Analysts from the University of Pennsylvania remain skeptical about the possibility of a casino company selling itself.
Last Friday, Penn Entertainment's (NASDAQ: PENN) stocks surged due to a letter sent to the gaming company's board by Donerail Group, urging them to consider a sale. However, some analysts don't believe this transaction will happen.
In this letter to Penn Chairman David Handler, Donerail's Managing Partner, Will Wyatt, criticized the casino operator for expensive blunders in the online sports betting sector and paying CEO Jay Snowden excessively while pointing out that the company should sell since it could fetch double its current market value in such a deal due to its regional gaming assets. JPMorgan analyst Joseph Greff disagrees with this prediction.
As per Greff, getting a buyer for PENN is exceptionally tricky and he doesn't foresee any significant disturbances leading to sustainable value creation for shareholders.
Although Greff comprehends Donerail's reasoning with Penn's downturning share market, he also pointed out the interactive losses have generated unfavorable sentiment for the company.
Possible Penn Suitors Emerge
Despite Donerail's claims that it'll be tough to find a buyer for Penn, reports on Monday suggest otherwise.
Today, CNBC's David Faber disclosed that he's heard of interest in Penn, but he didn't elaborate on sources or potential buyers. He did, however, question the potential viability of Boyd Gaming (NYSE: BYD) or other gaming enterprises acquiring Penn, as they are commonly regarded as deep value entities.
The possibility of Boyd gaming as a potential suitor for Penn is quite feasible because both companies are regional casino operators. Interestingly, Boyd possesses something Penn lacks β a sizable presence in Las Vegas. In contrast, Boyd has substantial overlap with Penn in the Midwest and South, suggesting it doesn't have to respond to Penn with a compelling deal.
Furthermore, Boyd holds a 5% stake in FanDuel, meaning Penn's struggling ESPN Bet operation wouldn't be a lucrative bargain chip in any likely acquisition deal. Las Vegas-based Boyd hasn't hinted at any plans for notable acquisitions soon, and this could be one reason why Penn's stocks fell nearly 1% today.
The Penn Conundrum
Apart from hinting at the potential benefits of a possible sale, the Donerail letter to Penn also addressed a recurrent issue among Penn shareholders: the company's expensive, numerous errors in the online gaming industry.
Mimicking other market players before it, Donerail asserted that Penn's investments in online gaming aren't yielding results and overshadow Penn's alluring portfolio of regional casinos. This belief resonates with Jefferies analyst David Katz, who holds that Penn investors are growing tired of the company's interactive errors.
"Regardless of the outcome of the current process, revisiting the existing investment and return trajectory is warranted given the present competitive situation in digital and the uncertainties around the investments required to capture the stated market share goals," wrote Katz in his report. "There needs to be a change in course" given shareholders' limited willingness to support the costs of expanding in the interactive segment.
