Penn National Merger Comes Up Snake-eyes

Gaming concern's buyout is a victim of falling stock price and the credit crunch.
Stephen TaubJuly 3, 2008

Another buyout deal — this one involving Penn National Gaming Inc. — has fallen apart due to the crumbling global stock markets and credit crunch.

Investment firms Fortress Investment Group LLC and Centerbridge Partners LP terminated their $5.82 billion agreement to acquire Penn National. Under the termination arrangement, Penn National will receive $1.475 billion, consisting of $225 million in a cash termination fee and the purchase of $1.25 billion of Penn National’s redeemable preferred equity due in 2015. The purchase will be by affiliates of Fortress, affiliates of Centerbridge, affiliates of Wachovia, and affiliates of Deutsche Bank. In addition, Fortress Investment Group chairman and CEO Wesley Robert Edens will be appointed to Penn National’s board, expanding it to seven members.

Penn National owns and operates 19 gaming and racing facilities, with a focus on “slot-machine entertainment.” Shares of the gaming company are down 44 percent since the deal was announced in June 2007.

Penn National CEO Peter M. Carlino says he is disappointed that the deal will not be completed for the originally agreed-upon price of $67 per share; however, he stresses that the prospect of using litigation to enforce performance of the merger agreement would expose the company to the significant risk related to a protracted legal process.

“We may be in the gaming business, but we would never gamble the company’s future and our shareholders’ best interest in this or any other circumstance,” he says. “This transaction represents the company’s best alternative to the uncertainty of litigation and delivers immediate tangible and material value to our stockholders.”

Penn National says it intends to use the net proceeds from the investment and the after-tax proceeds from the termination fee to repay existing debt, to acquire or develop pari-mutuel and gaming facilities, and for such other uses as may be authorized from time to time by the board of directors, including repurchases of its common stock.

The board has authorized the repurchase of up to $200 million of common stock over the next 24 months.

Unlike other deals that have resulted in litigation, the would-be acquirers are not claiming there has been a material adverse change at Penn National. Like earlier collapsed deals, however — including for Sallie Mae, Harman International, Alliance Data Systems, and United Rentals — the acquisition of Penn National seems to have fallen victim to the harsh realities of the credit crisis.