Penn National Gaming (PENN)

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Penn National Gaming (PENN) owns 12 casinos, 7 racetracks, and off-track betting facilities in 14 states and in Ontario, Canada.

State regulations are a mixed bag for PENN. On the one hand, a loosening of gambling regulations in Pennsylvania let Penn install 3000 new slot machines in its Granville, PA racetrack - each of which can generate $200 per day. ^[1]On the other hand, tight gambling restrictions keep competitors out of the market, and the absense of gambling in many states adjacent to PENN properties means the company can draw out of state visitors to its casinos. For instance, the company's casino in Lawrenceberg, Indiana (responsible for 20% of the company's revenue)^[2] has benefited from influxes of customers from Ohio and Kentucky. Both Kentucky and Ohio are re-examining their bans on casino gaming and other states in PENN's market areas, such as New Jersey, are granting licenses for new casino development. These new licenses encourage new competitors to enter Penn's markets.

Unlike its larger competitors which generate a substantial portion of their revenue from outside of the United States, Penn, is dependent on the United States for the vast majority (over 98% in 2007) of its revenue and is therefore more vulnerable to an economic slowdown in the US. ^[3]

Penn's growth over the last few years (2006/2007) has been driven mostly by acquisitions. As of the first quarter of 2008, Penn National Gaming’s balance sheet carried $2.9 billion in long-term debt and $2.8 billion in goodwill and intangible assets (such as gaming licenses), versus $2.2 billion of tangible assets.^[4]

In June of 2007, Penn National Gaming has agreed to be acquired by FORTRESS INVESTMENT GROUP (FIG) and Centerbridge Partners at a price of $67 per outstanding share of stock. Fortress and Centerbridge abandoned the agreement in July of 2008, after negotiations to reduce the buyout price of stock had failed.^[5]

[edit] Business Overview

Penn owns twelve casinos, seven racetracks, and five off-track wagering facilities in the United States, and collects managerial fees for operating a casino in Ontario, Canada. Its casinos and racetracks generate revenues primarily through house winnings in table games, slot machines, and wagers on races. Penn also earns revenues from food, beverage, accommodation, and other services.

^[6]

[edit] Gaming Revenue (87% of 2007 Revenue)

Winnings, the revenue generated for "the house" in table games, slot machines, and wagering odds against casino customers, accounted for 87% of Penn's revenues in 2007.^[7]

[edit] Non-Gaming Revenues (13% of 2007 Revenue)

Penn National Gaming also sells food and lodging services to their customers. These services generated $320 million, or 13% of gross revenues in 2007. Non-gaming revenues make up a small part of the company's total revenue.^[8] Of all the casinos and racetracks owned by the firm, only 5 of the properties feature hotel accommodations.^[9]

^[10]

Penn National Gaming's 10-K records net revenue after it factors "promotional allowances" against gross revenues. Promotional allowances are free or discounted food, beverages, accommodation, or other services given to customers as a means to attracting them to gaming. In 2007, Penn spent a total of $128 million in promotional allowances for its customers, or 6% of 2007 gross revenue.^[11]

[edit] Acquisitions, Developments, and Financial Health

Penn National Gaming has grown its revenue through acquisitions of casinos and racetracks.^[12] In 2007, the company acquired two properties: Black Rock Casino at Zia Park in New Mexico, and Sanford-Orlando Kennel Club in Florida. In February of 2008, the firm also completed development on the Hollywood Casino at Penn National Race Course in Pennsylvania. The new casino facility supplements the previously-existing race course with 2,020 slot machines, and new bars and restaurants.^[13] Since 2003, yearly revenue has grown at a Compounded annual growth rate - CAGR of 20%.^[14]

As of the first quarter of 2008, Penn National Gaming’s balance sheet carries $2.9 billion in long-term debt and $2.8 billion in goodwill and intangible assets (such as gaming licenses), versus $2.2 billion of tangible assets.^[15] While net revenues have increased 8% from 2006 to 2007, operating income actually declined from $577 million to $498 million.^[16]

[edit] Acquisition by PNG Acquisition Company

In June of 2007, Penn National Gaming reached an agreement with PNG Acquisition Company, a corporation managed by FORTRESS INVESTMENT GROUP (FIG) and Centerbridge Partners, to be acquired for $6.1 billion and assumption of Penn National Gaming's long-term debt obligations. In July of 2008, after an extension of the agreement's deadline to October of 2008, Fortress and Centerbridge terminated the deal. Penn's board stated that it was unwilling to negotiate over a reduced buyout price for its outstanding shares of stock. There were also concerns over regulation and falling consumer spending. Per the terms of the cancellation, Penn receives $225 million in fees and $1.5 billion in no-cost capital from Fortress and Centerbridge. ^[17]

[edit] Key Trends, Risks, and Forces

[edit] The Gaming Market Is Vulnerable to Declines in Consumer Discretionary Spending

Economic growth (gross domestic product) in the United States has slowed in the second half of 2007 to .6%. ^[18]. One of the results of this slowdown is a tightening of consumer discretionary spending: Businessweek reports that, in April of 2008, Nevada gambling revenues were down 4% over the past year.^[19] A constriction of consumer discretionary spending i]has reduced gaming revenues across the gaming industry, and Morningstar estimates that Penn and other companies have had anywhere between a 2-5% decline in gaming revenues in the first half of 2008.^[20]. In Penn's case, this decline in revenues is masked by increased revenue from its 2006/2007 acquisitions.

[edit] Penn's Riverboat Casinos in the Southwest are Vulnerable to Hurricanes

In late August of 2005, Penn National Gaming closed three of its casinos in Louisiana and Mississippi in anticipation of Hurricane Katrina. The storm damaged two of the casinos, and they were not re-opened until August of 2006. The company settled with insurers for a reimbursement of $225 million.^[21] Many of Penn's casinos are located upon rivers or other water bodies and are vulnerable to damaging floods or other disruptive weather.

[edit] Legislation Would Increase Competition While Making Some of Penn's properties more profitable

Penn National Gaming's capacity to develop or acquire properties is contingent upon licensing from state regulatory boards. Legislation that legalizes gambling and provides new licenses in states without gaming may open up new opportunities as well as competitors for Penn National Gaming. For example, a drive is underway as of June 2008 in Ohio to legalize one casino by November 2008 ballot referendum.^[22][23] A new Ohio casino would compete with Penn's Argosy in Lawrenceville, Indiana; the Argosy casino is currently the only casino in the Cincinnati metropolitan area.^[24] Furthermore, states such as Pennsylvania and New Jersey have granted new licenses for the development of new gaming facilities. While this may create new competitors, it also allows Penn to expand. For example, a 2004 Pennsylvania law has permitted Penn to add as many as 5,000 slot machines to its existing racetrack facility. Morningstar's analyst report estimates conservatively that an opportunity to install new slot machines would generate $219 million, or about 10% of annual revenue, for the next year. ^[25]

[edit] Penn's Competitors in the National Casino Industry

Penn's casinos draw many regional customers across state lines, from areas where gambling is not legal - for example, their Charles Town, West Virginia casino caters to customers in Baltimore and Washington, D.C. areas.^[26] Penn competes directly with several large gaming corporations and many smaller and independently owned gaming institutions in the Southeast, Midwest, and Mid-Atlantic United States.^[27] On a national scale, Penn competes against multinational firms like Harrah's Entertainment (HET), Las Vegas Sands (LVS), Boyd Gaming (BYD), and MGM MIRAGE (MGM). These corporations have expanded their casino operations into Mid-Atlantic and Southeastern markets, such as Tunica, Mississippi, where Penn earns the majority of its revenues (see pie chart below).

^[28]

Also, Penn competes with many independent casinos, racetracks and gambling operations, notably those of Native American tribes, such as Foxwoods Resort Casino, the largest casino in the world by square footage (4.7 million).^[29] Finally, Penn National Gaming competes with a growing niche of Internet gambling. The American Gaming Association estimates that Internet gambling will be a $20 billion industry by 2009.^[30]

The following are three of Penn National Gaming's market competitors, though this is only a sample of the diverse competition:

^[31][32][33]

[edit] Harrah's Entertainment (HET)

Harrah's Entertainment is the largest gaming corporation in the world, with over forty famous brand-name casinos, resorts and golf clubs, such as Caesar, Harrah's, and Bally. Harrah's Entertainment grossed total revenues of over $10 billion in 2007.^[34] Aside from its ownership of numerous Las Vegas and Atlantic City, New Jersey properties, Harrah's owns casinos in a number of states that compete directly with Penn National Gaming's casinos in the Southeast and Midwest. For example, Harrah's Joliet in Joliet, Illinois competes directly with Penn National Gaming's Empress Casino; the Margaritaville Casino and Resort competes with Penn's Boomtown Biloxi in Biloxi, Mississippi; and the Harrah's brand has competed with Penn's Hollywood Casino with three casinos in Tunica, Mississippi, since 1993.^[35]

[edit] MGM MIRAGE (MGM)

MGM Mirage is the second largest gaming corporation, with revenues of $7.7 billion in 2007. MGM is less diversified than Harrah's into non-Las Vegas holdings, but it still owns several casinos in locations that diminish Penn National Gaming's share of local gaming markets. For instance, MGM Mirage bought the Gold Strike Resort and Casino in Tunica, Mississippi in 1997, competing with both Penn's Hollywood Casino and Harrah's three Tunica casinos. The MGM Grand Atlantic City, a casino under construction and slated to be completed in 2012, will be the latest entrant into the regional mid-Atlantic gaming market and a competitor with Penn's Charles Town Entertainment Complex.^[36]

[edit] MTR Gaming Group (MNTG)

With revenues of $430 million in 2007, MTR Gaming Group is smaller and has fewer resources with which to compete than some of Penn National Gaming's other market competitors. However, MTR Gaming Group owns several properties of importance, including the Mountaineer Racetrack & Gaming Resort in Chester, West Virginia, and Presque Isle Downs & Casino in Erie, Pennsylvania. In particular, the Mountaineer Racetrack and Gaming Resort earned revenues in 2007 of $261 million.^[37]

Both compete with Penn National Gaming's Charles Town Entertainment Complex in Charles Town, Pennsylvania. In 2007, Charles Town Entertainment Complex earned net revenues of $500 million, the largest earner of revenues in Penn National Gaming's owned casinos and racetracks.^[38] The 10-K for 2007 stated that the company obtained "a substantial portion of our revenues and income" from its Charles Town and Lewisburg operations, and that local and competitive challenges posed a potential risk to the company's total revenues.^[39]

[edit] References

1. ↑ [Morningstar Analyst Report, June 18, 2008; Thesis, Page 1]
2. ↑ Morningstar Analyst Report on PENN, June 18, 2008; Thesis, Page 1
3. ↑ PENN, 2007 10-K, Item 7: Management's Discussion, Page 41
4. ↑ Penn, 2008 10-Q, Item 1: Financial Statements, Page 4
5. ↑ "Penn National's $5.82 billion takeover is off" Associated Press, July 3, 2008
6. ↑ PENN, 2007 10-K, Item 6: Selected Consolidated Financial Data, Page 33
7. ↑ PENN, 2007 10-K, Item 7: Management's Discussion, Page 41
8. ↑ PENN, 2007 10-K, Item 7: Management's Discussion, Page 41
9. ↑ PENN, 2007 10-K, Item 1: Business, Page 2
10. ↑ PENN, 2007 10-K, Item 7: Management's Discussion, Page 41
11. ↑ PENN, 2007 10-K, Item 6: Selected Consolidated Financial Data, Page 33
12. ↑ "Raising the Stakes" The Philadelphia Enquirer, August 28, 2005
13. ↑ PENN, 2008 10-Q, Item 2: Management's Discussion, Page 20
14. ↑ PENN, 2007 10-K, Item 6: Selected Consolidated Financial Data, Page 33
15. ↑ Penn, 2008 10-Q, Item 1: Financial Statements, Page 4
16. ↑ PENN, 2007 10-K, Item 6: Selected Consolidated Financial Data, Page 33
17. ↑ "Penn National's $5.82 billion takeover is off" Associated Press, July 3, 2008
18. ↑ "U.S. Q4 2007 GDP rises at 0.6% annual rate, up 2.2% for 2007" www.bloggingstocks.com, February 28th, 2008
19. ↑ "The Consumer Spending Mirage"; Businessweek, April 9, 2008
20. ↑ [Morningstar Analyst Report, June 18, 2008; Thesis, Page 1]
21. ↑ PENN, 2007 10-K, Item 7: Management's Discussion, Page 37
22. ↑ "Lakes Entertainment, Inc. Announces Status of Ohio Petition Drive" biz.yahoo.com, July 1, 2008.
23. ↑ PENN, 2007 10-K, Item 1: Business, Page 4
24. ↑ PENN, 2007 10-K, Item 1: Business, Page 4
25. ↑ [Morningstar Analyst Report, June 18, 2008; Thesis, Page 1]
26. ↑ Penn, 2007 10-K, Item 1: Business, Page 10
27. ↑ Penn, 2008 10-Q, Item 1: Financial Statements, Page 4
28. ↑ PENN, 2007 10-K, Item 7: Management's Discussion, Page 42
29. ↑ Foxwoods Resort Casino Website.
30. ↑ "Illegal Gambling Thrives on Internet" Technewsworld.com, May 25, 2006
31. ↑ HET, 2007 10-K, Item 7: Management's Discussion, Page 30
32. ↑ MGM, 2007 10-K, Item 7: Management's Discussion, Page 20
33. ↑ MNTG, 2007 10-K, Item 7: Management's Discussion, Page 30
34. ↑ HET, 2007 10-K, Item 6: Selected Financial Data, Page 20
35. ↑ "Hey Y'all!" The Tunica Times, May 29, 2008
36. ↑ MGM Grand Atlantic City website.
37. ↑ MNTG, 2007 10-K, Item 7: Management's Discussion
38. ↑ PENN, 2007 10-K, Item 6: Management's Discussion, Page 42
39. ↑ PENN, 2007 10-K, Item 1A: Risk Factors, Page 17