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Gaming Commentary (1-18-08)
Ahrens Advisors, L.P. - The overall market has been generally negative so far in 2008 due to a number of catalysts we have already heard a great deal about. Consumer discretionary stocks, including Gaming Stocks, have been hit particularly hard. But, recent fears and uncertainty in the markets have also caused a great deal of irrationally and some particular opportunities, in my personal opinion.
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A rare opportunity has presented itself where two significant holdings (MGM and PENN) are trading well below set prices that are expected in the near future. I say “set” price because one is set by a pending tender offer and the other buy a pending company buy-out. Both have traded down significantly in the past month. I believe both of the deals will be completed at the previously announced prices and could provide a very good opportunity for our portfolio.
MGM Mirage (MGM):
Late Tuesday night, January 15th, MGM Mirage and Dubai World jointly announced that they will increase their offer to purchase 15,000,000 shares of MGM Mirage common stock and set the tender price at $80.00. They had previously announced a price range of $75.00 to $80.00 per share for 10,000,000 shares. The new offer price represents more than 20% premium over Tuesday’s price of $66.47. This follows previous tender offers in 2007 which already came to fruition. It’s been widely publicized that Dubai World intended to increase their MGM holdings. Dubai currently owns 19.549 million shares representing 6.7 percent.
On Wednesday, the market greeted MGM’s big news by sending the stock up 6.17% to 70.57, but still well below the $80 offer price. In contrast, Dubai’s $84 tender offer last fall sent MGM’s shares up well over the $84 offer almost immediately. The actual tender offer was filed after the close on Thursday, but seems to have been barely noticed in this chaotic market.
The shares involved in this tender represent a significant percentage of the outstanding shares. I see no good reason that MGM shares shouldn’t be trading at or near $80 in a short period of time after the tender details are absorbed by the public. Numerous other factors are weighing on MGM’s stock price including real estate values, November gaming revenues, growth in Macau, and general recessionary fears, of course.
From the Fantini Gaming Report (1/16/08):
“MGM is rapidly taking on a rolling LBO personality as MGM and Dubai World buy shares,” Jeffrey Logsdon of BMO Capital said. “We do not believe this is the last investors will see of either party in 2008,” he added.
Harry Curtis of JP Morgan, noting the $80 offer is far above Tuesday’s closing price of $66.47, said that “by fixing the price at the high end, the board (of directors) is taking the long-term view that MGM’s value is substantially higher than $80 a share, which cleans up investor debate over what price within a range to tender.”
Penn National Gaming (PENN):
On or about June 15, 2007, Penn National Gaming agreed to a Merger Agreement (buyout) from funds affiliated with Fortress Investment Group LLC "Fortress" and Centerbridge Partners, L.P. "Centerbridge" at $67 per share. With a long approval process as a multi-jurisdiction gaming company, the deal was targeted for completion on June 15, 2008 after which the take-out begins to increase by a fractional amount daily. PENN, which had been trading in the mid to low 50’s, jumped to over $63 per share on the announcement.
Since that time the price has slowly deteriorated along with the market and closed January 15th below $51. As of the closing price Thursday, January 16, investors can potentially gain more than 25% in 5 months if the deal goes through at the $67 deal price.
“The Market” obviously thinks the deal will fall through, or the price wouldn’t be this low. I believe there has been a snowball effect of bad information, fears, conjecture, market conditions and investor over-reactions causing PENN to be unfairly priced. Investors are afraid due to the long time frame of a gaming deal. Harrah’s buy out was originally supposed to be completed by the end of December, but should now close one month late. Fortress itself (FIG) is under pressure like many financial stocks and has been downgraded recently by analysts. Penn’s gaming competitors such as Pinnacle, Boyd and Ameristar Casinos have faced steep declines in stock price (multiple compression), causing the Penn deal to suddenly look expensive. It certainly isn’t overpriced looking at long-term multiples or recent comparable deals. Finally, Penn National Gaming has “turned off” quarterly conference calls and most other communications. It is a standard practice in a buyout situation as there is usually not much to say – a buyout deal is already in place at a fixed price. In this case however, it’s had a very unsettling effect on investors as credit markets seem in chaos and the deal won’t be complete until summer.
On the other hand, there is a great deal of real information to say that the deal is going through on time and at the original price. In late December, some Penn Executives exercised options and completed stock sales. They really could not do so legally if they knew there was something going wrong in the deal. Also, some “change in control” payments to Penn executives for the deal were accelerated into 2007 for tax reasons; again signaling that the deal is in motion as planned. Finally, the company filed an 8K on Wednesday, January 16 to provide an update on the deal progress and answer the numerous questions they were receiving. In addition, Fortress and Centerbridge are now allowed to buy PENN shares on the open market. The financing for this deal is in place with Wachovia and Deutsche Bank, and Penn shareholders overwhelmingly approved the deal in December. A great deal of time and money has already been spent on this transaction, and the penalties are steep if Fortress or Centerbridge attempt to pull out. The break up fee of $200 million has been well publicized, but most people don’t realize how tight this agreement is in other ways, even providing for Penn National Gaming to seek an injunction for “specific performance” if they choose.
From the Fantini Gaming Report (1/17/08):
Larry Klatzkin of Jefferies raised PENN to a buy saying the risk that its buyout will not go through is lower than the likely 33 percent gain from the current share price. Deutsche Bank is committed to financing the takeover in an agreement that “is one of the tightest we have seen in the recent spat of takeovers and leaves little room for the buyer to pull out.”
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Ahrens Advisors, L.P. is an SEC Registered Investment Advisor. The firm acts as Sub-Advisor to the Ladenburg Thalmann Gaming and Casino Fund. Opinions and recommendations expressed within are that of Ahrens Advisors, L.P., and are not that of Ladenburg Thalmann & Co. Inc. or its affiliates.
All information provided is believed to be from reliable sources and opinions expressed are subject to change without notice. This commentary has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell securities, mutual funds or to participate in any particular trading strategy.
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For more information plaease contact:
Dan S. Ahrens
Ahrens Advisors, L.P.
4144 N. Central Expressway, Suite 600
Dallas, TX 75204
Ladenburg Thalmann Gaming and Casino Fund
http://www.gamingandcasinofund.com
Phone: 214-934-8160
Fax: 214-276-7372
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