Penn Entertainment Strategic Review Unlikely, Says Analyst

Shares of Penn Entertainment (NASDAQ: PENN) slumped Friday after a sell-side analyst said the regional casino operator is unlikely to commence a strategic review over the near term, potentially dashing hopes the company is a takeover target.

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Penn Entertainment’s logo. An analyst said the operator is unlikely to commence a strategic review over the near term. (Image: Casino.org)

On volume that was nearly 50% above the daily average, Penn slipped 8.7% on Friday after Truist analyst Barry Jonas wrote in a report that Penn is unlikely to evaluate a sale anytime soon despite a letter to the board by money manager Donerail Group pushing the gaming company to mull such a transaction because Penn could command double its current market capitalization in a sale.

Despite the activist letter, we don’t think any sort of formal strategic review at PENN is likely in the near-term,” wrote Jonas.

While Jonas may have rained on the Penn buyout parade, he boosted his price target on the stock to $25 from $23, implying upside of 43.6% from the June 14 close.

Familiar Refrain on Penn Entertainment Strategic Review

The Donerail letter, which was sent to Penn’s board of directors on May 31, stoked upside in the long-lagging stock and some short covering, but since the missive was revealed, analysts have almost universally said an outright sale of Penn is unlikely over the near term.

Jonas echoed that refrain, noting that with interest rates still high, acquisition values could be suppressed. While the higher interest rates caused by persistent inflation have prompted gaming companies to reduce and refinance debt — moves applauded by analysts and investors — those scenarios are weighing on share prices.

Likewise, elevated interest rates indicate that prospective buyers who need financing to execute transactions might be reluctant to strike deals because they’d be subject to higher financing costs and interest expenses.

“We also note PENN is one of the most efficient land-based operators in our coverage, which limits any low-hanging operational synergies,” Jonas added.

Penn Focused on Bolstering ESPN Bet

A significant part of Donerail’s excoriation of Penn management and the push for a sale centered on the gaming company’s well-documented missteps in the online sports wagering space. Still, the operator is committed to ESPN Bet, its new sports-wagering mobile application that debuted last November.

Jonas noted that Penn has a “clear ESPN Bet product roadmap” and that it could benefit during the upcoming football season. A full football campaign could bring clarity regarding ESPN Bet’s long-term prospects. To date, the app has struggled to gain noteworthy market share, but that’s true of nearly all competitors in the space that aren’t DraftKings or FanDuel.

Low hold rates, fierce competition, and the specter of increasing taxes are among the issues confounding some internet sportsbook operators, but Penn has the potential to leverage the ESPN brand and technological improvements to bring more bettors into ESPN Bet during the 2024 football season.

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