Betting on the Bettors

It’s the last day of class in Cramer’s Private School, where he tries to find the next stock that’s ripe for a takeover by private equity money at a big premium. There’s more private equity money out there than there’s ever been, and its purpose is to buy companies, Cramer says. More private equity action means speculating on stocks that could get bids is a better idea than it was even a year ago. So far, Cramer has picked out five choice private equity plays: Actuant, Darden, The Cheesecake Factory, TJXand Ross Stores. Today’s lesson plan is all about Penn National Gaming , a company he thinks fits right in with the others. Cramer looks at these companies and sees a lot in common that makes them appeal to the private equity palate: big cash flows, not much debt, and operations that could be improved by any private equity fund willing to take them private.

Penn has casinos and horse racing, all with a focus on slot machines – but you wouldn’t confuse PENN with a Las Vegas Sands , or a Wynn , or an MGM Mirage . It might not be in the big leagues of casinos, but its operations are everywhere. PENN has facilities in Illinois, Louisiana, Maine, New Jersey and Pennsylvania just to name a few states east of the Strip. The company gives regular people a chance to flush their money down the slots and right into the company’s bottom line, Cramer says.

But the question is why private equity would be particularly interested in PENN. Casinos generate a lot of cash and PE guys like that above anything else. PENN wouldn’t be the first private equity takeover either. Don’t forget about the gigantic Harrah’s buyout, in which Apollo Management and Texas Pacific paid nearly a 40% premium for the company – almost twice the average premium in these types of deals, according to Cramer.

Of course, PENN is a drop in the bucket compared to a company like Harrah’s, which was worth $27 billion when the bid was announced. PENN’s current enterprise value is $6.45 billion. Not much to compare, but then think of the huge amount of money private equity has lying around. It wouldn’t be that hard for one of these funds to come in and easily take PENN out, Cramer says.

It should be mentioned that PENN said it wasn’t for sale on the last conference call, although Cramer interprets that statements as meaning “you’d better pay a huge premium if you’re thinking of buying this company.” But even if the company doesn’t get the private equity takedown Cramer thinks could happen, he says there’s still upside to owning the stock.

For one, there’s a referendum in West Virginia to allow table games that would, if it passed, mean more business for PENN in that state. There’s also the potential removal of the $500 loss limit in Missouri, another catalyst for the stock. And then there’s Kansas, which recently passed gaming legislation. PENN has plans to move right in, Cramer says, and as more details come out, he thinks that, too, could send this stock higher.

Bottom line: Cramer’s betting that Penn National Gaming gets a buyout offer from a private equity fund, probably towards the high end of the premium scale. If you play your cards right with this one, he thinks it could make you over 30%.

Questions? Comments?