July 3, 2008 / 1:52 PM / in 11 years

Penn National loses takeover deal but gets funding

PHILADELPHIA/NEW YORK (Reuters) - Penn National Gaming Inc (PENN.O) said on Thursday its $6.1 billion takeover pact had been terminated, marking the latest leveraged buyout to crumble amid tight credit markets and a weak U.S. economy.

Fortress Investment Group FIG.N and Centerbridge Partners had agreed to buy the casino and racetrack operator for $67 a share last year, just before the leveraged buyout bubble collapsed.

Penn National shares have been under pressure for months on investors’ concerns that the deal price might be slashed or the buyout firms would fail to get funding at affordable rates.

“Since the deal was announced, credit went from being a big driver of these types of acquisitions to being a hurdle for a lot of them,” said Majestic Research analyst Matthew Jacob.

“At the same time, the economy and the gaming industry as a whole, and specifically Penn’s properties, started slumping.”

Under the termination agreement, Penn National would get $1.475 billion, consisting of a $225 million break-up fee and what effectively would be a seven-year, interest-free $1.25 billion loan from Fortress, Centerbridge, Wachovia Corp WB.N and Deutsche Bank (DBKGn.DE).

“It seems like this way it’s a decent compromise for what could have been a poor situation. The company now has cash ... We now have one of the few gaming companies that’s cash-flush,” said Barbara Cappaert, gaming analyst at KDP Asset Management.

Penn National would repay the $1.25 billion debt, called “redeemable preferred equity,” in 2015, using cash, its own common stock or a combination of the two. As of May 31, Penn National had $2.97 billion in outstanding debt.

Penn National shares whipsawed throughout the day, hitting a low of $26.85 and a $31.87 high. It closed at $29.66, up 3.7 percent, in a pre-holiday-shortened trading session on Nasdaq.

“The market already put a near-zero chance of completion (of the deal). Having $1.25 billion interest-free for seven years in this market is a real benefit,” said one arbitrageur who declined to be named.

Penn National said it became clear the deal could not be completed “without significant and lengthy litigation which is inherently unpredictable.”

Renegotiating the agreement at a reduced price “was not a viable option,” it said, given the current U.S. economy, tight credit markets and the weak outlook for the gaming industry.

“It became a less attractive collection of assets based on the price that had to be paid, the financing, and the kind of multiple given the more recent results for the underlying properties,” Jacob said. “The gaming industry is challenging right now.”

Penn National said consumers appear shell-shocked by the housing crisis and pricier fuel, and have reacted by curtailing gambling and entertainment spending. Still, the company said the U.S. slowdown in gaming revenues “is not here forever.”


Penn National is the latest buyout to collapse in the wake of last year’s subprime mortgage crisis and economic weakness.

Other failed deals involved audio equipment maker Harman International Industries Inc HAR.N, equipment renter United Rentals Inc (URI.N) and student lender Sallie Mae, formally known as SLM Corp SLM.N.

“It is a continuing theme of tight credit conditions,” said Mirko Mikelic, senior fixed-income analyst at Fifth Third Asset Management.

“It started as a subprime problem — and now we are seeing the impact on the LBO space,” Mikelic said. “These deals have dramatically slowed down since the beginning of the year. It’s tough for any buyout shop to get any financing for almost anything.”

Other deals, such as the Clear Channel Communications Inc (CCU.N) buyout, were renegotiated at lower prices. A pending buyout of Canadian telecoms company BCE Inc (BCE.TO) (BCE.N) remains in limbo as the buyout firms and banks discuss terms.

The battle over BCE’s $34.1 billion buyout may last through 2008 as banks funding it try to negotiate for concessions, such as the interest rates paid and the covenants or safeguards on the loan, a source familiar with the situation told Reuters.

In terminating the Penn National deal, the banks managed to escape with minimal harm as opposed to funding the entire deal. Wachovia and Deutsche agreed to pay Centerbridge and Fortress $550 million to be released from their debt obligations, according to a person familiar at one of the banks.

The Wall Street Journal reported in its online Deal Journal blog that Fortress took the biggest risk on the $1.25 billion preferred securities, buying 78 percent of them, while Centerbridge bought 18 percent and the two banks the rest.

Wachovia declined to comment. Deutsche, Fortress and Centerbridge did not immediately return calls seeking comment.


Penn National said it would use the net proceeds of the $1.475 billion infusion to repay debt, acquire or develop new betting or gaming facilities, and repurchase up to $200 million in stock. It may also purchase other gaming companies’ debt.

The company, which operates slot machines, gambling sites and racing facilities, said it was eyeing gaming opportunities in Maryland, and was more interested in Las Vegas business prospects than it was a year ago since prices have dropped.

“We view the termination of the merger favorably from a credit perspective,” debt-rating agency Standard & Poor’s said. “Had it moved forward, Penn National would have been highly leveraged during a period of challenging operating conditions in the U.S. gaming industry.”

(Additional reporting by Walden Siew and Elinor Comlay in New York; Editing by Dave Zimmerman and Braden Reddall)

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