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Howard Stutz

Private equity firms snap up Penn National

18 June 2007

LAS VEGAS, Nevada -- Casino operator Penn National Gaming became the latest target in private equity's fascination with the gambling industry, agreeing Friday to a buyout valued at close to $9 billion.

The deal, which is subject to approvals by Penn National's stockholders and gaming regulators in the states where the company operates, is not as costly as the planned $17.1 billion private equity buyout of Harrah's Entertainment. However, the deal tops the scheduled $5.4 billion acquisition of Station Casinos.

Fortress Investment Group, a publicly traded asset management company, and private equity firm Centerbridge Partners LP, agreed to pay $6.1 billion in cash and repay Penn National's outstanding debt of $2.8 billion in exchange for control of the company.

Under the buyout proposal, Penn National shareholders will receive $67 per share in cash for each share they own, a nearly 31 percent premium over the company's closing price of $51.14 on Thursday. Penn National has 45 days to solicit a better offer. The company's current management, including Chairman Peter Carlino, has agreed to stay on and operate the company.

"Fortress and Centerbridge are both leading private equity firms with proven track records and strong reputations," Carlino said in a statement. "This is a very attractive valuation for our shareholders, at a time when the financial markets are recognizing the strong investment rationale for gaming companies."

Penn National estimated it would take a year to 16 months for the deal to close.

Penn National, based in Wyomissing, Pa., operates 18 casinos and racetracks in 14 states and Canada. The company does not have a property in Nevada.

"Due to the scarcity of quality regional assets, we can't rule out competing bids at this point," Bear Stearns gaming analyst Joe Greff said in a note to investors. "Considering the solid balance sheet and strong and stable cash flows, we are not surprised by private equity interest in Penn National."

Penn National is considered either the third- or fourth-largest casino operator behind Harrah's and MGM Mirage, often flopping spots in the rankings with Boyd Gaming Corp. In 2006, Penn National reported net revenues of $2.2 billion, slightly ahead of the $2.19 billion reported by Boyd.

Penn National made news in 2005 when its spent $2.2 billion to acquire rival casino operator Argosy Gaming. The deal, however, was overshadowed that year by Harrah's $9 billion acquisition of Caesars Entertainment and MGM Mirage's $7.9 billion purchase of Mandalay Resort Group.

Friday's news, which sent Penn National shares soaring almost 22 percent on the Nasdaq National Market, had implications for other regional casino operators.

Share prices of Las Vegas-based Ameristar Casinos and Pinnacle Entertainment increased in trading Friday. Ameristar closed at $34.95 on the Nasdaq, up $2.55 or 7.87 percent. Pinnacle finished at $30.83, up $2.35 or 8.25 percent. Shares of Penn National finished up $10.98 or 21.5 percent at $62.16.

MGM Mirage, which is considering an offer from majority shareholder Kirk Kerkorian to buy two of its largest assets, also had its shares jump $3.48 or 4.23 percent Friday on the New York Stock Exchange to close at $85.70 based on the Penn National events. Some gaming analysts believe Kerkorian could be setting the stage to take MGM Mirage private.

"We think today's transaction has derivative implications for other names in the space as well, and we see the most significant value in MGM Mirage, Pinnacle and Boyd," Greff said.

Jefferies & Co. gaming analyst Larry Klatzkin said there are still other casino operators that could become private-equity buyout targets, such as Pinnacle, Isle of Capri Casinos, Boyd and Ameristar.

"We believe that this transaction could lead to speculation of any of the above four mentioned companies to be taken out as well," Klatzkin said in a note to investors.

"It is important to note that other than Pinnacle, the companies have significant insider ownership, thus making a buyout from an outside source more difficult and necessitating management's cooperation," he added.

Klatzkin thought the Penn National buyout mirrors the Station Casinos' deal, where the Fertitta family, the company's founders and majority shareholders, are taking the company private will help from a private equity group.