Unsurprising Boyd's Overview for Penn, Yet Analyst Predicts Deal Unlikelihood
It's not unusual to hear whispers of Boyd Gaming (NYSE: BYD) potentially making a play for Penn Entertainment, but it's not a guarantee that a deal will go down. That's the viewpoint of Deutsche Bank analyst Carlo Santarelli, who, in a recent report, echoed the sentiment shared by many on the sell-side - Boyd could be a fitting suitor for Penn, but it doesn't guarantee a transaction, nor is there confirmation that Penn is open to selling. These speculations surfaced last week with reports suggesting that Boyd and Penn are in discussions about an acquisition with Penn's valuation estimated to be over $9 billion.
We can't confirm this report, but we think there's probably some validity to the discussions between the parties," noted the analyst. "However, we believe the negotiations, if they're indeed happening, imply a level of interest that most investors didn't expect in recent weeks."
Santarelli dismissed the idea of Boyd offering $9 billion or more for Penn. Instead, he believes Boyd, if it's made an offer, might have floated around $25 to $30 per share. Based on Penn's 151.55 million shares outstanding, a $30 per share offer values the Ameristar operator at $4.54 billion - an offer the gaming company is likely to reject, according to the analyst.
ESPN Bet Likely to Find a New Home if Boyd Buys Penn
The rumors of Boyd and Penn surfaced earlier this month sparked several discussions about ESPN Bet - Penn's online sports betting arm.
Given Boyd's 5% ownership of FanDuel, it's plausible that it wouldn't want to pay for Penn's smaller internet gaming and sports wagering operations. Analysts seem to be in agreement with this thinking, and Santarelli added that if Boyd seriously pursues Penn, the sale of ESPN Bet to another buyer might be on the table, which would make a $25 to $30 per share offer for Penn more acceptable.
Santarelli suggested several other scenarios where Boyd could make the deal work. These include keeping operating losses on the table, eliminating $75 million to $150 million in redundancies, and the divestiture of overlapping assets to a third party for a similar price to what Boyd paid. Translation: if Boyd does buy its rival, it would probably involve the sale of several casinos.
The analyst also doesn't believe Boyd would overpay for Penn more than it's worth itself. As of June 21, Boyd's market capitalization was $5.1 billion.
"We find it hard to imagine BYD paying a substantial premium, relative to its own multiple, for PENN, from a free-cash-flow perspective, as BYD's free-cash-flow profile is considerably less volatile than that of PENN, given PENN's fixed-rent expenses," added the analyst.
Boyd/Penn Merger Could Get Complicated
Regarding Santarelli's comments about Penn's rent expenses, the company doesn't own the real estate its land-based casinos sit on, meaning it has significant, fixed obligations to landlords - namely Gaming and Leisure Properties (NASDAQ: GLPI).
Though Boyd has a relationship with GLPI, the operator generally prefers to maintain ownership of its property assets. The point is, the real estate investment trust (REIT) is likely to have some say in Penn being sold and the subsequent divestments that Boyd would make.
Additionally, there could be significant regulatory complexities due to the fact that Boyd and Penn operate in many of the same states. Not only would the Federal Trade Commission (FTC) need to approve the deal, but at least 10 states' gaming regulators would also need to sign off, according to Santarelli.
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