What should shareholders in each company be considering?  Risk looks to the downside on PNK.





How will the market treat a Q4 miss?

  • We think PNK could report as low as $0.14 for Q4. 
  • 2013 estimates look like they need to come down from $1.01 to closer to $0.92 given poor performance of the regional markets

Probability of a competing bid from MGM or PENN or another entity?

  • PENN, MGM, and WYNN have to take a look at this deal
  • PENN can roll up ASCA into its REIT structure.  We think they could offer up to $40 per share
  • MGM has significantly more NOLs than PNK and a bigger multiple.  Could offer a little stock and mostly cash and make the deal deleveraging.  Cheaper way for MGM to de-lever
  • Given the NOLs this would be a slam dunk for WYNN as well but Steve Wynn may be reluctant to be involved in regional markets.  We've believed in the rationale of this acquisition for sometime now.
  • Obviously, any competing bid would be a hugely negative catalyst for PNK.  Unlike some others on the sell side, we wouldn’t classify a competing bid as unlikely.

What is the combined entity worth?

  • PNK currently trading at 8.0x 2013 and 7.5x 2014 EV/EBITDA
    • Looks reasonable although at the higher end of historical regional multiples
    • EBITDA growth of combined entity looks limited
  • 30% FCF yield
    • Appears very high but the combined entity is highly leveraged and free cash flow will be used to reduce debt for 4 years
    • Most of their debt is short-term variable so big interest rate risk.   Yield is likely not sustainable




Probability of a competing bid

  • PENN/MGM/WYNN could pay significantly above $26.50 and make it value added
  • We don’t believe there was a competitive bidding process so deal may have caught other casino companies by surprise

Probability of closing

  • We think absent a higher bid, the deal has a high likelihood of gaining regulatory approvals
  • The 9 month timeline looks reasonable and could even be conservative
  • If we were a shareholder we would hold out for a higher price.  We think ASCA is worth at least $40 in a REIT structure similar to the one announced by PENN.  PENN could accelerate this process by bidding for ASCA.

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