Pinnacle, GLPI agree on $4.75 billion merger

The gaming industry's worst-kept secret became official Tuesday.

Real estate investment trust Gaming and Leisure Properties Inc. will acquire the real estate owned by regional gaming operator Pinnacle Entertainment for $4.75 billion in an all-stock transaction and lease the casinos back to the Las Vegas-based company.

The deal had been widely anticipated after Pinnacle announced plans last year to spin off its casinos into a separate publicly traded REIT.

GLPI, a gaming industry REIT based in Pennsylvania and spun off from Penn National Gaming, made two offers in the past few months to acquire Pinnacle, the most recent coming earlier this month. The companies had been in negotiations since March.

"We have consistently viewed GLPI's offer as superior to Pinnacle's standalone REIT conversion aspirations, as it was likely to come with greater certainty," Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski told investors.

The transaction, which requires shareholder and regulatory approval, is expected to close in early 2016.

Pinnacle shareholders will receive 0.85 shares of GLPI and one share of the new company being spun off, GLPI said Tuesday. The deal will create a combined real estate investment trust that will own 35 casino and hotel facilities in 14 states.

The deal values Pinnacle at $47 a share.

Pinnacle will operate the casinos under a 10-year lease agreement with GLPI and will initially pay the REIT $377 million in rent in the first year.

"Pinnacle's proven track record of continued improving operating performance will make GLPI even stronger as we pursue long-term growth," GLPI Chairman and CEO Peter Carlino said in a statement. He said on a joint conference call the deal creates "the largest publicly traded REIT in the U.S."

GLPI Chief Financial Officer Bill Clifford told investors that he didn't believe the Federal Trade Commission would have any antitrust issues with the transaction. The deal will give GLPI ownership of several properties in the St. Louis area. However, GLPI will not have any input in the operations of the casinos.

Pinnacle shareholders will end up owning about 27 percent of GLPI and 100 percent of the new operating company, which will consist of Pinnacle's current operating business, the Heartland Poker Tour, the company's Belterra Park Gaming & Entertainment Center racetrack and casino in Cincinnati, and the management contract for a racetrack in Texas.

On the conference call, Pinnacle CEO Anthony Sanfilippo said the transaction will leave the casino business "as a very, very healthy operating company." Sanfilippo said Pinnacle will still have growth opportunities and the ability to expand "in a thoughtful and strategic manner."

Deutsche Bank gaming analyst Carlo Santarelli said Pinnacle shareholders will be receiving stock in GLPI that has tremendous upside.

"We believe Pinnacle management did a superb job maximizing value for shareholders, while leaving the (operating company) on largely solid ground for the near to medium term," Santarelli said.

In the run-up to deal, GLPI said the transaction would save Pinnacle several steps -- as well as $700 million in REIT development costs -- by acquiring the casinos. Pinnacle doubled in size in 2013 when it bought rival Ameristar Casinos for $2.8 billion.

By law, REITs don't pay federal income taxes. With real estate as their primary source of income, REITs are required to distribute 90 percent of their taxable earnings to shareholders.

GLPI was spun off from Penn National in 2013 when the regional casino operator placed 21 of its 29 casinos and racetracks -- including M Resort -- into the REIT. Penn has continued to manage the casinos under a lease.

GLPI bought an Illinois riverboat casino in late 2013 but a 2014 deal to acquire a Pennsylvania racetrack casino fell apart and the matter is now a lawsuit.

Carlino said GLPI would continue to focus its efforts on the gaming industry for possible expansion. He said there are other potential gaming deals on the horizon.