$6.1-billion Penn Gaming leveraged buyout called off

04 July 2008

The current financial crisis and credit crunch has taken its toll on the biggest leveraged buyout (that could have been) this year. Fortress Investment Group LLC and Centerbridge Partners LP scrapped their $6.1 billion takeover of racetrack and casino owner Penn National Gaming Inc. as the credit market collapsed and gambling revenue slowed.

However, Penn came back from the negotiations not entirely empty-handed. It will get $225 million in cash as a termination fee, plus $1.25 billion in what amounts to no-cost capital or interest-free loan until 2015. The company said its board was unwilling to negotiate a reduced buyout price and that the settlement was preferable to suing the buyers to force the acquisition.

Penn is the largest leveraged buyout agreement to fall apart since J.C. Flowers & Co. backed out of an accord last year to purchase SLM Corp., also known as Sallie Mae, for $25.3 billion.

More than 60 buyouts announced last year, valued at a combined $174 billion, have been abandoned. Financing disputes have delayed or threatened to derail takeover agreements for Clear Channel Communications Inc., BCE Inc. and Huntsman Corp.

Although Penn still made quite a bit of money with the settlement, the management's disappointment at the failed buyout was palpable. "This is not the result we expected," said Penn National Gaming CEO Peter Carlino. "If we had seen a clear and certain path in getting to closing, we would have taken it."

Fortress and Centerbridge agreed a year ago to buy Penn for $67 a share. Penn, which owns 19 casinos and racetracks, was trading 57 per cent below that yesterday as investors remained skeptical the deal would go through after borrowing costs doubled and the U.S. economy slowed.