Wednesday, January 16, 2008 1 comments ++[ CLICK TO COMMENT ]++

Risk Arbitrage of PENN

One analyst today remarked that the PENN takeover is likely to proceed.

Shares of Penn National Gaming Inc. climbed Wednesday as an analyst upgraded the company, saying there is little risk its proposed $6.1 billion buyout would fall through.

Lawrence Klatzkin of Jefferies & Co. noted Penn National's stock was recently trading nearly $17 below the buyout price of $67 per share...

The analyst sees little risk to Fortress and Centerbridge receiving the necessary licensing approvals. He also said in a client note that Deutsche has committed to financing the deal and that the agreement leaves little room for Fortress and Centerbridge to back out.

I have no idea why this stock has dropped so much in the last few weeks. Are the risk arbitrage hedge funds liquidating due to margin calls? Or is there some negative development unfolding in the background?

The potential return on this arbitrage situation is attractive enough for me to consider. We are looking at around 30% raw return (deal is supposed to close 2Q08). The downside, though, is that I am not familiar with Penn National Gaming, or the gambling industry in general. When I took some risk arbitrage positions last year in Tribune and ABN-Amro (mom`s account), I had a good idea of the industry and why (or why not) someone would want to buy the target. With PENN, it`s hard for me to say. I believe that gambling stocks in general are overvalued (mostly due to speculation on huge profits from Macau) but not sure about PENN`s situation. If these stocks are overvalued then a merger failure can result in a huge decline in the stock price.

(Talking about merger arbitrage, BCE is down a lot today. A decline of almost 3% is huge for this megacap Canadian stock).

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1 Response to Risk Arbitrage of PENN

February 10, 2008 at 2:28 PM

I use as my source of merger data. It is really complete data and saves a bunch of time!

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