Wall Street analysts were generally unruffled by the Donerail Group’s demand letter that Penn Entertainment put itself up for sale. Penn stock was trading at $14.63 a share at the time they issued their reactions.
Summarized J.P. Morgan’s Joseph Greff, “We think a buyer for PENN is highly difficult and don’t see agitation resulting in anything that sustains shareholder-value creation.”
“When stocks underperform, patience wanes,” added David Katz of Jefferies Equity Research. “The public commentary from activists toward capturing higher value should not be surprising, given the underperformance, the negative narratives, around the shares going forward and the context of the shareholder base.” He wrote that the likely upshot would be a strategic-alternatives process, resulting in a change of Penn’s strategic direction or looks to capture value via external means.
Calling Penn’s stock performance “weak,” Greff professed sympathy with Donerail. “The gist of the letter is that PENN’s investments in digital have overshadowed its reasonably resilient regional land-based casino operations (we don’t disagree here, too) and that the board should consider a sale of the land-based casinos to generate incremental equity value,” he recapped. Greff noted “meaningful interactive losses generating poor investor sentiment for the overall enterprise.”
That being said, Greff continued that the talk of a Penn sale was nothing new, albeit one that has accelerated of late. He questioned whether a prospective buyer was out there, particularly given “overconcentration” among medium-sized and large casino companies.
Greff also queried the strength of the regional-casino customer, relative to the price Penn could realistically fetch on the market. He wrote, “We suspect any buyer will share these same concerns and this could result in wide valuation scenarios.”
The J.P. Morgan analyst lastly questioned whether such a transaction could be financed, especially given Penn’s three-year commitment to ESPN Bet, which includes $450 million in licensing fees to ESPN. Hence, Greff’s lack of “agitation” and “Neutral” rating on Penn stock.
Resumed Katz, “The activist letter highlights not only key drivers of the shares’ performance, but also prospective alternatives for driving higher value.” His opinion was that Penn would stay its course, Donerail’s objections notwithstanding.
Still, he continued, “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.” Katz opined, “Something has to change” in view of shareholders’ limited tolerance for the costs of interactive expansion.
