Boyd Experiences More Problems Than Advantages According to Analysts, Limited ESPN Coverage Reported
Stocks of Penn Entertainment (NASDAQ: PENN) observed a potential drop in value late on a Friday, fueled by different analyst opinions about the likelihood of Boyd Gaming (NYSE: BYD) purchasing the regional casino operator.
Takeover speculations had been bubbling for weeks and escalated on a Thursday with a report suggesting Boyd is engaging in talks with Penn for a valuation of over $9 billion, including debt. Neither company has confirmed this, but analysts sure have. For instance, Bank of America analyst Shaun Kelley shifted Penn to the “no rating” category following rumors of the alleged Boyd proposal.
In a note to clients, the analyst pointed out that acquiring Penn would be advantageous for Boyd, but the transaction could necessitate a mix of financing and leverage that could seem unappealing to the potential bidder. If the $9 billion figure is accurate, that's more than Boyd's enterprise value of approximately $8 billion, implying the potential buyer would probably have to raise debt, sell shares, or both to complete the acquisition.
Moreover, Kelley suggests a Boyd takeover of Penn could present some regulatory risks and might lead to asset sales.
ESPN Bet - Another Hurdle
Another hindrance in a possible Boyd-Penn union is the presence of ESPN Bet - Penn’s online sports betting mobile app.
Boyd possesses 5% of FanDuel, and apart from Nevada, the casino operator seems content with reaping the benefits of FanDuel's success. Alone, this could deter Boyd from incorporating the struggling ESPN Bet into its portfolio. Kelley imagined that the inclusion of ESPN Bet in a Penn acquisition would demand a “further M&A solution” down the line.
In other words, any possible buyer of Penn would likely divest ESPN Bet. Similarly, Barclays analyst Brandt Montour believes Penn is committed to making ESPN Bet succeed and may resist selling the sports betting business. He also argues that there are more disadvantages than advantages for Boyd, should it decide to advance talks with Penn.
We aren’t entirely surprised by this report, considering this concept has been under debate among investors for the past couple of weeks,” wrote Montour. “We believe PENN has more faith in ESPN BET’s ability to make progress from here, compared to what the market anticipates, and its current share price suggests, and we doubt BYD would be interested in assigning an optimistic valuation for PENN Interactive or crediting shareholders with PENN’s collective investment in Digital to-date.”
He added that Penn likely isn't eager to sell right now and the risk/reward balance in buying the company tilts more towards risk than reward. Montour also highlighted that Penn's relationship with Walt Disney (NYSE: DIS) through ESPN Bet and the gaming company's obligations to landlords could discourage Boyd.
A More Positive Outlook
Not every analyst is bleak about the prospect of Penn being acquired. Craig-Hallum analyst Ryan Sigdahl seized the moment to boost his price target on Penn to $30 from $20 based on reports hinting at a possible Boyd offer.
“We think the company’s retail casino assets are worth $30/share with an additional $15/share potential from either M&A or success with ESPN Bet,” Sigdahl noted.
That combined $45 implies the analyst’s current price target of $30 doesn't take ESPN Bet’s success into account, and the $45 assumption is more than double where Penn currently trades. The analyst believes takeover speculation and involvement of activists in Penn offer a “compelling risk/reward opportunity.”
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