Penn Actually Wins In Merger Implosion (PENN, FIG)

Penn National Gaming Inc. (NASDAQ: PENN) has been considered a dead merger for quite some time, yet it only officially became a dead merger this morning.  This was the last of the big multi-billion deals still officially on the books that was put together back before we had a full blown credit crunch.

PNG Acquisition Company Inc. was the entity that was going to do the acquisition, and that was an entity indirectly owned by certain funds managed by affiliates of Fortress Investment Group LLC (NYSE: FIG) and Centerbridge Partners, L.P.

The buyout price of $67.00 per share was older than Methuselah.  Since January, this stock slid steadily from over $60.00 down to under $30.00.  The deal was a known to be dead by everyone.  But there is actually a silver lining here for the company.  Penn National will get $1.475 Billion in cash out of this.  The breakdown is a $225 million deal termination fee, and the rest will be a $1.25 Billion redeemable preferred equity due 2015.  Affiliates of Fortress, affiliates of Centerbridge, affiliates of Wachovia, and affiliates of Deutsche Bank will all be holders of those notes.  To top it off, Fortress Investment Group’s  Chairman & CEO, Wesley Edens, will join the Penn National Gaming Board of Directors.

Penn National has also issued preliminary 2008 guidance of $2.5388 Billion in revenues, with $682.3 million in EBITDA, and $487.2 million in income from operations.  It will also repurchase $200 million in shares.

Wall Street is actually applauding this somewhat.  Shares are up 1.4% at $28.97 shortly after the open.  Penn National Gaming has a $2.5 Billion market cap as of today.  Penn isn’t a pure casino play as it also hold raceways.  But that sector has also seen a 50% drop (or worse) in many of the key names from last year’s highs, so the share price drop here is actually in-line performance. 

Penn had $2.9+ Billion in long-term debt and total liabilities stood at $3.85+ Billion in total liabilities.  This looks like it is going to bolster the company’s books more than any hurt an already-known dead merger was going to do. It is always possible you’ll see a selling response, but after looking it over the company is going to have a better operating structure with far less leverage than it would have been under that merger.

Jon C. Ogg
July 3, 2008