Casinos & Hotels

Penn National Gaming's Recent Stock Offering Almost Looks Free

Jon C. Ogg

Published: September 30, 2020 1:06 pm

Many companies are punished when they announce secondary stock offerings after their shares already have surged. Then again, sometimes that is the best thing a company can do. Why not use the strength of the market or their own stock price to ensure years of stability when the economy is bumpy? Penn National Gaming Inc. (NASDAQ: PENN) recently closed on its public secondary offering of 16,100,000 shares, after including the overallotment option for the underwriters.

While this offering is technically dilutive to prior shareholders, Penn National’s gross proceeds came to $982.1 million. Its current market cap is $10 billion, but this stock was in the $30s before the pandemic and it reached as low as under $5 at the crush-depth selling zenith in March. At $72 a share now, the company effectively raised more cash than its entire equity value just six months ago.

Another issue that might classify this recent capital raise is that the secondary offering was priced at $61.00. Even though it weighed briefly on the stock, Penn National’s stock has risen another $10 or so since.

Penn National has been financed the same way that many other casinos were financed: lots of debt. This more than $900 million equity sale was shown to boost Penn National’s omnichannel strategy, which includes the launch of its Barstool Sportsbook app in new markets. The company further telegraphed that the capital will be used to develop new features and products, to establish Barstool-branded sports bars and retail sportsbooks, and even to “reimagining the customer experience” at its existing casinos.

As for the books and using a pro forma for the transaction, Penn National indicated that the company had net traditional debt of approximately $1 billion as of June 30, 2020. The company further noted that this represents a significant reduction from the pre-COVID-19 periods.

Penn National’s Barstool Sportsbook app is still only in its second week of operation, and the company has seen strong growth without spending any real dollars on external marketing. The company also issued guidance that it still expects its third-quarter revenues to come in a range of $1.04 billion to $1.145 billion. It also consolidated adjusted earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) to be in a range of $410 million to $450 million, which the company noted is consistent with the ranges previously reported in the offering’s prospectus supplement.

It is very difficult ever to suggest that a secondary offering that brings dilution is free. That said, Penn National does not pay a dividend to its common shareholders. The company’s investor relations site even confirmed that it has not paid common dividends since its initial public offering (way back in 1994) and that the company intends to retain its earnings to reduce outstanding debt and to finance future growth.

If a company is not paying a dividend, dilution for a casino and gambling operation almost feels like it’s another version of playing with the house’s money. Penn National’s investor relations site also specifies that the company has no present intention of paying dividends.

Standard & Poor’s also took note of Penn National’s “free” money offering. S&P has only a B rating, which is below “investment grade,” but the ratings agency noted that this could help the company in its efforts to deleverage while also funding growth. S&P also believes the growth initiatives will help grow its earnings before interest, taxes, depreciation and amortization over time and leave enough capital to further pay down its debt.

S&P now estimates that a pro forma cash balance as of June 30 would have been over $1.5 billion with the new funds, as well as another $670 million still available under its existing $700 revolving credit line. The risk is that, despite having reopened its casinos and seeing EBITDAR improvements, the agency’s B rating reflects “a high degree of uncertainty around the sustainability of its recovery over the next year.” S&P also maintained a “negative” outlook because of the risks.

Shares of Penn National Gaming traded up about 3% at $71.50 on Wednesday afternoon, in a 52-week trading range of $3.75 to $76.62. Its consensus target price from Refinitiv is $62.64 a share.