Penn National sale derailed by credit crunch

The $6.1 billion purchase of casino and racetrack operator Penn National Gaming Inc. by two private-equity firms is off, the latest in $65 billion worth of such buyouts to founder on credit-market turmoil since September.

The termination, announced yesterday, comes as the gambling industry is under pressure from consumer-spending cutbacks driven by high gasoline prices and a weak job market.

Unlike most jilted targets, however, Penn National, of Wyomissing, Pa., is getting a hefty consolation prize: $1.475 billion in cash from Fortress Investment Group L.L.C., Centerbridge Partners L.P., and their banks, Penn National said yesterday.

Penn National shares rose $1.06, or 3.71 percent, to close yesterday at $29.66.

"This is not the outcome that we expected. However, as we are here and as we look at the opportunities this settlement affords, we see a pretty bright future for this company," chief executive officer Peter M. Carlino said in a conference call with analysts.

The Carlino family, Penn National's largest shareholders, stood to make nearly $800 million if the sale, announced last June for $67 a share, had gone through.

Carlino gave no information on the negotiations that led to the settlement with the private-equity firms. "We are not going to go into the details of who shot who and how we arrived at this moment," he said.

Financial-information company Thomson Reuters said nine private-equity buyouts had been withdrawn since September. Among them was the $1.73 billion deal for PHH Corp., of Mount Laurel.

Some of the broken deals have ended up in protracted litigation. Penn National said its board wanted to avoid that uncertainty.

The Penn National "announcement, while obviously not a clear positive, as the deal did not go through at $67 per share, is better than most expected," Robert A. LaFleur, an analyst with Susquehanna Financial Group L.L.P., said in a note to investors.

Penn National executives said the company would use the cash it was receiving in exchange for preferred stock to buy back $200 million in shares and to repay $610 million in revolving debt. The remainder, perhaps $500 million, will be used to pursue "opportunities," management said.

"This gives us an incredible amount of cash," said William Clifford, Penn National's chief financial officer.

That's an advantage at a time when tight credit markets have prompted some casino developers in Las Vegas and Atlantic City to postpone major projects. An example is Pinnacle Entertainment Inc.'s plans for a $1.5 billion gambling palace on the Atlantic City Boardwalk.

Carlino said Penn National was considering expansion in Kansas, Atlantic City, Las Vegas and Maryland - if a gambling referendum passes there in November.

"Let's be honest. We would be just as happy if Maryland did not have slots," Carlino said. The worry is that if Maryland voters approve the placement of five casinos with 15,000 slot machines, business could be taken away from Penn National's most profitable property, Charles Town Races & Slots in West Virginia.

In preparation for the possible passage of the gambling referendum, Penn National has identified land along Interstate 95 in Cecil County. "We have a great piece of ground if that should happen," Carlino said.