In a move that has sent ripples through the US casino industry, Boyd Entertainment reportedly made a $9 billion bid to take over Penn Entertainment. According to a Reuters report on 21st June, the proposed valuation has sparked immediate scrutiny and skepticism from financial analysts, who suggest the path to a successful acquisition is fraught with obstacles.
Deutsche Bank and Barclays have both voiced reservations about the feasibility of such a deal. The general consensus among these financial heavyweights is that Penn Entertainment is unlikely to be a willing seller at this time. “Penn may not be receptive to a deal at this proposed valuation,” Barclays observed. The firm also pointed out that the transaction volume cited in the initial reports appears questionable.
On Friday, Deutsche Bank publicly challenged the valuation outlined in the Reuters report, estimating instead that Penn Entertainment’s 2024 enterprise value to EBITDA ratio stands around 5.1x. For context, enterprise value includes both market capitalization and net debt. This alternative valuation significantly reframes the deal’s potential attractiveness. “At the right valuation – in the $25-$30 range – the deal could become highly favorable for Boyd,” Deutsche Bank’s note stated. Penn’s current enterprise value hovers between $13.5 billion and $13.6 billion.
Despite this, both banks foresee a range of issues potentially stifling acquisition discussions. Barclays, for instance, believes that Penn has robust faith in its digital strategy, a conviction that the market may not entirely share. Additionally, Barclays sees confidence in ESPN Bet’s potential to capture market share being downplayed by the current stock price.
This financial climate is further complicated by the opinions of significant shareholders. In May, the Donerail Group, an activist investor, urged Penn to offload certain assets to generate concrete value for shareholders. Such a move, the hedge fund manager argued, could provide a more immediate and certain return on investment, rather than relying on uncertain gambles. “While ESPN Bet may seem like a promising venture under the right management, the board should objectively assess the past four years of execution and the substantial amount of shareholder capital lost,” Donerail Group stated in a candid letter.
For Penn, the numbers tell a less optimistic story for its interactive ventures, including ESPN Bet. The company’s interactive revenue fell by 11.1% to $207.7 million in Q1, a dip attributed to unfavorable outcomes in major sporting events.
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Deutsche Bank pointed out that the valuation of Penn’s B2C interactive assets appears to be significantly underappreciated by the market, suggesting a disconnect in perceived value. This perspective is echoed by Truist Securities, which, on 17th June, indicated that the market undervalues Penn’s ESPN Bet product. Truist underscored Disney’s strategic involvement, noting that Disney has historically been reluctant to enter the regulated gambling market directly.
Penn’s partnership with Disney’s ESPN, secured in a $1.5 billion licensing deal last year, includes a ten-year operational window with the option for another decade. Under this agreement, Penn runs the ESPN Bet app, while ESPN boosts its visibility across digital and traditional platforms. Truist emphasized the strategic synergy, considering ESPN Bet an integral part of Disney’s direct-to-consumer strategy. “The integrated betting application aligns perfectly with Disney’s broader digital strategy,” said Truist.
Yet, this partnership could add layers of complexity to Boyd’s proposed acquisition. For instance, if a deal surpasses the general warrants issued to ESPN Bet (12.7 million shares at $26.08, 12.8 million shares at $29.99, 7.3 million shares at $32.60), questions arise about how these would be managed by a third-party buyer like Boyd. Deutsche Bank has called attention to this potential complication in a recent note.
Following the Reuters report, Penn’s shares experienced a quick uptick, although they later fell by 2.57% to $19.52 per share in New York trading. In contrast, shares in Boyd saw a 1.42% increase, bringing them to $53.43 per share.
As these financial maneuvers unfold, it remains to be seen whether Boyd Entertainment can navigate the intricate landscape of valuations, strategic fits, and shareholder sentiments to successfully acquire Penn. The official standpoints from Deutsche Bank, Barclays, and Truist Securities suggest that while the deal might offer significant upside at a different valuation, current conditions present formidable barriers to overcome.
