Majestic Research

TheStreet.com

Penn Buyout Sends Casino Stocks Soaring

By Nicholas Yulico
Published: June 15, 2007

Casino stocks rang up big gains Friday after Penn National Gaming (PENN) agreed to be taken private at a hefty premium.

Fortress Investment Group (FIG) and Centerbridge Partners signed a deal to buy Penn for $67 a share, representing a 31% premium to the stock’s close Thursday. The transaction is valued at $8.9 billion, including about $2.8 billion of outstanding debt.

“This is a very attractive valuation for our shareholders, at a time when the financial markets are recognizing the strong investment rationale for gaming companies,” Penn National CEO Peter Carlino said in a statement.

The agreement marks just the latest example of private equity’s growing interest in the casino sector. Harrah’s (HET) last year agreed to be bought by Apollo Group and Texas Pacific.

MGM Mirage (MGM) has also been the subject to buyout rumors since investor Kirk Kerkorian announced his intention to buy two of that company’s largest assets in Las Vegas.

Matthew Jacob, an analyst with Majestic Research, says he was a little surprised at the news, since he viewed Penn National as more of an acquirer than a seller.

“This goes to show that private equity is still seeing attractive buyouts in the industry,” he says.

The prospects of more mergers, as well as the big valuation awarded to Penn, sent shares of casino stocks jumping. Pinnacle Entertainment (PNK) was adding $2.20, or 7.7%, to $30.68; Boyd Gaming (BYD) was up $1.50, or 3%, to $51.30; Melco PBL (MPEL) was climbing 46 cents, or 3.8%, to 12.54; and MGM was up $3.18, or 3.9%, to $85.40. Penn National was vaulting $11.01, or 22%, to $62.15.

Penn National owns casinos and racetracks across the U.S., including Charles Town Races & Slots in West Virginia and the Argosy group of casinos in Iowa, Indiana and Missouri.

Ryan Worst, an analyst with Brean Murray, pointed out that the buyout deal is one of the first for a casino company without significant land development opportunities on the Las Vegas Strip. Previous casino operators that agreed to be taken private, such as Harrah’s, Aztar, and Station Casinos (STN), all have a presence in Vegas.

“In our view, the proposed transaction indicates that private equity’s strong appetite for gaming companies also includes strong cash flow generating regional gaming companies in addition to Las Vegas operators with substantial land values,” said Worst in a research note.

The merger agreement allows Penn to solicit other proposals for the next 45 days—and investors may be looking for a higher bid. Akre Capital Management, the company’s largest shareholder, says it hasn’t made a decision on whether it will approve the buyout.

“Akre Capital Management is keenly aware of the value Penn National Gaming Inc. represents to potential buyers due to its unmatched collection of high quality gaming assets and robust development pipeline,” a representative for the fund told TheStreet.com. “As 8.7% owners of the outstanding shares, we are carefully evaluating the current Fortress-Centerbridge proposal in an effort to determine if it is in the best interest of our shareholders.”

In a research note, JP Morgan analyst Harry Curtis said he expects the final buyout price for Penn National to be 10% to 20% higher than the current offer. “Closing should be less complicated than Harrah’s, as PENN operates in fewer jurisdictions, and should be completed in around 12 months,” he wrote.

“In our view, a competing bid is possible but would ultimately need the support of the Carlino family and (management) so it would be challenging,” Curtis wrote.

Fortress manages $36 billion in assets through private-equity funds and hedge funds—some of its holdings can be found here. Centerbridge is a $3.2 billion multi-strategy private investment fund.

The companies expect the deal to be completed in 12 to 16 months, subject to shareholder approval and the go-ahead from state gaming authorities.