Penn Deal is Stalled: What is Best for Investors?

The New York Times reported that Penn Gaming (PENN) is battling over loan terms and potentially the price of the leverage buyout deal of the company that is expected to close early this summer. The New York Times argued that the banks (Wachovia, Deutsche Bank) are "reluctant to honor the originally agreed-upon terms" while the buyers (Fortress, Centerbridge) are seeking a lower price for the deal. I would note that, in a later release, Wachovia denied that they are attempting to make any changes to the deal.

The proposed action was not unexpected, as similar moves have been made against other private equity buyouts that were expected to close this spring or summer. My personal view, based on the review of other deals, is that this deal will be financed in the high 50s to $60 range, but there is still a possibility that the deal is done at $67 if Penn wishes to play "hard ball" and if it is true that the banks are still committed to the deal (as Wachovia has thus far stated). This will force Fortress and Centerbridge into paying a $200 million fee plus potential other damages which could be in the hundreds of millions. There is also a roughly 15-20% chance that the deal will not be not completed, although this will likely result in a cash payment due from the private equity firms to Penn Gaming.

When I look at a company, I like to examine normalized earnings and my own analysis shows that the firm is now nearing trough earnings (although gas prices are a wildcard) and that the company is still producing a large amount of free cash flow for investors. In the short-term, if a deal is not consummated, the stock will likely decline by a small to moderate amount, however, long-term, the shareholders may be better off if the company stays public due to its history of strong cash flows and earnings growth.

Disclosure: The author holds shares in PENN.

Comments

[Donpow]

Dan,
Due the the recent exptension of the merger to for 120 more days, it is obvious to me that the deal will go through at 67 plus the per day penalty. Fortress just paid 2.4 mill to the PA gaming commission for their aproval, Iowa just approved and it appears all but Indiana will be approving shortly. Look, there is no way the deal will be repriced as it would be a legal mess for Fortress and the banks. Fortress was willing to wait a year for all the approvals, they confirmed in their CC that the deal was progressing. All this talk by the FT and NYT is heresay, believe me. Penn is a great value, they know it will be for their investors and they want those fees that go alon with it. If they want to keep Carlino happy, and stay there then the deal goes through. By the way if you look at the chart is is very bullish.