Penn National likely to extend LBO termination date; Axcelis, Sumitomo, TPG enter confidentiality pact

By Paul A. Harris

St. Louis, June 6 - Penn National Gaming Inc. has indicated that it is unlikely to receive the remaining regulatory approvals that it needs in order to complete its merger with affiliates of Fortress Investment Group LLC and Centerbridge Partners, LP by the June 15 termination date.

Penn National said in a late-afternoon announcement Thursday that it might exercise its option to extend the termination date to Oct. 13.

If the merger is not completed by June 15 Penn National Gaming shareholders will be entitled to receive $0.0149 per day above the $67.00 cash per share bid that the sponsors made last June.

Shareholders approved the $8.9 billion transaction in December.

An equities analyst who covers Penn Gaming confirmed that shareholders will be expecting the 1.49 cent increase should the June 15 deadline come and go without the merger having been completed.

The analyst recalled that the equity firms struck the deal exactly a year previous to the June 15 expiration date, and added that for the sponsors and their lenders the timing could hardly have been more miserable.

That's because the LBO was structured in the final days of the red hot leveraged markets which prevailed through much of 2006 and through the first half of 2007.

The ink had hardly dried on the deal when the credit markets underwent a massive correction spurred in part by catastrophic writedowns in subprime mortgages.

Not long afterwards stock prices in the gaming sector began to retreat, the analyst added, reckoning that names in the sector have since come off between 40% and 50%.

"They bought this deal at the top of the market, both with respect to easy credit and casino stock prices," the analyst remarked.

Little faith

On Friday - with stock markets in the United States in full retreat, having been stampeded by rising unemployment numbers and spiking oil prices on the heels of saber rattling in the Middle East - Penn National Gaming shares outperformed the market, ending the day just 0.82% lower.

The company's stock (Nasdaq: PENN) lost $0.38 on the day to close at $45.76.

That's $21.24, or approximately 32%, below last June's $67 per share bid.

The analyst said the notable spread is a reflection of dwindling faith among investors that the deal will get done.

"People think that either the private equity companies or the banks are going to renege on the agreements," said the analyst.

"This was the last deal gaming deal announced, in terms of private equity buyouts. It happened right before the market crashed."

The analyst also said that the possibility exists that Penn Gaming, the sponsors and their lenders could wind up filing lawsuits against one another in much the same fashion as was seen recently in the Clear Channel Communications Inc. situation, which was ultimately settled out of court, and is now expected to proceed to a conclusion, albeit with a downwardly revised bid for Clear Channel shares.

As to the seemingly elongated time frame of the Penn Gaming LBO, the analyst recalled that the buyout of Harrah's Entertainment by Apollo Management, LP and Texas Pacific Group took at least a year.

"The surprise, here, is that they were able to fix that one-and-a-half cent incremental share payment with such a tight deadline," the analyst said.

Elsewhere in the gaming sector there was no shortage of red ink on Friday.

MTR Gaming Group, Inc. (Nasdaq: MNTG) shares dropped 4.65%, or $0.27 per share, to close at $5.54.

Pinnacle Entertainment, Inc. (NYSE: PNK) saw its shares lose 5.23%, or $0.73 per share, closing at $13.23.

And shares of Isle of Capri Casinos (Nasdaq: ISLE) fell to $6.95, down $0.16 per share, a loss of 2 ¼%.

Axcelis, suitors enter agreement

Elsewhere on Friday Axcelis Technologies, Inc. reported that it, Sumitomo Heavy Industries Ltd. and TPG Capital have entered into a confidentiality agreement covering discussions between the parties related to Sumitomo's bid to acquire Axcelis.

In March Axcelis' board unanimously rejected a revised and unsolicited proposal by Sumitomo and its private equity partner, TPG, to acquire the company for $6.00 per share.

That bid had been revised upward from the $5.20 per share offer that the Sumitomo and TPG made in February.

Shares of Axcelis (Nasdaq: ACLS) gained 0.85% on Friday to close at $5.91, a nickel higher on the day.

Sumitomo (TSE: 6302) shares were up 1.67% on Friday.

Discussions among Axcelis, Sumitomo and TPG are expected to begin promptly, according to Friday's press release.

Icahn pressures Yahoo! again

A special situations equities source said that activist investor Carl Icahn sent a letter to the Yahoo! Inc. requesting the company to publicly put itself up for sale at $34.38 per share.

Yahoo responded by reiterating that it is open to any transaction which it deems to be in shareholders' interests, but said the public purchase price is ill-advised.

Icahn earlier labeled Microsoft Corp.'s $33 per share bid for Yahoo! a superior alternative to Yahoo!'s prospects of operating as a standalone company.

Icahn nominated a slate of nine candidates plus himself for election to the Yahoo! board of directors after the current board turned down the merger deal with Microsoft.

In May the Federal Trade Commission granted early termination of antitrust reviews in Icahn's bid to purchase up to $2.5 billion of Yahoo! shares.

On Friday shares of Yahoo! (Nasdaq: YHOO) gained eight cents (0.3%) to close at $26.44, $6.56, or slightly less than 20%, below the withdrawn Microsoft bid.

Microsoft (Nasdaq: MSFT) shares dropped 2.86% on Friday, $0.81 lower, closing at $27.49.

Friday's situations unfolded against a backdrop of full-scale retreat in U.S. stock prices, with all three major indexes giving up approximately 3% of their value.

The Dow saw the steepest drop, 3.13% or 394.64 points, closing the session at 12,209.81.

The S&P 500 lost 3.09%, or 43.37 points, ending the day at 1,360.68.

The Nasdaq was the outperformer of the trio, dropping by 2.96%, or 75.38 points, to finish at 2,474.56.

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