VICI Clings to Investment-Grade Rating with Stable Outlook at Fitch

Fitch Ratings reaffirmed VICI Properties’ (NYSE: VICI) credit grade at “BBB-“ with a “stable” outlook in a report out Thursday.

Caesars asset sale
Caesars Palace on the Las Vegas Strip. Owner VICI Properties retained an investment-grade credit rating at Fitch Ratings. (Image: CNN)

The research firm said the rating — the lowest on the investment-grade spectrum — is supported by VICI’s status as one of the largest domestic real estate investment trusts (REITs) by enterprise value, earnings before interest, taxes, depreciation, and amortization (EBTIDA) capabilities, and its ability to access capital. VICI is the largest owner of gaming real estate.

The ratings also incorporate the company’s stable occupancy and ownership of large, strategic assets with regulatory barriers to access and contractual protections, as well as material tenant concentration with high-yield counterparties and potentially weaker contingent liquidity compared to other more traditional commercial real estate (CRE) property types,” noted Fitch.

New York-based VICI owns the property assets of iconic Las Vegas Strip casino hotels such as Caesars Palace and the Venetian, among others.

VICI Focusing on Deleveraging

One of the reasons VICI shares slid 7.58% over the past year and are lower by 10.13% year-to-date is because the operator took on more leverage at a time when interest rates are high. Alone, high borrowing costs weigh on REITs, but when more debt is factored into the situation, it can be a significant headwind, but VICI is working to delever.

Much of the landlord’s recent debut accumulation stems from the $17.2 billion acquisition of rival MGM Growth Properties in 2022. With that deal, VICI added Excalibur, Luxor, Mandalay Bay, MGM Grand, Mirage, New York New York, and Park MGM, as well as various regional casinos operated by MGM Resorts International (NYSE:MGM) to its portfolio.

“VICI’s leverage has returned to its long-term financial policy (5.0x-5.5x net debt/operating EBITDA) on an MRQ basis with MRQ annualized REIT leverage of 5.4x as of March 31, 2024. Leverage was elevated in 2022-2023 as a result of its merger with MGM Growth Properties (MGP) and its acquisition of minority interests in the MGM Grand/Mandalay Bay joint venture,” added Fitch.

The research firm believes the REIT will drive leverage below 5.5x by the end of this year. Fitch added that non-traditional owners, including private equity firms, gobbling up Las Vegas Strip real estate is compressing cap rates, thus bringing a potential long-term positive catalyst forth for VICI.

Watch for Indiana Transactions

As was reported here earlier this week, it’s possible VICI will soon provide an update on its outlook for Centaur Holdings — the holding company of Harrah’s Hoosier Park and Horseshoe Indianapolis, both of which are operated by Caesars Entertainment (NYSE: CZR).

By way of Eldordado Resorts’ 2020 acquisition of Caesars, Eldorado and VICI reached an agreement under which the gaming company could put those properties to the REIT or the landlord could call them away by the end of this year. Caesars has previously indicated it’s not planning to use its put rights, but VICI could decide to use its call rights, which could lead to higher-leverage over the near-term.

“Were either party to exercise its rights, the ensuing transaction would represent material capital allocation for VICI. Depending on the company’s funding mix for the transaction, leverage could be elevated in the near term, though we expect the company would be able to manage leverage within its sensitivities within a reasonable amount of time post-acquisition,” concludes Fitch.

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New York Gaming Facility Location Board Provides Update on Downstate Casinos

The New York State Gaming Facility Location Board on Thursday provided an updated timeline for the issuing of the three downstate casino concessions.

New York casino license
New York City’s Manhattan is seen looking south at the Empire State Building and Lower Manhattan. The New York State Gaming Facility Location Board this week provided a new timeline for the issuing of the three downstate casino licenses. (Image: Shutterstock)

New York residents in 2013 voted in favor of amending the state constitution to permit Las Vegas-style commercial casinos. The vote authorized four upstate and three downstate casinos, but the downstate concessions were delayed 10 years to allow the upstate properties to establish their customer bases.

The moratorium on the downstate licenses is over and a slew of interested developers have prepped multibillion-dollar bids. Many state lawmakers have urged the State Gaming Facility Location Board and Gov. Kathy Hochul (D) to expedite the process, as the licenses were originally intended to be awarded this year but the state agency in March conceded the process would likely drag into late 2025.

The board provided updated guidance on when the coveted downstate licenses will be granted. For those wishing to get the resorts up and running as soon as possible, the statement won’t be welcomed.

Downstate Details 

The New York State Gaming Facility Location Board says applications for the downstate licenses are due by June 27, 2025. Each qualified bid will be designated a six-person Community Advisory Committee (CAC) consisting of Hochul, New York City Mayor Eric Adams (D), the borough president, and applicable state senator, assemblyperson, and city councilor.

Each casino pitch must secure the support of their CAC by Sept. 30, 2025. The Gaming Facility Location Board says it will then take October and November to review the submitted bids with CAC backing and render its winners by Dec. 1, 2025.

Winning casino bids must submit their $500 million license fees to the state by Dec. 31, 2025.

This timeline encompasses all legal requirements that potential bidders must meet before we may evaluate applications,” said Board Chair Vicki Been. “This roadmap also gives communities ample opportunity to have their voices heard, establishes a level playing field among multiple competitors, and affords serious applicants the opportunity to participate in a lucrative and transformational process.”

Along with obtaining a CAC endorsement, each casino applicant, the Gaming Facility Location Board said, must complete all entitlement processes such as acquiring land-use permits and zoning signoffs. The Board says the pushback of applications to the June 27, 2025, deadline levels the playing field for several bids that continue to labor to secure local approvals for their gaming resort projects.

“At least four publicly known potential applicants are not currently able to avail themselves of the zoning change due to specific requirements not covered by the amendment, including mapping changes, grading, or revocable consent to construct over streets. The New York City Department of City Planning has advised the Board that the four impacted entities expect to emerge from the zoning (ULURP) process by the end of June 2025,” the Board explained.

Environmental Review Tedious

The Board added that bids must also undergo a State Environmental Quality Review.

SEQR process is lengthy, with the purpose to identify any potential adverse environmental effects of proposed actions, assesses their significance, and propose measures to eliminate or mitigate significant impacts,” the Board release explained. “Applicants are expected to be substantially complete with the environmental reviews by the end of June 2025.”

MGM Resorts and Genting are the front-runners for two of the licenses that would allow their respective video lottery racinos — Empire City in Yonkers and Resorts World in Queens — to become full-scale casinos with Las Vegas-style slots, live dealer table games, and sportsbooks. Other companies that continue to develop downstate bids include Hard Rock International, Wynn Resorts, Las Vegas Sands, Bally’s, Mohegan, and Caesars Entertainment.

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SCOTUS Ruling on Florida Sports Betting Not Instructive in California

Last week, the United States Supreme Court declined to hear an appeal challenging Florida’s decision that essentially allows for the Seminole Tribe to maintain a monopoly on online sports wagering activities in the state. That sparked speculation that other states, including California, where tribes control gaming could bypass voters and establish internet sports betting.

James Siva
CNIGA Chairman James Siva. He said California tribes aren’t rushing into sports betting despite a recent Supreme Court decision. (Image: CNIGA/Facebook)

While some tribal gaming leaders in California viewed the Supreme Court decision as a positive, they don’t view it as a playbook for bringing online sports betting to their state. That outlook runs counter to the thesis recently laid out by Deutsche Bank analyst Carlo Santarelli, who wrote that the Supreme Court ruling “provides a blueprint for California and other states with tribal gaming.”

Gaming tribes in California support the ruling, but that doesn’t mean they’re rushing into sports betting. James Siva, chairman of the California Nations Indian Gaming Association (CNIGA), speaking on the Indian Gaming Association’s (IGA) “New Normal” podcast on Thursday said the only certainty at this point is that tribes won’t be pushing for sports betting in California this year.

I know there’s a lot of excitement over this decision and it was the right decision, but people think we’re going to start having a push for new initiative immediately (in California),” Siva said. “Luckily, we have a CNIGA meeting coming up this week and everyone realizes we’ll continue on the path we’ve been taking the last few years, moving carefully and methodically. This opens up some new avenues for us, but our timeline remains the same even with this decision.”

The podcast is hosted by IGA Chairman Victor Rocha who is a member of the Pechanga Band of Luiseño Indians, which runs the Pechanga Casino Resort in Temecula, Calif.

Commercial Ops Could Be in for Rude California Awakening

After backing an ill-fated 2022 ballot proposal to bring online sports betting to California without consulting tribes, commercial sportsbook operators are licking their wounds in the state and things may not get better from here.

Owing to the fact online sports betting in California would be a new form of wagering under the terms of the Indian Gaming Regulatory Act (IGRA), at least 60% of the related revenue must flow to tribal governments. A potential revenue split along those lines could be unattractive to companies such as DraftKings (NASDAQ: DKNG), FanDuel, and the like, but Siva made clear California tribes won’t accept sports betting “crumbs on the table.”

Likewise, Scott Crowell, a tribal-gaming attorney with the Crowell Law Office Tribal Advocacy Group, said on the podcast that the Supreme Court’s decision to not hear the West Flagler appeal signals that the exploitative model commercial gaming companies have used in some tribal-heavy states such as Arizona won’t fly in California.

If they think they can continue with the unconscionable model they’ve been pursuing for so long in other jurisdictions, I hope this decision is a wake-up call. That’s not going to happen,” he said.

Rocha added that under a hypothetical scenario in California, tribes would gain exclusivity over iGaming and commercial companies could potentially work with tribes on sports betting while being subject to a graduated tax rate that could run as high as 45%. That would be the second-highest sports wagering levy in the country behind only New York and several small states.

No Clear Timeline for California Sports Betting

A takeaway from the podcast is that California tribal casino leaders want the state’s voters to have a say on the matter of sports betting, but exactly when that happens hasn’t been decided. The only clarity on timing is that it won’t be this year, according to Siva.

Tribes have monitored the situation and realize that after California voters dealt with sports betting ballot initiatives in 2022, the appetite isn’t there for the issue to be reckoned with this year. It’s possible the matter could be pushed out to 2028 or 2030 and California tribes are comfortable playing the waiting game.

“Our careful approach, and protecting the industry we built up from nothing over the last three decades, mean more to us than adding another percentage to the bottom line. That’s always been and will continue to be our approach,” added Siva.

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Live! Casino Philadelphia Fined $100K for Taking Proxy Sports Bets

Stadium Casino RE, LLC, the operator of Live! Casino and Hotel Philadelphia in the city’s Stadium District, has been slapped with a $100K fine for violating Pennsylvania’s sports wagering regulatory conditions.

Live! Casino Philadelphia sportsbook fine
An aerial view of Live! Casino and Hotel Philadelphia. The casino’s FanDuel Sportsbook took banned proxy bets from a bettor that resulted in the resort’s operating company being hit with a $100K fine. (Image: Tripadvisor)

The Pennsylvania Gaming Control Board (PGCB) signed off on a consent agreement offered by the Board’s Office of Enforcement Counsel (OEC) to Stadium Casino to settle the regulatory mishaps. Live! officials conceded that several of its FanDuel Sportsbook employees wrongly took bets via the telephone from a bettor who wasn’t physically located on the casino’s grounds.

The state probe said it found at least 15 wagers were facilitated totaling $287,421 over eight says for a patron who wasn’t present in the casino. Proxy wagers, or placing bets on behalf of another, are prohibited in Pennsylvania.

Along with the $100K fine, the PGCB revoked the gaming employment licenses of three sportsbook employees who accepted and placed the wagers, resulting in their termination.

Regulatory Actions

The PGCB this week also denied motions from two gamblers who were placed on the state’s Involuntary Exclusion List for leaving minors unattended in vehicles while they gambled inside a casino.

Actions such as these to deny statewide gambling privileges serve as a reminder that adults are prohibited from leaving minors unattended in the parking lot or garage, a hotel, or other venues at a casino since it creates a potentially unsafe and dangerous environment for the children,” the PGCB wrote.

Pennsylvania’s iGaming Involuntary Exclusion List is also expanding. The PGCB added 11 more people to the blacklist this week after determining that those individuals engaged in iGaming fraud.

The board said 10 of the individuals were found to have used someone else’s name and identifiers to establish fraudulent iGaming accounts. The 11th person banned reportedly used an iGaming account to launder money by having deposits made into the account with other people’s credit cards before withdrawing the funds to their personal bank account without ever engaging in any gaming activity.

The Board’s Bureau of Investigations and Enforcement conducted the iGaming inquiry and reported the findings to the OEC. The OEC recommended to the board that the 11 people be excluded from further iGaming participation.

Premier Regulatory Agency

Since becoming home to one of the largest gaming industries in the US, the PGCB has emerged as a new “gold standard” of gaming regulation.

Pennsylvania is one of only seven states where online slots and interactive table games are allowed. The commonwealth is home to 17 brick-and-mortar commercial casinos, retail and online sports betting, fantasy sports, and video gaming terminals inside diesel truck stops.

As Japan moves closer to opening its first casino, a delegation from the East Asia country traveled to Pennsylvania last September to meet with PGCB officials to learn about best regulatory casino practices.

PGCB Executive Director Kevin O’Toole told following the meeting that the Japanese officials were “very focused on learning as much as they can,” with their primary objective to better understand how the state goes about conducting background checks on key casino personnel and how the board performs investigations into possible regulatory noncompliance.

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Florida Gaming Regulators Afforded Personal Confidentiality With DeSantis Signature

The Florida Gaming Control Commission (FGCC) members have been provided with personal confidentiality protections through a bill signed into law by Gov. Ron DeSantis (R).

Florida Gaming Control Commission Ron DeSantis
Law enforcement members with the Florida Gaming Control Commission raid an arcade on May 9, 2023, in Fort Pierce. Florida Gov. Ron DeSantis has signed a bill into law that provides gaming commissioners with protections from public records. (Image: Treasure Coast Palm Beach Post)

Senate Bill 692 was introduced in January by state Sen. Travis Hutson (R-Flagler). The measure seeks to provide exemptions from public records for current and former FGCC commissioners and their spouses and children.

The statute passed the Senate in February and the House in March, both by unanimous votes. DeSantis signed the act into law on June 21.

State gaming regulators and their immediate families can now keep confidential their home addresses, personal telephone numbers, dates of birth, their spouse’s places of employment, schools attended, and other personal information. SB 692 brought the FGCC into Florida’s longstanding public records act that provides exemptions for most elected and government-appointed officials.

The Legislature finds that the release of such personal identifying and location information might place the commission’s current or former commissioners and their family members in danger of physical and emotional harm from disgruntled individuals whose businesses or professional practices have come under the scrutiny of the commission,” the state’s lawmaking body wrote in its explanation of the bill sent to DeSantis.

The governor had no comment on signing the bill.

The FGCC has recently cracked down on arcades where law enforcement says illegal gambling machines are operating. The confidentiality statute could help protect commissioners from backlash from those business owners.

Gaming Regulatory Expanding

Florida’s gaming industry is amid considerable change after the US Supreme Court last week denied an appeal challenging the state’s deal with the Seminole Tribe to allow the Hard Rock owner to operate online sports betting in the Sunshine State. Lower federal courts ruled that the US Department of the Interior’s Bureau of Indian Affairs didn’t err in approving the Class III gaming compact that DeSantis and the tribe reached in 2021.

The amended compact that provides the Seminoles with the exclusive rights to slot machines outside of Miami-Dade and Broward counties and most house-banked table games statewide gives the tribe its first online gaming privileges. Opponents, including West Flagler Associates, which owns and operates the Bonita Springs Poker Room, argued the compact violated the federal Indian Gaming Regulatory Act (IGRA), which mandates that tribal gaming occurs only on tribal lands.

Federal courts opined that since the Hard Rock Bet online sportsbook computer servers remain on Seminole sovereign territory, and Florida lawmakers earlier passed legislation to redefine tribal gaming to permit the transmission of bets via the internet, the compact remains in IGRA compliance.

Gaming Oversight 

The FGCC has regulatory jurisdiction over most gaming in the Sunshine State, except for the Florida Lottery. The commission governs parimutuel wagering, slot casinos in Miami-Dade and Broward, and manages the Seminole Compact.

The lone form of gambling, along with the lottery, that doesn’t fall under the FGCC’s scope are the two gaming properties run by the Miccosukee Tribe. The tribal nation hasn’t entered into a state gaming compact in favor of operating Class I and II gaming, which allows for electronic bingo-based slot-like devices at its Miccosukee Casino & Resort in Miami and gaming plaza along Alligator Alley.

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Penn Downgraded as Analyst Sees Little Hope of Near-Term Sale

Shares of Penn Entertainment (NASDAQ: PENN) slumped Tuesday after an analyst downgraded the stock, in part citing long odds that the regional casino operator sells itself over the near term.

ESPN Bet Penn Entertainment sports betting
The ESPN Bet logo. Operator Penn Entertainment probably won’t sell itself over the near term. (Image: ESPN Bet)

In a note to clients on Tuesday, Raymond James RJ Milligan lowered Penn to “market perform” from “outperform” while setting a price target of $20 on the stock. That implies upside of about 8.1% from where the shares trade at this writing.

Given the path to profitability in digital still remains uncertain, and we don’t expect any dramatic shift in strategy (e.g., an outright sale of the company) in the near-term, we are recommending investors take profits and look for better risk-adjusted opportunities in the sector,” wrote Milligan.

The analyst’s commentary arrived just days after reports surfaced indicating that Boyd Gaming (NYSE: BYD) may be considering a takeover bid of more than $9 billion for Penn. Shares of Penn have rallied since late May when the Donerail Group, a major investor in the gaming company, sent a letter to the board of directors pushing for a sail.

Penn Waiting on ESPN Bet Football Uptick

In the wake of the Boyd rumor, the prevailing consensus among sell-side analysts is that it’s not surprising the Orleans operator might be interested in rival Penn, but that getting a deal completed is easier said than done.

Multiple reasons fortify that thesis, including Penn not yet signaling it’s open to a sale. Analysts believe the company might consider divesting some regional casinos, but a transaction for Penn in its entirety probably isn’t the near-term cards.

Additionally, Penn is viewed as wanting to evaluate the performance of its ESPN Bet mobile sports wagering application over a full football season — an opportunity presenting itself this year. The app debuted last November.

Among others, those moving parts are among the reasons Milligan encouraged clients to take profits in Penn and look for better risk-adjusted opportunities in the gaming space. Caesars Entertainment (NASDAQ: CZR) is Raymond James’ top pick.

ESPN Bet Could Loom Large in Deal for Penn

Penn’s commitment to ESPN Bet, which was heavily criticized by Donerail, could be a significant factor in a large-scale transaction and, potentially, the company’s ultimate decision to sell itself or continue as an independent entity.

Specific to Boyd, some analysts believe that owing to that operator’s 5% stake in FanDuel — the largest online sportsbook in the US — it would have no interest in ESPN Bet and would likely want Penn to find another buyer for that unit as part of a possible agreement to acquire the company’s land-based casinos.

Locating an acquirer for ESPN Bet could also be easier said than done due to Penn’s relationship with ESPN parent Walt Disney (NYSE: DIS) and ESPN Bet’s currently modest market share.

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VICI Properties Gets Analyst Nod Ahead of Earnings Update

Shares of VICI Properties (NYSE: VICI) rallied Monday after Jefferies analyst David Katz reiterated a bullish view on the real estate investment trust (REIT) ahead of its second-quarter earnings report.

Venetian remodel
Venetian Las Vegas. An analyst waxed bullish on owner VICI Properties on Monday. (Image: Vegas Means Business)

Katz said he and his team updated their models on VICI to reflect rent escalations at Caesars Palace on the Las Vegas Strip, as well as rental income at the Venetian tied to the $700 million in financing the landlord is extending to operator Apollo Global Management (NYSE: APO) to enhance the venue. Jefferies now expects VICI to post 2025 revenue of $3.98 billion.

We are valuing the company on the same blended multiples on 2024/2025 of 18x enterprise value/earnings before interest, taxes, depreciation, and amortization (EBITDA), 19x price/acquired funds from operations (AFFO), and 16x price/free cash flow, which are peer-level multiples vs. triple net REITs with longer track records, absent the growth and future outlook of VICI. As the company diversifies its tenant base and pursues accretive deals, we expect the gap to continue compressing over time,” observed Katz.

Katz reiterated a $43 price target on the REIT, implying upside of 53% from the June 21 close. VICI’s estimated second-quarter earnings date is July 24.

VICI Could Provide Update on Caesars’ Indiana Options

Katz also told clients that VICI could use the second-quarter earnings report to update investors on the possibility of exercising its call option to acquire Caesars Entertainment’s (NASDAQ: CZR) Centaur Holdings, the holding company of Harrah’s Hoosier Park and Horseshoe Indianapolis, formerly known as Indiana Grand.

When Eldorado Resorts announced its $17.3 billion takeover offer for the “old Caesars” in June 2019, it struck an agreement with VICI whereby the gaming company could sell or the REIT could acquire those assets between Jan. 1, 2022, and Dec. 31, 2024.

With Caesars looking to reduce outstanding debt and management previously hinting at selling assets it views as noncore, there has been some speculation that this could be in the year in which VICI acquires the real estate assets of those venues or Caesars puts those properties to the REIT.

Harrah’s Hoosier Park and Horseshoe Indianapolis, which are two of the operator’s four Indiana casinos, joined the old Caesars by way of that company’s $1.7 billion purchase of Centaur Holdings in November 2017. The company’s other Indiana properties are Horseshoe Hammond and Caesars Southern Indiana. Caesars and MGM Resorts International (NYSE: MGM) are VICI’s two largest tenants.

VICI Could Discuss Other Opportunities

Beyond the possibility of VICI telling analysts and investors what it plans for Centaur Holdings, Katz noted the REIT could also provide updates on its nongaming activities, including its relationship with bowling alley operator Bowlero and the Kansas City sports center.

Katz also expects that VICI will update market participants on acquisition plans in the gaming and experiential spaces, as well as the possibility of more financing deals comparable to the Venetian emerging.

Owing to the interest rate sensitivity of the real estate sector, it’s possible VICI management will also comment on its rate outlook on the earnings call.

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MGM Acquiring Tipico’s US Sportsbook Operations

MGM Resorts International (NYSE: MGM) announced that it’s acquiring the US iGaming and sportsbook operations of Tipico Group.

Fanatics Tipico
An ad for Tipico Sportsbook. MGM is acquiring the company’s US operations. (Image: Tipico)

Financial terms of the transaction weren’t revealed. The Las Vegas-based casino giant said its LeoVegas Group unit is the entity acquiring the aforementioned Tipico assets. MGM acquired LeoVegas in 2022 for more than $600 million.

This acquisition is the second major investment by LeoVegas, following the acquisition of game developer Push Gaming in 2023. The acquisition will allow LeoVegas to operate a purpose-built proprietary sportsbook across all international markets and brands, with the exception of those exclusive to the BetMGM JV, with a focus on a clean, fast consumer experience with top-class product, pricing and functionality,” according to a statement issued by MGM.

Under the terms of the deal, Tipico will wind down its US operations and some members of the target’s domestic management, technology, and trading teams will join LeoVegas. The transaction is expected to close in the third quarter.

Tipico Acquisition Bolsters MGM Technology

Germany-based Tipico, which is owned by private equity firm CVC Capital, offers sports wagering in just four states — Colorado, Iowa, New Jersey, and Ohio.

The operator’s share in Iowa and New Jersey is small enough that in some years it’s been measured in hundreds of thousands of dollars. In Colorado and Ohio, Tipico found more success, but its revenue only exceeded $10 million in Ohio.

The decision to acquire Tipico isn’t as much about bolstering BetMGM’s market share as it is about bringing more of the operator’s technology needs in-house. Entain, which owns half of BetMGM, has long represented the technology side of the joint venture.

“The acquisition of Tipico’s award-winning U.S. platform marks a significant milestone in the strategic development of MGM Resorts’ global digital gaming business, allowing us to operate a proprietary sports betting platform,” said Gary Fritz, president of MGM Resorts International Interactive, “This acquisition gives us control of our entire technology ecosystem, and we are delighted to bring Tipico’s U.S. team, with their track record of developing high-quality product and pricing capabilities, into our business.”

Long-Running Tipico Rumors Come to an End

Tipico has long been the subject of mergers and acquisitions speculation. In June 2022, reports surfaced that privately held Fanatics was considering a purchase of the gaming company. That deal didn’t materialize.

In April, rumors serviced that Tipico’s US assets were for sale and that MGM was evaluating an offer. It remains to be seen if CVC looks to sell the remainder of Tipico, as there was speculation earlier this year that it was considering selling the gaming company in its entirety.

CVC has been the majority investor in Tipico for eight years. It’s rumored the private equity shop valued all of Tipico at $3.75 billion.

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Boyd Overture for Penn Not Surprising, but Deal Unlikely Says Analyst

It’s not surprising that Boyd Gaming (NYSE: BYD) may be mulling a takeover offer for rival Penn Entertainment, but that doesn’t mean a deal will come to fruition.

M Resort
Penn Entertainment’s M Resort in Henderson, Nev. An analyst says it’s not surprising Boyd Gaming is interested in Penn, but that doesn’t mean a deal will happen. (Image: YouTube)

That’s the take of Deutsche Bank analyst Carlo Santarelli, who in a recent report, echoed an increasingly familiar refrain among those on the sell-side: Boyd makes for a logical suitor for Penn, but that doesn’t guarantee a transaction, nor is there confirmation that Penn is a willing seller. Santarelli’s note was published after media reports surfaced last week indicating Boyd is in talks with Penn on an acquisition valuing the target at more than $9 billion.

We do not know this to be true, but we believe there is likely merit to the discussions between the parties,” observed Santarelli. “That said, we believe the negotiations, if they are in fact occurring, imply a level of interest beyond what we think most investors deemed possible in recent weeks.”

Santarelli rejected the idea that Boyd is considering an offer of $9 billion or more for Penn. Rather, he thinks that if Boyd has made an offer, it would be for around $25 to $30 a share. Based on Penn’s 151.55 million shares outstanding, a $30 per share offer values the Ameristar operator at $4.54 billion — a bid the gaming company is likely to reject, according to the analyst.

ESPN Bet Likely Sold Elsewhere if Boyd Wins Penn

In the wake of the Boyd/Penn rumor surfacing earlier this month, there’s been much speculation regarding what the buyer would do with ESPN Bet, Penn’s online sports betting arm.

That’s a plausible discussion because Boyd owns 5% of FanDuel and likely wouldn’t want to pay for Penn’s far smaller internet gaming and sports wagering operations. Analysts seem to agree with that thesis, and Santarelli noted that if Boyd earnestly pursues Penn, it would be under the terms of ESPN Bet being sold to another buyer, which would potentially make an offer of $25 to $30 a share for Penn more acceptable.

Santarelli proposed several other circumstances in which Boyd could digest. Those include the buyer maintaining the target’s operating losses, the elimination of $75 million to $150 million in redundancies, and the divestiture of overlapping assets to a third party that would pay a price comparable to what Boyd paid. Translation: if Boyd does buy its rival, such a transaction will almost certainly result in sales of various brick-and-mortar casinos.

Likewise, Santarelli doesn’t view it as likely that Boyd would pay significantly for Penn than it is worth itself. The Orleans operator’s market capitalization as of June 21 was $5.1 billion.

“We struggle to see BYD paying a meaningful premium, relative to its own multiple, for PENN, from a free-cash-flow perspective, as the BYD free-cash-flow profile is considerably less volatile than that of PENN, given PENN’s fixed-rent expenses,” added the analyst.

Boyd/Penn Marriage Could Be Complex

Regarding Santarelli’s comment about Penn’s rent expenses, the company owns none of the real estate on which its land-based casinos reside, meaning it has substantial fixed obligations to landlords — namely  Gaming and Leisure Properties (NASDAQ: GLPI).

While Boyd has a relationship with GLPI, the operator has largely preferred to maintain ownership of its property assets. The point is the real estate investment trust (REIT) is likely to have some say in Penn being sold and the subsequent divestments that Boyd would make.

Add to that, there could be significant regulatory complexities due to the fact that Boyd and Penn operate in many of the same states. Not only would the Federal Trade Commission (FTC) have to approve the deal, but so would at least 10 states’ gaming regulators, according to Santarelli.

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Penn Brings More Headaches Than Perks to Boyd, Scant ESPN Interest, Say Analysts

Shares of Penn Entertainment (NASDAQ: PENN) were pointed lower late Friday after sell-side analysts revealed diverging views on the likelihood of Boyd Gaming (NYSE: BYD) acquiring the regional casino operator.

regional casino headcount
Boyd Gaming’s Orleans Hotel & Casino. Some analysts still believe the operator is unlikely to acquire rival Penn Entertainment. (Image: YouTube)

Speculation about such a marriage had been percolating for weeks and intensified Thursday amid a reporter that Boyd is engaged in talks with Penn that value the target at more than $9 billion, including debt. Neither company has commented on the rumor, but analysts have. For example, Bank of America analyst Shaun Kelley moved Penn to the “no rating” category following news of the rumored Boyd overture.

In a report to clients, the analyst noted that while buying Penn would be accretive to Boyd, the transaction would require a combination of financing and leverage that could be “unattractive” to the prospective suitor. Assuming the $9 billion figure is accurate, that’s more than Boyd’s enterprise value of roughly $8 billion, meaning the prospective buyer would likely need to issue debt, sell stock, or both to complete the takeover.

Additionally, Kelley believes a Boyd takeover of Penn would create some regulatory risk and almost result in asset sales.

ESPN Bet a Problem, Too

Another issue that cannot be overlooked if Boyd is really courting Penn is the existence of ESPN Bet — Penn’s online sports betting mobile application.

Boyd owns 5% of FanDuel, and outside of its home state of Nevada, the casino operator has been content to enjoy the spoils of FanDuel’s success. Alone, that could be a deterrent to Boyd wanting to bring the scuffling ESPN Bet into its fold. Kelley speculated that the presence of ESPN Bet in a takeover of Penn would require a “further M&A solution down the road.”

Said another way, any buyer of Penn would likely divest ESPN Bet. Likewise, Barclays analyst Brandt Montour believes Penn is committed to making ESPN Bet work and might be a reluctant seller of the sports betting business. He also thinks there are more cons than pros for Boyd should it opt to advance negotiations with Penn.

We’re not completely surprised by this report, given this idea has been debated in the investor community for the last couple weeks,” wrote Montour. “We believe PENN has more confidence in ESPN BET’s ability to gain ground from here, versus what the market expects, and its current share price implies, and we doubt BYD would be interested in giving an optimistic valuation for PENN Interactive or credit shareholders with PENN’s cumulative investment in Digital to-date.”

He added that Penn probably isn’t a willing seller at the moment and the risk/reward in buying the company leans more into risk than reward. Montour added that Penn’s relationship with Walt Disney (NYSE: DIS) through ESPN Bet and the gaming company’s obligations to landlords could be deterrents to Boyd.

A More Constructive View

Not all analysts are pessimistic on the idea of Penn being acquired. Craig-Hallum analyst Ryan Sigdahl took the opportunity to lift his price target on Penn to $30 from $20 on the reports suggesting Boyd may be readying an offer.

“We think the company’s retail casino assets are worth $30/share with another $15/share potential from either M&A or success with ESPN Bet,” observed Sigdahl.

That combined $45 implies the analyst’s current price target of $30 doesn’t account for ESPN Bet success and that $45 assumption is more than double where Penn trades today. The analyst believes takeover chatter and activist involvement in Penn provide a “compelling risk/reward opportunity.”

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