Penn Analysts Not Convinced Casino Company Will Sell Itself

Shares of Penn Entertainment (NASDAQ: PENN) surged last Friday after investor the Donerail Group sent a letter to the gaming company’s board urging it to consider a sale, but analysts don’t believe such a transaction will materialize.

A slide from a Penn Entertainment investor presentation. Analysts don’t believe a buyer will come calling anytime soon. (Image: Penn Entertainment)

In the letter to Penn Chairman David Handler Donerail Managing Partner Will Wyatt excoriated the regional casino operator for costly missteps in the online sports betting space and overpaying CEO Jay Snowden while noting the company should consider a sale because it could command double its current market value in such a deal owing to its regional gaming assets. JPMorgan analyst Joseph Greff isn’t a believer in Penn selling itself anytime soon.

We think a buyer for PENN is highly difficult and don’t see agitation resulting in anything that sustains shareholder-value creation,” wrote the analyst.

Greff noted he understood from where Donerail is coming due to Penn’s lengthy stretch of share declines, but he added “meaningful interactive losses generating poor investor sentiment for the overall enterprise.”

Some Talk of Penn Suitors Emerges

While Greff and other sell-side analysts aren’t convinced a buyer will soon come calling for Penn, reports out Monday suggest otherwise.

CNBC’s David Faber reported that he’s heard there’s interest in Penn, but he didn’t identify sources or specific suitors. He did, however, question whether or not Boyd Gaming (NYSE: BYD) or other gaming companies could make a run at Penn, which is widely viewed as a deep-value name.

It’s easy to float Boyd as a potential suitor for Penn simply because the former, like the latter, is a regional casino operator. Additionally, Boyd has something Penn lacks: a significant Las Vegas footprint. Conversely, there’s significant overlap between the two operators in the Midwest and the South, indicating Boyd doesn’t need to rush to make a deal with Penn.

Add to that, Boyd owns 5% of FanDuel, which implies Penn’s struggling ESPN Bet business wouldn’t be a selling point in a possible deal. Las Vegas-based Boyd hasn’t signaled any plans for large-scale acquisitions over the near term, and those are likely among the reasons why shares of Penn slipped almost 1% on Monday.

With Penn, Something’s Got to Give

In addition to highlighting the benefits of a potential sale, the Donerail letter to Penn addresses an important, long-running concern of Penn shareholders: the company’s costly, numerous mistakes in the online sports betting industry.

As other market participants before it have done, Donerail argued that Penn’s ventures in online gaming aren’t paying off and are overshadowing the operator’s compelling portfolio of regional casinos. Jefferies analyst David Katz appears to agree with the notion that Penn investors are tiring of the company’s interactive missteps.

“Irrespective of the outcome of the current process, revisiting the current path of investment and returns is warranted, given the current competitive landscape in digital and the uncertainties around the investment required to capture the stated share goals,” he wrote in a report. “Something has to change” in view of shareholders’ limited tolerance for the costs of interactive expansion.”

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