Analyst Downgrade Dims Penn Entertainment’s Takeover Prospects

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On Tuesday, a troubling sentiment dampened the atmosphere at the headquarters of regional casino operator Penn Entertainment. Penn’s stock (NASDAQ: PENN) took an unexpected plunge following an analyst’s decision to downgrade it. Fueling the pessimism was significant skepticism over prospects of the company securing a sale in the near future.

Just a few hours ago, an audience of eager clients were on the receiving end of a less than favorable narrative. Financial pundit, RJ Milligan of Raymond James, delivered a sobering note casting Penn’s stocks prospects into uncertain waters. Previously slated as “outperform,” the casino operator’s stocks were briskly downgraded to “market perform.” Adding to the prevailing gloom was the price target of $20 on these very stocks. This indicates a modest advance of around 8.1% from their current, and disheartening, standing.

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The pessimistic stance stems from an unstable path to-profitability in the digital realm. Coupled with the lack of anticipation for any drastic strategic overturn – like a complete company sale – in the near term, the odds are visibly stacked against Penn. Consequently, Milligan recommends his followers to cash out their profits and channel their investments towards more risk-evaluated opportunities within the sector.

Recent chatter in the industry hinted at a possible takeover bid upwards of $9 billion for Penn by Boyd Gaming and it served to bolster Penn’s shares which have been rallying since late May. The surge was sparked by a letter addressed to the board of directors by the Donerail Group, a key investor in Penn. Unfortunately for Penn, the widespread consensus is that while Boyd’s interest isn’t surprising, securing the deal may prove an uphill task.

Several factors lend weight to this prediction. Central among them is that Penn hasn’t yet suggested it could be open to a sale. Some analysts propose the company might be considering divestment of a few regional casinos, but an outright sale might not be in the cards in the foreseeable future.

What’s more, Penn is seemingly keen on giving its ESPN Bet mobile sports wagering application a full run during the upcoming football season. After a lackluster debut last November, a promising performance could well be a game-changer further complicating a swift company sale.

Milligan expressed unyielding support for his clients to cash out from Penn, citing these circumstances. His eyes are set on the more secure opportunities in the gaming industry, with Caesars Entertainment (NASDAQ: CZR) selected as Raymond James’ top pick.

A great deal hangs on Penn’s association with ESPN Bet to shape its future. Donerail was one of the early critics of this relationship, and yet it could morph into a key determinant in a big-ticket transaction. Potentially, it could pave Penn’s route to either selling itself or carrying on as an independent entity.

In Boyd’s context, some analysts speculate that the operator’s 5% stake in FanDuel, America’s leading online sportsbook, would steer it clear of showing any interest in ESPN Bet. If anything, Boyd would likely expect Penn to scout for a separate buyer for ESPN Bet as a precondition to striking a deal for Penn’s land-based casinos. However, finding a buyer for ESPN Bet could be a mountain to climb, given Penn’s ties with ESPN parent Walt Disney (NYSE: DIS) and ESPN Bet’s currently modest market share.