Boyd Overture for Penn Not Surprising, but Deal Unlikely Says Analyst

It’s not surprising that Boyd Gaming (NYSE: BYD) may be mulling a takeover offer for rival Penn Entertainment, but that doesn’t mean a deal will come to fruition.

That’s the take of Deutsche Bank analyst Carlo Santarelli, who in a recent report, echoed an increasingly familiar refrain among those on the sell-side: Boyd makes for a logical suitor for Penn, but that doesn’t guarantee a transaction, nor is there confirmation that Penn is a willing seller. Santarelli’s note was published after media reports surfaced last week indicating Boyd is in talks with Penn on an acquisition valuing the target at more than $9 billion.

We do not know this to be true, but we believe there is likely merit to the discussions between the parties,” observed Santarelli. “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 rejected the idea that Boyd is considering an offer of $9 billion or more for Penn. Rather, he thinks that if Boyd has made an offer, it would be for around $25 to $30 a share. Based on Penn’s 151.55 million shares outstanding, a $30 per share offer values the Ameristar operator at $4.54 billion — a bid the gaming company is likely to reject, according to the analyst.

ESPN Bet Likely Sold Elsewhere if Boyd Wins Penn

In the wake of the Boyd/Penn rumor surfacing earlier this month, there’s been much speculation regarding what the buyer would do with ESPN Bet, Penn’s online sports betting arm.

Santarelli proposed several other circumstances in which Boyd could digest. Those include the buyer maintaining the target’s operating losses, the elimination of $75 million to $150 million in redundancies, and the divestiture of overlapping assets to a third party that would pay a price comparable to what Boyd paid. Translation: if Boyd does buy its rival, such a transaction will almost certainly result in sales of various brick-and-mortar casinos.

Likewise, Santarelli doesn’t view it as likely that Boyd would pay significantly for Penn than it is worth itself. The Orleans operator’s market capitalization as of June 21 was $5.1 billion.

“We struggle to see BYD paying a meaningful premium, relative to its own multiple, for PENN, from a free-cash-flow perspective, as the BYD free-cash-flow profile is considerably less volatile than that of PENN, given PENN’s fixed-rent expenses,” added the analyst.

Boyd/Penn Marriage Could Be Complex

Regarding Santarelli’s comment about Penn’s rent expenses, the company owns none of the real estate on which its land-based casinos reside, meaning it has substantial fixed obligations to landlords — namely  Gaming and Leisure Properties (NASDAQ: GLPI).

Add to that, there could be significant regulatory complexities due to the fact that Boyd and Penn operate in many of the same states. Not only would the Federal Trade Commission (FTC) have to approve the deal, but so would at least 10 states’ gaming regulators, according to Santarelli.