Stock of the Day
|
Penn National Gaming (PENN)
Will Penn National Rebound after Being Jilted by Private Equity?
2007 - Especially the first half of it, was the year of buyouts, especially leveraged ones, as private equity firms used the cheap credit which flooded the markets to take aim at public businesses, lever them up, and then either restructure the poorly performing ones or ride the coattails of the free cash flow being generated by the top-performing ones. However, 2008, no matter how you look at it, is the year of the 'failed buyouts'. A lot of the transactions that were announced last year are now in the trash can. Add the Penn National Gaming buyout to the list. This morning, it was officially announced that the company, the buyers and the banks have agreed to call it quits. Typically, in these cases, shares in the target company fall when the deal is called off because shareholders are bummed out that they will not be getting the hefty premium that comes with these buyouts. However, today, Penn National ended the holiday-shortened training session up almost 4%. Why the enthusiasm? And there is further room on the upside for the stock?
|
| Daily Chart |
If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here
|
| Stock Analysis |
Penn National Gaming is in the business of owning and running gambling properties such as casinos and horse racetracks. It is a mid-size, regional player in the space with revenue in the $2.2 billion range. Just over a year ago, on June 15, 2007, right when the Bear Stearns hedge funds were starting to implode and the credit markets were tightening, Penn agreed to be bought and taken private for $67 a share (to be paid in cash and stock) by investment funds affiliated by Fortress Investment (FIG: Charts, News, Offers) and Centerbridge Partners. The stock was trading in the mid-$40s two months prior to the announcement of the buyout and the day before the deal hit the newswires, it closed at $51.14. So shareholders received a generous $31% premium. This was a great deal for Penn, because in addition to the premium, Fortress and Centerbridge also agreed to assume Penn's outstanding debt obligations which were to the tune of $2.8 billion.
|
For Fortress and Centerbridge, this represented a chance to get into the gambling and casino business which was doing very well at the time thanks to the strength in the economy and high disposable incomes. Harrah's, the largest player in the industry had just been taken private by Apollo and Texas Pacific Group, and obviously, Fortress and Centerbridge, were eager to get into the action too. However, the deal has been under a shadow of doubt for a while now. As credit conditions worsened, banks financing these transactions (which in this case were Deutsche Bank (DB: Charts, News, Offers) and Wachovia (WB: Charts, News, Offers)) became less and less inclined to take on more leveraged debt on their balance sheets primarily because market conditions would force them to mark it down (to levels close to 85-90 cents on a dollar) almost immediately, leading to hundreds of millions in losses. The fact that the stock hasn't traded anywhere close to the $67 buyout price since January (it started the year at $60 and then has slid down all the way to the $28-$30 range) basically tells you what traders on the street were thinking - i.e. this thing is never going to close and it will join the likes of SLM Corp. (SLM: Charts, News, Offers), ADS (ADS: Charts, News, Offers), Harman International (HAR: Charts, News, Offers) and United Rentals (URI: Charts, News, Offers), in the annals of recent failed buyouts.
|
So what kind of shape is Penn National Gaming left in? Well, let's just say it fared a lot better than most of the companies that are left stranded on the altar by private equity suitors. Penn can thank Wachovia and Deutsche Bank for this because the two banks, especially Wachovia, given the huge amount of pressure that it has been under recently thanks to its missteps in the mortgage market, were desperate to get out of the deal. Therefore, they paid the $225 million breakup fee due to Penn and also paid another $225 million to pacify the buyers, Fortress and Centerbridge, lest they turn around and sue the banks to force them to provide the funding. Penn National is also getting $1.28 billion in cash from the private equity firms and the banks. This is because Penn is selling seven year preferred convertible securities (i.e. basically debt) to these entities. And since these are zero-coupon bonds, the terms of the offering are extremely favorable to Penn. This along with the fact that Penn is known for having first-tier management talent along with strong cash-flow and tangible assets is making investors look at Penn favorably, now that the uncertainty and distraction associated with the buyout is over. Sure, the gambling business is struggling right now and that's part of the reason, Penn put out a profit-warning today, but all-in-all, the company should be able to ride out the weakness just fine.
|
Profile |
Click here to view a detailed profile of Penn National Gaming.
|
|
|
|
|
