Analysts question Penn National's bid

LAS VEGAS -- Speculation abounded Wednesday on news that regional casino operator Penn National Gaming was making a play to buy gaming industry giant Harrah's Entertainment.

Or are they?

Financial television network CNBC, citing unnamed sources, first reported the interest on Tuesday. On Wednesday, The Wall Street Journal, also citing unnamed sources, said Penn National and Harrah's executives were meeting this week in Las Vegas.

Officials from both companies weren't offering up much in the way of information.

"Unfortunately, I can't comment on marketplace rumor and speculation," Harrah's spokesman Alberto Lopez said.

But gaming analysts Wednesday questioned how a company such as Penn National, which operates 16 casinos and race tracks in 12 states and Canada, could make a play for Las Vegas-based Harrah's, the industry's largest company with more than 40 casino in 13 states. Harrah's operates several casino brands, such as Caesars and the Horseshoe, and owns the lucrative World Series of Poker.

Penn National earned $120.9 million on revenues of $1.4 billion in 2005. Harrah's reported earnings of $236.4 million on revenues of $7.1 billion during the same period.

Penn National has a market capitalization of $3.2 billion; Harrah's market cap is $14.6 billion.

Factor into the equation that Harrah's is still contemplating selling itself for $15.5 billion to two private equity firms that made an offer on the company Oct. 2, and the conjecture flowed.

"The problem is that very little information is out there," Majestic Research gaming analyst Matthew Jacob said. "What isn't clear is the structure of any deal or what the ownership percentage would be. There is just very little information available to ascertain any kind of thought process."

The nonmanagement members of Harrah's board of directors have spent the past six weeks contemplating a buyout offer from New York-based Apollo Management and Texas Pacific Group of Fort Worth, Texas. In the deal, the private equity groups offered to buy all outstanding shares of Harrah's for $81 a share. The offer was raised on Oct. 11 to $83.50 a share.

Some analysts speculated that Harrah's is trying to get a better price from the private equity groups.

The CNBC story reported that New York-based hedge fund D.E. Shaw & Co. was part of the Penn Gaming deal, an aspect that a source familiar with the discussions told the Review-Journal on Tuesday was incorrect.

"While the story seems to be largely speculation at this point, we believe such a bid is possible," Key Banc gaming analyst Dennis Forst said in a note to investors. "However, we contend that a going-private transaction is more likely to be executed by the company itself or via a follow-on offer from the original private-equity bidders."

Ever since the original offer, he continued, "we have maintained our belief that the company would eventually be taken private. While this report serves to reaffirm our position, we point out that the same CNBC talking head had 'sources' of the opposite opinion less than a month ago."

Forst added that news of the talks about Harrah's operations may have been made public to extract a higher bid from Texas and Apollo.

"I would be shocked if half a dozen other companies weren't doing the exact same thing, meeting, talking," he said. "Somehow this one came out. Clearly somebody leaked it intentionally."

Jacob, who follows Penn National, said buying Harrah's is somewhat out of character for the company, which has been content to grow regionally. The company does not operate a casino in Nevada or New Jersey.

Only recently, Jacob said, company executives started to comment on moving into the Las Vegas or Atlantic City markets. He said Penn could be seeking to buy a portion of Harrah's casino portfolio.

"I think this shows that Harrah's management may not be satisfied with the bids already out there," Jacobs said. "This news may be a byproduct of that. We're not sure if there is a real bid or just an expression of interest."

Bear Stearns gaming analyst Joe Greff told investors that Penn National would need help from banking partners and others to pull off a full purchase of Harrah's. But the deal could have complications.

"Harrah's and Penn's property portfolios overlap in many markets, making asset sales likely, including Indiana, where licenses are restricted to two (the combined entity would have three) and in Pennsylvania, where ownership is limited to one license and one-third ownership of additional licenses (the combined entity would have one license and 50 percent ownership of Chester Downs)," Greff wrote to investors.

Harrah's shares traded up 46 cents Wednesday on the New York Stock Exchange, closing at $78.92, a 0.59 percent increase. Shares of Penn National, which are traded on the Nasdaq National Market, fell 86 cents to close at $37.30, a drop of 2.25 percent.

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