like other gambling operators is struggling with a consumer which has less disposable income but much like alcohol there is always a demand for their product. The cash flows at the firm remain very strong with excellent free cash flow generation and the company has recently begun operating a new PA facility along with potentially down the road a casino in NJ to help with revenue growth going forward.

Interestingly, just a few hours after the NYT article a spokesman for Wachovia came out and denied that they are attempting to change any terms or lower the price of the deal. Now whether they are being completely honest is another question but it does show that the deal can be done. I dont see any issues with the remaining regulatory hurdles (state approvals) so its really going to come down to the negotiations.

Long term if no deal happens I still like this stock as they will likely strongly benefit once the economic environment improves and move to more normalized growth rates.

2008 May 22 01:22 PM