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Penn's Weakness Could Attract Vultures

Posted: Oct 07, 2008 11:37 AM by Glenn Curtis

Tickers in this Article: FIG, MGM, WYNN, PENN

Last year a deal was struck between private equity firm Centerbridge Partners and investment manager Fortress Investment Group (NYSE:FIG) to acquire troubled casino operator Penn National Gaming (Nasdaq:PENN). The deal collapsed in early July 2008, and although Penn got a hefty termination fee, I felt the overall outcome could be negative for Penn Gaming shareholders.

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It was hardly a vote of confidence in the company, and given the turmoil in the economy it looked like Penn Gaming could be in for a rough ride. Since then the stock has floundered, and its latest guidance for the third quarter doesn't inspire confidence.

The Weakness
Pennsylvania-based Penn Gaming said that it now expects its EBITDA to come in at $146.3 million for the third quarter. It's also looking for revenue of $617 million. This is well below the guidance of $178.6 million in EBITDA and $657.5 million in revenue it offered up back in July in conjunction with its second-quarter results.

This is a large revision in my book, and for Penn Gaming to lower the bar that far in such a short period of time is a sign that the operating environment is exceptionally difficult.

It also tells me that forecasting is quite difficult. Interestingly, the company only provided Q3 guidance, and it did not provide full-year guidance as it did back in the second quarter. We'll have to see what happens when Penn releases its quarterly results on October 27, but at the moment this exclusion makes me wonder if the operating environment has become so volatile that it's not possible to make a prediction that far out. I'm not left with that warm and fuzzy feeling.

Buzzards Begin to Circle
Penn is trading near its 52-week low, and unfortunately, this drop in share price could attract scavengers. A would-be suitor could use these tough times as leverage to acquire the company on the cheap. If a suitor were to put a reasonable offer on the table, I think Penn Gaming would be hard pressed to ignore it. The shareholders have got to be an anxious lot, and they could jump at almost any deal - even a bad deal. (To learn more about why Penn may be a take over target, read Pinpoint Takeovers First).

Penn Gaming doesn't have much going for it right now. Sure, it has a number of fairly high profile facilities, including its Hollywood Baton Rouge casino in Louisiana and its Hollywood Aurora casino in Illinois, but the competitive environment in gaming in general is quite stiff and the economy is on the ropes. As a standalone, it's going to be nearly impossible, at least in the near-term, to garner attention from the investment community. The few analyst eyes will be drawn to more popular and larger operators such as MGM Mirage (NYSE:MGM) and Wynn (Nasdaq:WYNN) as they flirt with their 52-week lows.

The flip side to all that is that financing a deal to take out Penn in this environment might not be an easy.

Bottom Line
Penn Gaming's third quarter guidance isn't inspiring, and its slumping share price leads me to believe that a suitor could emerge at a time when frankly the company isn't dealing from a point of leverage. Long story short, I wouldn't bottom fish the stock right now.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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