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Discussions between Penn National’s banks and sponsors surrounding a potential price cut for the buyout remain ongoing and have yet to be presented to the target’s board, two sources close to the situation told dealReporter.
As the original price and financing terms are no longer feasible for the banks or sponsors, resolving one issue without the other is not an option; thus, the price cut is the first matter of business before the credit agreement negotiations begin, said one of the sources. He said it was possible a revised deal could be presented to the company next week but that there was no rush as outstanding regulatory approvals are still pending.
There now seems to be disagreement at the board level as to how they should react to a newly introduced price as some are more willing to be more litigious than others who are more shareholder-conscious, the source claimed. The majority of the board is believed to be taking a very aggressive stance saying that the contract is strong enough to fight any change to the original terms, he added.
The source said he had heard that large Penn investors began reaching out to CEO Peter Carlino and other senior executives last week to voice strong resistance to pursuing litigation similar to Clear Channel; these shareholders seemed more willing to agree to a lower, more acceptable buyout price as neither the banks nor the sponsors can justify the original deal’s terms, the source claimed.
A person claiming familiarity with the situation said he has been in contact with a few large Penn shareholders said to be willing to take a deal in the USD 50-55 range while a market investor said he heard revised price talks were hovering around USD 58 per share. The current offer price is at USD 67 per share.
While no revisions to the deal are definitive yet, the hypothetical USD 58 per share cut might be seen as working out for all of the involved parties, said the second source, while a deal in the low USD 50s would likely see even greater resistance from the target’s board.
However, the person claiming familiarity with the situation said that the company’s mindset of having a “bullet-proof” contract is going to present major problems for a re-cut offer which could then see litigation in Pennsylvania. “If sponsors are changing their mind, you have to remember that [they] don’t have reverse termination fee. Only if Penn terminates [the deal] can the sponsors pay the break-up fee and walk,” he said.
Unlike previous broken deals that have ended up in court, Penn’s merger agreement has no ambiguity in the specific performance clause, the person asserted, allowing the target the right to force the shell to sue the sponsors’ parent companies for equity financing. And if the banks refuse to fund the shell companies, the shell companies are required to sue the banks, he said, adding that no deal’s litigation process has fully tested these waters and gone to judgment.
Ultimately, while the target is anticipated to present stumbling blocks to a revised offer, the source said it will have to do what is best for its shareholders, and at this point, investors seem more willing to take a price cut than lose the deal completely.
This morning, Penn shares temporarily shot up around 4% on talk of a re-cut deal before settling at USD 43.41 for the day.
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