Penn Gaming is no impulse casino buyer

By Liz Benston (contact)

Monday, Jan. 26, 2009 | 2 a.m.

Penn National Gaming, with $1.5 billion in cash on hand from a failed attempt to go private last year, is shopping for casinos.

Like a consumer who saved while others blew their wads, the Pennsylvania-based company is one of a few in the debt-ridden casino industry with the ability to buy some major bling — on sale, of course.

Buying a casino isn’t as simple as signing a check for a billion dollars.

Unlike parties to other business transactions, casino buyers must go through the lengthy process of obtaining a state license. Closing escrow could take six months to a year after a contract is signed — plenty of time for operating performance to deteriorate because of management or the economy.

Such changes can derail a sale.

“A lot can happen in nine months,” said Carlton Geer, who leads CB Richard Ellis’ gaming division.

The Las Vegas Hilton offers a cautionary tale.

In 2001 owner Park Place Entertainment sued real estate magnate Ed Roski for reneging on a $365 million deal to buy the property. Roski countersued, saying free-falling earnings at the Hilton hurt his ability to finance the purchase. Roski accused Park Place of sabotaging business by moving high rollers and hosts to other properties while the sale was in progress.

Roski ultimately won and backed out of the deal with a confidential settlement.

Most purchase contracts contain a “material change” provision allowing prospective buyers to exit in the event of a significant decline in performance or major change in operations.

Coupled with extended escrow periods, such clauses make casino deals tricky at best.

A casino’s best workers might seek jobs elsewhere once a sale becomes known. Customers might leave, fearing their VIP status will change under new ownership, Geer said.

These days, the troubled economy and the difficulty in obtaining financing make deals even riskier.

Potential sellers such as MGM Mirage — which needs cash but isn’t hitting the panic button — are willing to sell some properties at a slight discount, but are unable to go much lower, insiders say.

Many gaming giants owe more than any of their individual properties are worth, so fire sales won’t improve their financial position unless they have no other option and bankruptcy is imminent.

And yet, it’s hard to fault buyers for low-balling, with earnings on the decline and upscale brands in trouble.

Agreements on a price might prove elusive.

For MGM Mirage, asset sales could help the company pay down debt.

Uncertainty over its ability to pay down $1.2 billion in bonds due next year is hurting the company’s stock, analysts say.

Its prized Mirage is one of many properties in which Penn has shown interest.

Penn executives have expressed interest in acquiring a marquee property to serve as an inducement for customers of their smaller, regional casinos. Like participants in Harrah’s Entertainment’s rewards program, Penn gamblers could earn points, say, toward a stay at a Las Vegas resort. An Atlantic City resort would also make sense for Penn, which has casinos in East Coast feeder markets.

“They look at everything — the company kicks a lot of tires,” Penn spokesman Joe Jaffoni said. “It’s all about the purchase price and the return on capital.”

Executives say asking prices are too high given the depressed economy.

“Room rate trends in Las Vegas aren’t positive,” Jaffoni said. “We’re going to remain very disciplined. To expect something imminent is probably not realistic.”

With the downturn expected to last through this year and more distressed properties on the horizon, Penn can afford to wait.

But MGM Mirage is no Mervyn’s. So the window shopping and coupon clipping continue.

Like any good bargain hunter, Penn will be circling back to Las Vegas in hope of better discounts.