Penn Gaming to split

CHARLES TOWN – Penn National Gaming Inc. enjoyed a dramatic overnight spike in its stock price following an announcement that the company intends to split into two companies.

Penn National, which owns and operates Hollywood Casino at Charles Town Races, made the announcement on Nov. 15 that it intends to split into two publicly traded companies. One, called Penn National Gaming, will deal with the operation of gaming centers the company currently owns. Seventeen of the casinos currently owned by Penn National will be owned by a real estate investment trust called PropCo. The new Penn gaming company will lease the facilities from PropCo, and PNG will be PropCo’s only tenant, at least at first. PNG is expected to pay PropCo about $450 million in rent per year.
The market greeted the news jubilantly. Enthusiastic overnight trading caused the stock to skyrocket to almost $50 per share when trading opened on Nov. 16; about a 32 percent increase over its closing price the prior afternoon. This came in spite of concerns over the possibility that revenues at several of their facilities – including at Charles Town – might begin flagging the next few years due to new competition.
According to a Bloomberg article published the same day, PNGI Chairman and CEO Peter Carlino, in a conference call with shareholders on Nov. 16, said the move was meant to help “unlock” the value of the company’s real estate holdings. The new REIT will have to pay 90 percent of its taxable earnings to its shareholders as dividends, but will have the ability to acquire property holdings overseas as well as non-casino real estate, according to the report.
Carlino will be the chairman of the board at both PNG and PropCo after the split. He will become chief executive officer of PropCo, while current PNGI Chief Operating Officer Tim Wilmont will become CEO of PNG.
Area investment advisor Rob Hoxton called the move by Penn National an unusual business restructuring.
“I do wonder if part of the reason for this has to do with the passage of Question 7 over in Maryland,” Hoxton said. “If PNG wanted to diversify, and maybe reduce their exposure to real estate in Charles Town, if they were able to sell some of that interest to other investors … then that would be a good situation [for them]. They’re able to take a few chips of the table, if you will, so that they can reinvest and diversify their other holdings.”
Despite the dramatic increase in the stock price, Hoxton warns locals considering investing in PropCo to do careful research. He said he sees potential problems with the new REIT.
“Normally I’m a big believer in diversification,” Hoxton said. “If I were going to buy a REIT, I would want to buy a REIT that owns properties that are leased by lots of big, blue chip companies. In this case, it’s a REIT that is going to have only one customer — PNG— and I happen to know that PNG is going to have substantial competition just over the river.”
“I think it is really important that people assess PropCo independently of PNG,” he said. “It probably makes sense to consult a competent advisor in doing so, especially if they are thinking about investing fresh capital in PropCo.”
Hoxton said the new arrangement could have one big benefit for PropCo.
“PropCo’s cost of capital is probably going to be substantially lower, just because they have access to capital markets by way of this publicly traded REIT.”
This could either help facilitate casino expansion – buying new properties for PNG to rent and operate – or help PropCo to look at investing in other kinds of property to help diversify its holdings, Hoxton said.
Current shareholders of PNGI will receive one share of PropCo stock — if the deal is approved — in the second half of 2012 through a tax-free dividend. PropCo will then pay a taxable dividend, which is estimated to total about $1.4 billion, 35 percent of which will be case – around $5.45 per share – with the remainder being additional PropCo stock.


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