Boyd buying Penn Entertainment is possible at the right valuation, Carlo Santarelli of Deutsche Bank said Friday.
That said, the “complexity of this deal should not be underestimated,” he explained in a note. Santarelli rates both BYD and PENN at hold. The potential of a deal does not necessarily change that, he explained.
“Bluntly … we believe the high short interest in PENN, is a tough position to be in, while also challenging to be an incremental buyer of BYD at present, while this overhang of uncertainty lingers,” Santarelli said.
Penn, Boyd chatter heats up
It has been less than a month since an investor letter took Penn and its leadership to task for missed opportunities and sunken costs.
Still, since the Donerail Group suggested selling, Penn and Boyd have been linked. That link was fueled by Boyd adding a new director seat for Michael Hartmeier, who owns a strong gaming investment background, then Reuters reported Friday that Boyd formally approached Penn about a deal.
Santarelli cannot confirm the Reuters report but said he believes there is “likely merit to the discussions between the parties.” He also said he is “fairly confident” the $9 billion valuation attributed to Penn in the article is incorrect.
“That said, we believe the negotiations, if they are in fact occurring, imply a level of interest beyond what we think most investors deemed possible in recent weeks,” Santarelli said.
Valuation could be an issue
Santarelli suggests it is likely that Boyd has considered buying Penn and potentially had some discussions around the $20 per share to $25 per share range.
That is likely not a level that Penn would accept, he added. A hypothetical range of $25-$30 per share, though, could be possible in the right conditions.
That would include a third party buying the interactive segment and synergies of $75 million to $150 million from the core business.
Santarelli does not see Boyd paying a multiple that is “meaningfully in excess of its own for an OpCo, which BYD has shown resistance to being.” That likely leaves the upper limit of the offer around $25 per share excluding the interactive segment.
Complex process to buy Penn
A deal between Boyd and Penn is not “by any means, a sure thing,” Santarelli noted. Eight parties would have to get involved, which underlines the complexity of the deal.
First, Penn, Boyd and Penn’s landlord, Gaming & Leisure Properties, all need to be on board. Then there has to be a buyer of about 10 retail casinos, as well as a buyer for the interactive division, which means Disney also has to be involved.
State regulators and the FTC also have to approve the deal. The deal also has to be supported in the capital markets as well for funding purposes, Santarelli added.
