Merger Arbitrage: Penn National Gaming (PENN)

Part of my strategy is to keep a small portion of my portfolio for risk arbitrage. My goal is to develop some skill in generating a decent return to complement my longer term equity holdings. I did a scan of some takeovers and found the following to be of interest.

Penn National Gaming (PENN) announced mid last year that a consortium consisting of Fortress Investment Group and Centerbridge Partners were going to buy PENN for $8.9 billion ($67 per share) in cash. The shareholders accepted the deal in December so it's down to the final stretch.


I haven't been following PENN but for some reason it has fallen off a cliff this week.

(source: stockcharts.com)

The stock is trading near the pre-takeover-annoucement price. Do note that the stock ran up a lot on takeover rumours before the annoucement so I can still see the stock falling if the deal doesn't close.

I haven't seen any published reports indicating that the deal is off. My feeling is that the private equity firms will complete the deal because this is a stable, attractive, industry. Even an economic slowdown will only have a small impact on gambling. I suspect that the market thinks that the takeover firms won't be able to raise capital and I suspect Fortress will be fine but not so sure about the other partners.

One attractive thing about this deal is that it is 100% cash. You won't be stuck with an uncertain return based on stock price of some other stock (if stock were offered instead).

The risk for someone like me, in Canada, is currency risk. I don't think the Canadian dollar will strengthen much over the next few months but it's still a risk.


Details of the Takeover

Takeover price: $67 (cash)
Current price: $53.50

Closing date: late 2Q 20008



Potential (simple) return: 25.2%
Potential loss (guess): -10%
Probability of success (guess): 75%
Probability of failure (guess): 25%

Expected return = 0.252*0.75+(-0.1)*.25 = 16.4%


Overall, it looks like a good opportunity. If I can get a handle on why the stock is selling off so sharply, I'll make a decision thereafter.

Comments

  1. Dan LoomisJanuary 31, 2008 at 1:56 PM

    I am also looking at PENN as an arbitrage investment. Are you still looking at this? If not, why?

    ReplyDelete
  2. Sivaram VJanuary 31, 2008 at 6:49 PM

    PENN still looks attractive but I'm leaning more towards BCE given the sell-off (which is a Canadian deal and will make me avoid adverse currency movements). You might also want to look at BCE (which trades on the NYSE).

    Right now, potential return on PENN is around 28% vs 17% for BCE. If I can get around 20% (on BCE) with a lower risk, I would go for that instead of trying to get an extra 10% with much higher risk.

    I should also note that I don't understand casino valuations very well and not sure what the true value of Penn National is. In contrast, I feel that I have a better grasp of BCE, which is a Canadian telecom.

    My concern with PENN is that it can fall a lot if the deal is called off. Casino stocks have been on fire for several years so I am not sure about the built-in momentum that can collapse any minute the deal is called off.

    Anyway, that's my thinking right now. I might still consider PENN in the near future--or maybe invest some in PENN and some in BCE.

    ReplyDelete
  3. AnonymousFebruary 10, 2008 at 2:30 PM

    Have you looked at www.madmergers.com yet? They give away free merger data! It is more complete than the data at the other free sites too!

    ReplyDelete

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