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