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Posted At : July 3, 2008 03:52 PM | Posted By : D McKee
Related Categories:
Penn National,Wall Street,Harrah's
Update: A correction to this item has been posted, c. 7/8/08.
There was something good for everybody in today's announcement that the increasingly inscrutable Penn National Gaming LBO was well and truly off. Penn makes out like a bandit, collecting a $225 million breakup fee in cash (enough to buy a casino or two, at least), plus roughly $1.25 billion in preferred shares of a quartet of would-be buyers.
Forbes characterizes the latter as "a severn [sic]-year, interest-free loan." (If Penn defaults on the loan, however ... ) "They would rather pay that than finance a deal that was forged in far more optimistic times and would involve heavy losses on billions of dollars of debt," said the Financial Times of the bankers who underwrote the exit strategy.
Even in the worst-case scenario, Penn stands to collect $700 million. Time for a little retail therapy! Already it's announced that it has its eye on an expansion into Maryland, in addition to $200 million in stock buybacks. It's even making noises about moving on Las Vegas. (At last! Rescue for the Tropicana -- or even the Riviera -- could be in sight.)
Lead buyers Fortress Investment Group and Centerbridge Partners got off easy, too. They escaped having to pay a 125% premium on stock that, while not exactly tanking, had slipped to a "street value" far less than the $67/share (plus penalties) Fortress and Centerbridge were looking at paying. Going through with this LBO would have been insanity and, to their great credit, all parties recognized as much.
Even as analyst Barbara Cappaert praised the deal for putting Penn in a "cash-flush" position, CEO Peter M. Carlino moped a bit. As much as he wanted to maximize shareholder value, was it realistic for him to expect Fortress and Centerbridge to take a haircut of Yul Brynner severity when his stock was flying low? And is this really the time to be tripling his company's debt load?
One intriguing prospect Penn threw out there was using its newfound liquidity to purchase other companies' debt. This could be a very opportunistic move indeed. With, for instance, Harrah's Entertainment's debt discounted by almost half, Carlino could put himself in somebody else's driver's seat -- and soon.
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