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GLPI's offer to buy PNK looks like a good deal for both sets of shareholders

QUICK THOUGHTS

  • Somebody knew something as PNK traded up 7% last week versus PENN down 2% and BYD down 4%
  • GLPI’s effort goes against conventional wisdom that there can’t be a hostile takeover in gaming because of the regulatory scrutiny. PENN/GLPI management has consistently argued: why not?  I guess they’re putting their money where their mouth is
  • The likelihood GLPI will need to raise their bid is fairly high in our opinion, but it would likely be a “saving face” gesture to appease PNK’s senior management. Thus, we don't expect the sweetener will be material
  • We don’t exactly agree with the offer valuation provided by  GLPI: 
    • Specifically, GLPI values its offer at $35.77 per PNK share, comprised of $22.13 for the value in Pro Forma GLPI and $13.64 in value for Pro Form Pinnacle OpCo.  Our issue is with the latter. 
    • We do not believe a 7.5x multiple is appropriate.  While the best OpCo comp would be PENN and PENN does indeed trade at 7.5x EV/EBITDA, that multiple is based on 2015 EBITDA.  With full year contributions from 2 new properties opening in 2015 and 2016, PENN’s EBITDA is poised to grow 14% in 2016 while PNK OpCo will likely be flattish. 
    • Looking out to 2016, PENN trades at only 6x, a much more appropriate multiple for the PNK OpCo in our opinion. 
    • OpCo’s deserve low multiples in domestic gaming given the lack of growth, oversaturation, demographic headwinds, and the volatility of revenues without the underlying real estate value. 
    • As a pure play on regional gaming, we believe PENN is better managed and would warrant a higher multiple.
    • Our estimates for PNK are close to the numbers used in GLPI’s analysis
  • PNK is now trading at $33, below the GLPI assessed valuation of $36.  Investors seem to agree with GLPI’s 7.5x valuation of OpCo.  Using a more appropriate 6.0-6.5x valuation for OpCo, we arrive at only $30-32 in value per PNK share.  
  • Considering the 9 months to close for this potential deal, the uncertainty of the PNK board and shareholders accepting the deal, as well as the potential risks of not receiving all the necessary regulatory approvals, PNK’s stock looks overvalued here, even after incorporating $1-2 per share associated with a higher offer.
  • GLPI is currently up 9% in trading which looks appropriate