PENN Arbitrage Play

In June of last year, PENN National Gaming Inc. (PENN) agreed to be acquired by a group of investors led by Fortress Investment Group (FIG) for $67 in cash for each share of the stock. At the time of the buyout announcement this was a 31% premium over the previous days stock close at $51.14.

Right after the merger was announced the stock shortly dropped for 7 straight trading days. Normally after a buyout announcement stocks trade pretty close to their buyout price, say within 5% of the actual buyout offer. PENN was only at that range the first day the merger was announced. Now the date of the merger also has a play on how close the stock will actually trade to the buyout price. In the case of PENN the merger wasn’t set to complete till 12 – 16 months after the announcement, a bit long for some people’s tastes. The terms of the buyout agreement had a clause that said if the merger wasn’t complete after 12 months the purchase price would increase by $0.0149 per day after June 15th 2008.

The closing price of PENN today was $47.13. The stock is currently trading below the price it was before the buyout offer with no news that the merger is not set to go through. Fears about the credit situation have obviously been in investors minds so I can understand some people wanting to dump their shares and take a profit. But for the stock to now be trading at a price 42% below the buyout offer is a bit fishy. Right up until 2008, the stock had been hovering around $59 a share for a while showing around a 13-14% discount from the buyout offer of $67 per share. Once the new year passed the stock dropped 9 straight trading days to $50.20 close on Jan 15th. The stock rose the following day on an upgrade from Jefferies & Co. Does someone know something I don’t know? During this time period there was no announcement about any concerns for the financing of the merger. Since then the stock rose as high as $56.85 only to drop back down to a low of $45.53 a few trading days ago.

So what is going on with this stock? Are there that big of doubts about the current credit situation that this merger won’t go through? FIG already announced on August 22nd that they had secured financing for the deal from Wachovia and Deutsche Bank. According to the agreement the merger could not go through if there was a “material adverse effect” or the financing backed out and paid a pretty fee of $200 million dollars.

   “    Material Adverse Effect on the Company    ” means a material adverse event, change, effect, development, condition or occurrence on or with respect to the business, operations or financial condition of the Company and its Subsidiaries, taken as a whole; provided, however, except (other than in clauses (A), (B), (C), (D), (H), (I) and (J) below) to the extent such changes have a materially disproportionate effect on the Company and its Subsidiaries, taken as a whole, when compared to other companies operating in the same industries in which the Company or its Subsidiaries operate, that Material Adverse Effect on the Company shall not be deemed to include any event, change, effect, development, condition or occurrence to the extent resulting from any one or more of the following: (A) changes in general economic conditions, the securities or financial markets, the gaming industry generally or in any specific jurisdiction or regulatory, legislative or other political conditions or developments; (B) public disclosure of this Agreement or the transactions contemplated hereby, including the identity and/or structure of Parent and its Affiliates; (C) any taking of any action specifically required by this Agreement; (D) changes in Law (other than a change in Law enacted by the State of Illinois, the State of Indiana, the State of West Virginia or the Commonwealth of  Pennsylvania prohibiting all gaming activities which are currently permitted therein) or GAAP, or the interpretation thereof; (E) any outbreak or escalation of hostilities or war or any act of terrorism; (F) any weather-related or other force majeure event; (G) any outbreak of illness or other public health-related event; (H) any divestiture or disposition of any assets or operations of the Company or any of its Subsidiaries which, as of the date hereof, the Company and its Subsidiaries have committed to make to satisfy any Gaming Authority or which is disclosed in the Company Disclosure Letter; (I) changes in the share price or trading volume of the Shares or the failure of the Company to meet projections or forecasts (unless due to a circumstance which would separately constitute a Material Adverse Effect on the Company); or (J) any litigation alleging breach of fiduciary duty or other violation of applicable Law relating to this Agreement or the transactions contemplated by this Agreement. 

Regulators also could not approve the deal which could cause the buyout to not go through. Although I can’t find much information about any news regarding regulatory approval or disapproval or if they are even in talks about it.

The cynic in me is hoping that some big bad institutional investors have been driving the price down so they can accumulate more shares and out of no where we will see this stock begin taking off. But what do I know…

Disclaimer: I own stock in PENN