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Still a work in progress but PENN takes a major step to a Vegas presence

Earlier today, Penn announced it has purchased all of The M Resort bank debt plus $160MM of subordinated debt formerly held by MGM, from Bank of Scotland for $230.5 million.  Since M Resort's TTM EBITDA is in the "teens" and cannot service its debt, the property has no equity value and therefore Penn effectively purchased M Resorts for $230.5MM.  That said, a few things need to happen before Penn can take the keys and begin operating this property.

While Penn was licensed in Nevada this summer when they took a minority stake in a slot manufacturer headquartered in the state, they still need to get a license to operate the property.  According to our sources, securing an operator license in Nevada takes approximately 6 to 12 months.  Until Penn gets licensed, they need to play nice with the Marnell family, who currently holds the license.  It's likely Penn will pay Marnell to operate the property during its licensing period.  We also believe that during this period, Penn will likely file the property for bankruptcy to clear it of any outstanding claims and liens.  The bankruptcy process should be rather painless but is good precaution to make sure that once they take over the property they are free and clear.

So what do we think of the deal?  Well, it's probably one of the cheapest ways for Penn to get a foothold in Vegas and takes away any overhang of them doing an expensive 'bad deal.'  While on the surface the purchase price was expensive, it's actually not a terrible deal when taken into account that:

  • The property will be debt free
  • Is brand new and requires minimal capital expenditures for the next few years
  • No taxes will likely be paid any time soon
  • EBITD is at trough levels

In addition, Penn believes that it can operate the property more efficiently and get rid of some of the overpaid executives at the property which will help lift EBITDA.  Over time, Penn will also be able to use this property to cross market and offer their best customers a place to gamble in Vegas a la the Harrah's model.  While we wouldn't characterize this deal as a game changer and it will take some time for the payoff, it seems like a smart strategic move for PENN