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Penn National buys M Resort for $230.5 million

8 October 2010

LAS VEGAS, Nevada -- Regional casino operator Penn National Gaming has acquired the 19-month-old M Resort for $230.5 million, the Wyomissing, Pa.,-based company announced this morning.

In a statement, Penn National said it purchased all of the M Resort bank debt, plus $160 million of subordinated debt formerly held by MGM Resorts International, from Bank of Scotland, a unit of Lloyds Banking Group.

M Resort was built by Anthony Marnell III and his family at a cost of $1 billion. The price included $300 million for the 93-acre site at the corner of Las Vegas Boulevard South and St. Rose Parkway, and $700 million for construction.

"This transaction represents a great opportunity for Penn National, M Resort, its customers and employees as we address the financial uncertainty and debt burden which has created an overhang on M Resort's operations," Penn National Chief Executive Officer Peter Carlino said in a statement.

"M Resort is a unique, differentiated property that we expect will continue to improve its operating results even without the benefit of a rebound in the local Las Vegas economy," Carlino said.

The Review-Journal reported in August that Blackstone Group, a global investment firm, solicited bids for $700 million in debt held by the bank. According to gaming sources, 12 companies, partnerships or individuals expressed interest in M Resort.

Marnell and his family, including his father, casino construction pioneer Tony Marnell Jr., in partnership with Los Angeles-based private equity firm Leonard Green & Partners, made one of the offers for the debt.

The transaction was announced before the stock markets opened for trading. But Wall Street was quick to respond positively to the deal.

"While we have a cautious view of the Las Vegas market at present, we think the deal makes strategic sense for Penn," Wells Fargo Securities gaming analyst Carlo Santarelli said in a note to investors.

He added that Penn is buying a property that "will generate a solid cash on cash return of about 13 percent once its operating strategies are implemented and is buying a luxury-type asset in a destination market at a fraction of replacement cost."

Penn National operates racetracks and 16 casinos in U.S. cities other than Las Vegas and Atlantic City. In June, Penn National received a Nevada gaming license after acquiring 1 percent of a small Nevada slot machine manufacturer.

The move cleared the path for the company to move quickly and buy a Las Vegas-based resort.

JP Morgan gaming analyst Joe Greff said the deal wasn't a "major positive" right away because of the depressed Las Vegas market. But he said Penn acquired "a nice asset."

"The acquisition gives Penn the ability to enter the Las Vegas market, diversify its portfolio and offer its database of regional customers an asset to visit in Las Vegas market," Greff said.

Carlino said Penn National would tap into its database of 12 million customers to boost visitation to M Resort.

M Resort has 390 hotel rooms and a 92,000 square foot casino. The stylish property has nine restaurants and more than 60,000 square feet of meeting and conference space.

M Resort's master plan includes the potential to develop up to 1 million square feet of retail and a multi-screen digital movie entertainment complex.

The property had been funded through an equity investment by the Marnell family, loans from the Bank of Scotland, and $160 million investment by MGM Resorts.

A year ago, MGM Resorts wrote down its investment on M Resort when the casino was just a few months old.

M Resort opened at the height of the economic downturn following a year-and-a-half building process. The operators had been banking on planned nearby housing communities and businesses to fuel the customer base. The sour economy halted or canceled those projects.

M Resort opened to large crowds enticed by a massive marketing effort. The heavy business forced M Resort to hire 250 more workers to its 1,800-person work force. When the newness wore off, business slowed.
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