Boyd Gaming (NYSE: BYD) considering a takeover of rival Penn Entertainment (NASDAQ: PENN) isn’t surprising, but a deal is unlikely to materialize, according to Deutsche Bank analyst Carlo Santarelli. In a recent report, Santarelli echoed a common sentiment among analysts: Boyd is a logical suitor for Penn, but this doesn’t guarantee a transaction, nor is there confirmation that Penn is a willing seller. Santarelli’s note followed media reports last week suggesting Boyd is in talks with Penn on an acquisition valued at over $9 billion.
“We do not know this to be true, but we believe there is likely merit to the discussions between the parties,” observed Santarelli. “That said, we believe the negotiations, if they are in fact occurring, imply a level of interest beyond what we think most investors deemed possible in recent weeks.”
Potential Offer and Valuation Concerns
Santarelli dismissed the idea that Boyd is considering an offer of $9 billion or more for Penn. He speculates that if Boyd has made an offer, it is likely in the range of $25 to $30 per share. Based on Penn’s 151.55 million shares outstanding, a $30 per share offer values the company at $4.54 billion — a bid that Santarelli believes Penn would likely reject.
ESPN Bet and Boyd’s Strategic Decisions
Following the Boyd/Penn rumor, there has been speculation regarding the future of ESPN Bet, Penn’s online sports betting arm. Boyd owns 5% of FanDuel and would likely prefer not to pay for Penn’s smaller internet gaming and sports wagering operations. Analysts agree that if Boyd pursues Penn, it would likely involve selling ESPN Bet to another buyer, potentially making a $25 to $30 per share offer more acceptable.
Santarelli proposed several scenarios where Boyd could make the acquisition feasible, including maintaining Penn’s operating losses, eliminating $75 million to $150 million in redundancies, and selling overlapping assets to third parties at a comparable price. Such a transaction would almost certainly result in the sale of various brick-and-mortar casinos.
Santarelli also expressed doubt that Boyd would pay significantly more for Penn than its own market value. As of June 21, Boyd’s market capitalization was $5.1 billion.
“We struggle to see BYD paying a meaningful premium, relative to its own multiple, for PENN, from a free-cash-flow perspective, as the BYD free-cash-flow profile is considerably less volatile than that of PENN, given PENN’s fixed-rent expenses,” added Santarelli.
Complexities of a Boyd/Penn Merger
One significant complexity is Penn’s rent expenses, as the company owns none of the real estate on which its land-based casinos operate. This means it has substantial fixed obligations to landlords, primarily Gaming and Leisure Properties (NASDAQ: GLPI). Boyd, preferring to maintain ownership of its property assets, has a different approach, which could complicate negotiations.
Additionally, there could be significant regulatory hurdles. Both Boyd and Penn operate in many of the same states, meaning the Federal Trade Commission (FTC) and at least 10 state gaming regulators would need to approve the deal.
Conclusion
While Boyd Gaming’s potential acquisition of Penn Entertainment makes sense from a strategic standpoint, significant challenges and complexities make such a deal unlikely, according to analyst Carlo Santarelli. The potential merger faces valuation disagreements, strategic decisions regarding ESPN Bet, substantial rent obligations, and regulatory approval hurdles. As such, the gaming industry may continue to speculate on the possibility, but a transaction remains uncertain.
