In mid-2007, word broke that private equity firm Centerbridge Partners and investment manager Fortress Investment Group (NYSE:FIG) had agreed to purchase Penn National Gaming (Nasdaq:PENN) for $67 a share. The takeout price represented about a 30% premium at the time.
However, for the last couple of months there's been some speculation that the deal to acquire the Pennsylvania based racetrack and casino operator might be altered in some way. The company's slumping share price said it all. Then on Thursday, July 3, Wall Street learned the deal was officially dead. I view this as both good and bad news for Penn National Gaming shareholders.
Penn To Get A Pretty Penny
While it would have been nice to get the deal done at $67 per share, its important to note that Penn does go home with a small parting gift. According to CNBC, Penn will receive $1.475 billion under the termination agreement, consisting of a break-up fee of $225 million and what is effectively a seven-year, interest-free $1.25 billion loan from Fortress, Centerbridge, Wachovia and Deutsche Bank.
First and foremost, this provides the company a cushion. The economic slowdown is hurting the casino operator, as evidenced by its slip in EBITDA in Q1. This dough provides an element of protection in this economic storm.
It also gives Penn flexibility. It could use the cash to pick up land or other facilities on the cheap, or perhaps to repurchase shares. Other options include bumping up advertising for its properties or sprucing up existing facilities.
The Downside
My guess is that there were more than a few investors who held onto the shares in hopes that the company would be taken out for a premium. For these people, news that the deal fell through must be a big disappointment, and they may jettison the stock. Shares are currently trading toward the low end of the 52-week trading range. If pressure remains on the stock, I think that tax-loss selling could be pretty rough this year.
Also, with Centerbridge and Fortress out of the picture, Penn Gaming will end up going it alone for the time being, which could be tough. I have faith in the company's prospects over the long haul (it has some terrific properties in markets such as Iowa, Mississippi, and Illinois), but right now the competition to get gamblers through the door is stiff.
It may end up fighting for attention from the sell-side and institutional investors as well. Many of those who are looking to dabble in the gaming space may be drawn to bigger names such as Wynn (Nasdaq:WYNN) or MGM Mirage (NYSE:MGM) which sport market caps of $8.8 billion and roughly $8 billion respectively. By comparison, Penn is small fry with a market cap of $2.6 billion. (To learn how big players can both create and destroy value for investors, read The Pros And Cons Of Institutional Ownership.)
Bottom Line
The collapse of this deal could be both good and bad for Penn shareholders. At the end of the day, I believe that this is probably a good long-term play. However, given current market conditions, I'd be reluctant to nibble. I just have this sense that there may be a better entry point down the road.
To learn more, check out Mergers And Acquisitions: Why They Can Fail.