On Friday, casino operator Penn National Gaming announced an agreement to be taken private at a purchase price totaling $8.9 billion. Fool gaming analyst Jeff Hwang says that if Penn National is a private equity target, then so is everybody else.
I doubt I'm alone when I say that I've become a little desensitized to the happenings in the gaming industry. To tell you the truth, very little of what happens in the gaming industry these days truly shocks me.
Surprised? Sure. But shocked? Not really.
Back in 2004, when MGM Mirage (NYSE: MGM) bought out Mandalay Resort Group, and Harrah's Entertainment (NYSE: HET) acquired Caesars Entertainment, that shocked me. When Harrah's agreed to be taken private, that shocked me. But after that, there was little shock value left when Station Casinos (NYSE: STN) said it was going private. And when MGM majority shareholder Kirk Kerkorian's Tracinda Corp said last month that it was entering negotiations to buy out MGM's two biggest properties -- Bellagio and the ongoing $7.4 billion Project CityCenter -- that was more of an annoyance than anything else, as I was planning on buying the stock.
That said, I have to admit to being more than a little surprised when Penn National Gaming (Nasdaq: PENN) announced on Friday an agreement to be taken private. The company said that certain funds managed by affiliates of Fortress Investment Group LLC and Centerbridge Partners LP agreed to purchase Penn in an all-cash transaction totaling $8.9 billion, including the repayment of $2.8 billion in debt. The purchase amounts to $67 per share in cash, representing a 31% premium over Penn's price at Thursday's close. That price also amounts to a hefty 14 times 2006 EBITDA.
Who's next?
But aside from the huge payday for Penn's shareholders, there's a bigger underlying message here: Everybody is game.
The reason I say that is because what Harrah's, Station, and MGM all have in common is a lock on the best available real estate in the most valuable gaming market in the United States. MGM controls 865 acres of land on the Las Vegas Strip, the most valuable being the land smack at Center Strip -- the land represented by Bellagio and Project CityCenter. Harrah's controls 350 acres of land on or around Center Strip (including Rio), and Station Casinos has the best casinos and locations at every corner of the Las Vegas locals gaming market, as well as a lock on some of the best available sites zoned for gaming left in the market. So the Las Vegas real estate represents an obvious attraction to these companies.
Penn National, incidentally, has none of that.
While Penn does have a nice racino development pipeline and two of the highest-grossing casinos in the industry outside of Las Vegas (Argosy Lawrenceburg near Cincinnati and Charles Town Races & Slots in West Virginia), the company is largely a second-tier casino operator. The only obvious attraction is that the company produced $629 million in EBITDA in 2006. But I think that's really the key: Private equity has a pile of cash that needs to be spent, and the tremendous, reliable cash flows of the casino operators make them attractive targets. Moreover, private equity is willing to pay up for it.
This begs another obvious question: If Penn National is suitable, then why stop there? My guess would have been that Boyd Gaming (NYSE: BYD) is a far more attractive target; while Boyd's riverboat operations are largely comparable to Penn's, what Boyd has that Penn doesn't is the key Las Vegas real estate set aside for Echelon Place, which has the company positioned to have a national network.
Alternatively, if it's the mere pursuit of cash flow, then a top-tier riverboat casino operator such as Motley Fool Hidden Gems selection Ameristar Casinos (Nasdaq: ASCA) -- a company that has publicly stated that it has no intention of going private -- would warrant a massive premium. And even a bottom-tier operator like Isle of Capri (Nasdaq: ISLE) would seem to be a viable target under that criteria.
I would caution that the pipeline-rich players such as Las Vegas Sands and Pinnacle Entertainment are less likely targets. But the gist of it is that if Penn National is a private equity target, then so is everybody else in the game.
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Fool contributor Jeff Hwang owns shares of Ameristar Casinos and Las Vegas Sands. The Fool plays with a six-deck disclosure policy.
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