Shares of Penn Entertainment (NASDAQ: PENN) were pointed lower late Friday after sell-side analysts revealed diverging views on the likelihood of Boyd Gaming (NYSE: BYD) acquiring the regional casino operator.
Boyd Gaming’s Orleans Hotel & Casino. Some analysts still believe the operator is unlikely to acquire rival Penn Entertainment. (Image: YouTube)
Speculation about such a marriage had been percolating for weeks and intensified Thursday amid a reporter that Boyd is engaged in talks with Penn that value the target at more than $9 billion, including debt. Neither company has commented on the rumor, but analysts have. For example, Bank of America analyst Shaun Kelley moved Penn to the “no rating” category following news of the rumored Boyd overture.
In a report to clients, the analyst noted that while buying Penn would be accretive to Boyd, the transaction would require a combination of financing and leverage that could be “unattractive” to the prospective suitor. Assuming the $9 billion figure is accurate, that’s more than Boyd’s enterprise value of roughly $8 billion, meaning the prospective buyer would likely need to issue debt, sell stock, or both to complete the takeover.
Additionally, Kelley believes a Boyd takeover of Penn would create some regulatory risk and almost result in asset sales.
ESPN Bet a Problem, Too
Another issue that cannot be overlooked if Boyd is really courting Penn is the existence of ESPN Bet — Penn’s online sports betting mobile application.
Boyd owns 5% of FanDuel, and outside of its home state of Nevada, the casino operator has been content to enjoy the spoils of FanDuel’s success. Alone, that could be a deterrent to Boyd wanting to bring the scuffling ESPN Bet into its fold. Kelley speculated that the presence of ESPN Bet in a takeover of Penn would require a “further M&A solution down the road.”
Said another way, any buyer of Penn would likely divest ESPN Bet. Likewise, Barclays analyst Brandt Montour believes Penn is committed to making ESPN Bet work and might be a reluctant seller of the sports betting business. He also thinks there are more cons than pros for Boyd should it opt to advance negotiations with Penn.
We’re not completely surprised by this report, given this idea has been debated in the investor community for the last couple weeks,” wrote Montour. “We believe PENN has more confidence in ESPN BET’s ability to gain ground from here, versus what the market expects, and its current share price implies, and we doubt BYD would be interested in giving an optimistic valuation for PENN Interactive or credit shareholders with PENN’s cumulative investment in Digital to-date.”
He added that Penn probably isn’t a willing seller at the moment and the risk/reward in buying the company leans more into risk than reward. Montour added that Penn’s relationship with Walt Disney (NYSE: DIS) through ESPN Bet and the gaming company’s obligations to landlords could be deterrents to Boyd.
A More Constructive View
Not all analysts are pessimistic on the idea of Penn being acquired. Craig-Hallum analyst Ryan Sigdahl took the opportunity to lift his price target on Penn to $30 from $20 on the reports suggesting Boyd may be readying an offer.
“We think the company’s retail casino assets are worth $30/share with another $15/share potential from either M&A or success with ESPN Bet,” observed Sigdahl.
That combined $45 implies the analyst’s current price target of $30 doesn’t account for ESPN Bet success and that $45 assumption is more than double where Penn trades today. The analyst believes takeover chatter and activist involvement in Penn provide a “compelling risk/reward opportunity.”
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