The big headline news of the past week has been reports that Boyd Gaming might make an offer to buy PENN Entertainment.
The reports have caused PENN shares to spike from the mid-teens to around $20 as of this writing.
On the surface, we’re skeptical. PENN has certainly put itself in a vulnerable position with past, current and prospective losses on its online gaming ambitions that are driving down the stock price below the value of its 43 brick-and-mortar casinos.
In a normal time, such reports would be both credible and enough to attract the attention of a host of prospective buyers.
But these aren’t normal times. Interest rates are high relative to debt already on the books of many companies, debt that was taken on during the long period when the Fed kept rates artificially low to the point where money was basically free.
Further, valuations of casino operators are depressed to a level where prospective buyers such as Boyd would find it hard to buy PENN at high enough of a premium to justify the purchase to themselves or the sale to PENN’s shareholders. Already, there is speculation that $25 is the practical top that Boyd could pay and that that isn’t high enough to win PENN’s approval.
Then you throw in the complications. So many properties today are owned by REITs, not the operating company to be acquired. And then there’s PENN’s deal with Disney’s ESPN for ESPN Bet. PENN has issued warrants to ESPN at strike prices ranging from $26.08 to $32.60, well above today’s market prices.
Casino company mergers take a long time given the need for regulatory approvals in every jurisdiction. That can further stretch out given the complexities mentioned above plus simply the large number of jurisdictions in which Boyd and PENN operate. A lot can happen to the economy and company and/or industry fundamentals during that time to jeopardize whatever deal would be reached. Finally, many jurisdictions might have monopoly concerns in a PENN-Boyd combination.
That doesn’t mean a deal can’t or won’t be done. A good look at the strategic options by PENN and Boyd might lead to possibilities short of a full takeover, such as selling individual properties or groups of properties to Boyd or to some other company or companies.
Perhaps a more likely outcome is that a private equity buyer comes in free to pay a higher valuation than a public company could justify.
Activist shareholder Donerail noted in its recent letter to PENN directors that, even at just seven times EBITDA, PENN’s brick-and-mortar operations are worth nearly double the company’s enterprise value. That might attract a private buyer.
From a PENN shareholder viewpoint, the ideal outcome would be for the digital business to make confident strides towards solid profitability so digital and brick-and-mortar combined could achieve valuations in the direction of what now seems distant territory — $50, $60, $70 a share or higher. And, indeed, there has been some speculation that critics have gotten management’s attention and costs – thus losses – of its digital operations will be shown to be greatly reduced when PENN reports second-quarter earnings next month.
If so, PENN management might get some reprieve. If not, something will have to happen for PENN’s assets to realize something approximating their value, though how and by how much will remain to be seen.
