Boyd Gaming (NYSE: BYD) executives said they’re open to acquisitions, but they didn’t specifically mentioned Penn Entertainment (NASDAQ: PENN) on their company’s second-quarter earnings conference call this evening.
There was no direct mention of Penn on the call. Speculation that Penn is a takeover target has intensified since late May when investor the Donerail Group wrote a letter to the regional casino operator’s board of directors, excoriating them for allowing costly missteps in online sports betting and not adequately capitalizing on land-based casinos. The shareholder also advocated for a sale.
On June 20, reports surfaced that Boyd was mulling a takeover bid of at least $9 billion for its rival, but since then, neither company has confirmed takeover talks nor has Penn expressed interest in selling. Boyd CEO Keith Smith acknowledged that the company’s growth has been aided by smart acquisitions.
I think we’ve developed a great expertise at it. We know how to buy properties right, companies right, we know how to extract value out of these companies once they’re part of our portfolio,” Smith said on the call in response to a question from Stifel analyst Steven Wieczynski. “Look, we’ve always been willing, it’s not new news, to take a hard look at opportunities that arise. And so, we’ll continue to do that.”
Wall Street analysts have widely noted that Boyd acquiring Penn is highly unlikely, but the rumor lives on and is a significant part of the reason shares of Penn rallied in June.
How Boyd Could Afford Penn
How Boyd could finance any acquisition, whether it’s for a single venue or an entire, depends “on the specific facts and circumstances around the transaction,” added Smith. CFO Josh Hirsberg said the operator has specific long-term leverage targets it wants to meet.
“To the extent that we were to leverage up to do some sort of transaction or pursue some sort of opportunity, whether it was a development opportunity or acquisition or anything of that nature, we have set a long-term leverage target of to be below 3 times traditional leverage in the neighborhood of where we are today,” said the Boyd financial boss in response to the Wieczynski question. “And so, we would have the objective of getting back to that level very quickly.”
Previously, some analysts scoffed at the notion that Boyd would offer $9 billion or more for Penn. If the former does make a move for the latter, one analyst theory is that 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.
Although that’s a healthy premium to Penn’s closing market capitalization of $2.71 billion today, it’s believed the operator would reject such an offer.
Real Estate Could Be in Factor for Boyd
Another reason why Boyd could be reluctant to pursue Penn is that the former owns the bulk of the real estate on which its casinos resides and it prefers that model when making acquisitions. Conversely, Penn has opted for the operating company (opco) model and has sold off its gaming real estate.
“We talk or think about kind of OpCo/PropCo, we still prefer from an M&A standpoint to buy wholeco assets,” said Smith in response to a query from JPMorgan analyst Joseph Greff. “That is more difficult today because most assets are part of an OpCo/PropCo structure. And so, we’re certainly willing to do that. We did it with the Pinnacle assets that we bought several years back.”
Any prospective buyer of Penn would have to consider the operator’s long-term lease agreements with Gaming and Leisure Properties (NASDAQ: GLPI), which owns most of the land on which the operator’s casinos are situated.
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