Penn National Takeover Deal Terminated
Casino and racetrack operator Penn National Gaming said on Thursday its $6.1 billion takeover pact has been terminated, marking the latest leveraged buyout to crumble amid the tight credit markets and weak U.S. economy.
Fortress Investment Group and Centerbridge Partners had agreed to buy the casino and racetrack operator last year for $67 a share.
Shares of Penn National have been under pressure for several months amid investors' concerns that the terms of the deal might be revised or that the buyout firms would fail to get funding for the deal at affordable rates.
"Since the deal was announced, credit went from being a big driver of these types of acquisitions to being a hurdle for a lot of them," said Majestic Research analyst Matthew Jacob.
"At the same time, the economy and the gaming industry as a whole and specifically Penn's properties, started slumping," Jacob said.
Under the termination agreement, Penn National would --receive $1.475 billion, consisting of a break-up fee of $225 million and what effectively would be a seven-year, interest-free $1.25 billion loan from Fortress , Centerbridge, Wachovia and Deutsche Bank.
Penn National would repay the $1.25 billion debt, called "redeemable preferred equity," in 2015, using cash, its own common stock or a combination of the two.
"They are getting a nice infusion of cash out of this termination at least -- that's the silver lining here," Jacob said.
Penn National said it became clear that the deal could not be completed "without significant and lengthy litigation which is inherently unpredictable."
Renegotiating the agreement at a reduced price "was not a viable option," given the current U.S. economy, tight credit markets and the weak outlook for the gaming industry.
"It became a less attractive collection of assets based on the price that had to be paid, the financing, and the kind of multiple given the more recent results for the underlying properties," Jacob said. "The gaming industry is challenging right now."
Penn National said that consumers appear shell-shocked by the housing crisis, high fuel prices and the general economic weakness, but they haven't completely abandoned gambling and entertainment spending.
Consumers have cut back spending on gambling, but the national slowdown in gaming revenues will not last forever, Penn National said.
Penn National is the latest buyout to collapse in the wake of the subprime mortgage crisis as the economy weakens. Other failed deals include audio equipment maker Harman International Industries , equipment renter United Rentals and student lender Sallie Mae, formally known as SLM.
Other deals, such as the buyout of Clear Channel Communications, were renegotiated at lower prices, while the pending buyout of Canada telecommunications company BCE remains in limbo as the buyout firms and banks discuss terms of the deal.
"It is a continuing theme of tight credit conditions," said Mirko Mikelic, senior fixed-income analyst at Fifth Third Asset Management.
"It started as a sub-prime problem -- and now we are seeing the impact on the LBO space," Mikelic said. "These deals have dramatically slowed down since the beginning of the year. It's tough for any buyout shop to get any financing for almost anything."
Penn National said it would use the net proceeds of the $1.475 billion cash infusion to repay existing debt, to acquire or develop parimutuel and gaming facilities, and potential stock repurchases. It said it is eyeing gaming opportunities in Cecil County, Maryland, and it is more interested in Las Vegas business prospects than it was a year ago.
The company said it may repurchase up to $200 million in common stock. It will use its funds to repay a revolving credit facility quickly. As of May 31, Penn National had $2.97 billion in outstanding debt.
Shares of Penn National hit a low of $26.85 in early trading, but rebounded to $29, up 39 cents, or 1.4 percent, on the Nasdaq.
--CNBC contributed to this report.