analyst deems strategic review unlikely for Penn Entertainment
Stock in Penn Entertainment (NASDAQ: PENN) took a hit on Friday as an analyst suggested a takeover is unlikely in the short term, dampening hopes for a potential buyout.
Penn slipped 8.66% on significant trading volume that was almost double the daily average, following a report by Truist analyst Barry Jonas stating that the regional casino operator is unlikely to explore a sale soon, despite a letter to the board of directors from hedge fund Donerail Group advocating for such a move, as Penn could potentially fetch twice its current market value in a sale.
In his report, Jonas mentioned that while the activist letter sparked optimism in the stock and prompted some short sellers to cover their positions, analysts generally agreed that an outright sale of Penn is not imminent.
Despite theetto optimistic tone, Jonas increased his price target on the shares to $25 from $23, suggesting a potential increase of 43.6% based on the closing price on June 14.
Frequent Themes in Penn Entertainment Takeover Discussion
The Donerail letter, sent on May 31st, boosted the struggling stock price, but most analysts have since stated that an immediate sale of Penn is improbable due to high interest rates, which could suppress acquisition values.
With inflation causing persistent high interest rates, gaming companies have reacted by lowering and restructuring debt - a move praised by analysts and investors, but it has weighed on share prices.
Interestingly, elevated interest rates may discourage potential buyers who require financing to complete deals, as they would then incur higher financing costs and interest expenses.
"PENN is one of the most efficient land-based operators in our coverage," Jonas wrote, "which limits any significant operational synergies for potential buyers."
Penn Focused on Enhancing ESPN Bet Performance
One of the points raised by Donerail in their criticism of Penn's management and their call for a sale revolved around the gaming company's struggles in the online sports wagering sector. However, Penn remains dedicated to its ESPN Bet mobile app, launched in November last year.
Jonas emphasized that Penn has a well-defined ESPN Bet product development plan and that this focus could yield positive results during the upcoming football season. With the full football season approaching, there could be greater clarity regarding the long-term prospects of ESPN Bet, which has thus far struggled to capture a significant market share, a challenge shared by most competitors not named DraftKings or FanDuel.
Low hold rates, fierce competition, and the specter of rising taxes are some of the difficulties faced by online sportsbook operators, but Penn has the potential to leverage the ESPN brand and technological advancements to attract more users to ESPN Bet during the 2024 football season.
