PENN price drop shows concern over buyout

March 04, 2008 7:00 AM
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The Insider by Ray Poirier |

Closing on the buyout of Penn National Gaming Inc. (PENN) is just three months away but based on the marked decline in the price of the company’s shares there are many investors betting it will never happen.

For months now, speculators have been wondering whether the buyers – Fortress Investment Group LLC and Centerbridge Partners L.P. – will find the necessary cash during the current credit crunch to pay each shareholder $67 per share.

As word of a weakening economy has spread, Penn National’s share price has dropped. On Monday, it closed at $44.04

There was similar concern about Harrah’s Entertainment Inc. as the closing date of its takeover by the partnership of Apollo Investments and Texas Pacific Group but that buyout was accomplished without incident.

Still investment advisers keep pointing to the many gaming projects that have been put on hold and cancelled completely because of the lack of funding.

Respected Deutsche Bank analyst Andrew Zarnett recently was quoted as saying, "The credit markets are temporarily closed. That doesn’t mean you can’t raise money if you’re willing to pay a very high rate of interest. But on anything at a reasonable rate, now wouldn’t be the time."

Followers of the company who have studied the buyout agreement point out that Fortress and Centerbridge have their financing in place with both Wachovia and Deutsche Bank. But if they decide to walk away, they must pay a breakup fee of $200 million.

And although the $67 per share offer is a far cry from the current trading value of the shares, it has been noted that the acquirers can go to the open market and buy shares at the lesser price, thus reducing the amount they will have to pay at closing.

The agreement requires that if the deal does not close on June 15 the buyers must add a few pennies per share per day for each day beyond that date.