Penn National’s Next Move

Some were surprised, but the deal that wouldn’t die has finally left the building.
But look at Penn National Gaming’s stock.

A failed merger usually doesn’t garner a leap in share price to the tune of 10% plus. (Though considering the spread on this one, maybe.) But a fat $225 million breakup fee, plus Centerbridge and Fortress’s agreement to buy $1.25 billion of the company’s debt, is enticing to investors. What will Penn do with all that cash?

The company has already said it will delever by $610 million and look at share buybacks and development deals.

Now, given the economic environment, leisure companies are trading at depressed multiples. One investor went so far as to call their trading levels irrationally low. A gaming PE pro told me “right now is the time for stuff to happen” in the gaming space, meaning his firm is sniffing around at undervalued companies in the space.

With their peers undervalued, I say why not make an acquisition. The best and most available option looks like Ameristar Casinos (trading up). It’s known to be up for grabs, since the owner of Ameristar donated his shares, worth more than half of the company, to a research trust when he died a few years back. That trust needs to sell its shares (and thus, the controlling stake). And pricing-wise it’s not far from its 52-week low today.

Other targets? Isle of Capri Casinos (trading down), Pinnacle Entertainment (about even) and Boyd Gaming Corporation (also down). Boyd is attractive but that hinges on the completion of a big Vegas project late next year, and also, it’s family-controlled. The rest of the known targets in gaming are distressed, like the bankrupt Tropicana Entertainment and debt-laden Herbst Gaming, according to industry experts.

Penn National isn’t itself a target, because its trading above most of its peers. So I say, Penn National, why build when you can buy? Investment bankers, make your calls.