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Analysts say Penn deal for Fontainebleau 'unlikely'

18 Sep 2009

By Howard Stutz

LAS VEGAS, Nevada -- Analysts were quick to shoot down a Wall Street Journal report this morning that Penn National Gaming was close to buying the bankrupt Fontainebleau project, which shut down construction earlier this year.

While Penn National has openly said it was seeking to acquire a Strip resort — the company has more than $1.5 billion in cash thanks to an aborted takeover attempt last year — analysts doubt the $3 billion, 4,000-room Fonrtainebleau was the target.

"Penn has done some work looking at Fontainebleau, much as it has looked at many property acquisition candidates over the last year," JPMorgan gaming analyst Joe Greff told investors. However, we believe that today's news is old news and somewhat off the mark. As such, we ascribe a low likelihood to Penn's buying Fontainebleau."

Stifel Nicolaus gaming analyst Steven Wieczynski said Fontainebleau doesn't fit Penn's tastes. The company would rather purchase a hotel-casino currently operating.

"Penn would be acquiring a property that sits in a somewhat remote location and would be adding another 4,000 hotel rooms to an already saturated market," Wieczynski said. "(Return on investment) would be extremely low for the first couple of years until the Las Vegas market returned to more normalized levels."

However, Macquarie Securities gaming analyst Joel Simkins said there was still a chance Penn might move on the Fontainebleau, but it would cost at least $1 billion to finish the project.

"While we believe that a Las Vegas asset makes strategic sense for Penn long term, if Penn moves forward, we see it likely working with a partner as well as minimizing the cash outlay and on–balance sheet risk," Simkins said.

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