Gambling Firm Penn to Split Itself in Two - WSJ.com

Gambling Firm Penn to Split Itself in Two - WSJ.com

Gambling Firm Penn to Split Itself in Two

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By ALEXANDRA BERZON

Regional casino company Penn National Gaming Inc. PENN +28.24% said it is splitting its gambling operations from its real-estate holdings.

The plan to divide its operations and its property into two separate companies will allow Penn—which operates 29 casinos, many under the Hollywood brand, and horse racetracks across the country—to save substantially on federal taxes. It's a common strategy for other industries, but it remains to be seen how the move will translate to casinos and racetracks.

Associated Press

Hollywood Casino in Bangor, Maine.

"I think this process will unlock tremendous value," Penn Chief Executive Peter Carlino said in a conference call with analysts Friday.

Under the terms of the Penn arrangement, one company, known for now as PropCo, will own the physical buildings that house casinos operated by the other, known as Penn National Gaming. Penn is to pay a substantial share of its pretax earnings in rent to PropCo, which will own 17 casino properties. As a real-estate investment trust, or REIT, PropCo won't have to pay taxes on that rent, as long as it distributes nearly all of its income to shareholders.

The company has been working for 18 months on the plan—which would create the first REIT focused on gambling properties—and expects to finish implementing the arrangement in early 2014.

The plan could allow Penn to save on its U.S. tax bill of around $160 million, according to Barclays BARC.LN -2.11% analyst Felicia Hendrix.

Executives said the arrangement will also lower costs to borrow money for acquisitions and development, and could make it easier to secure licenses in some jurisdictions, such as Pennsylvania and Maryland, that restrict the number of casinos a single company can own. Because the operating company will be much smaller than the current, combined company, it could make pursuing small deals more accretive, executives said.

Investors cheered the news, pushing the company's shares up about 28%, or $10.62, to close at $48.23 Friday. Many other gambling stocks also traded up Friday as investors anticipated a possible new industry trend. Rival regional casino company Ameristar Casinos Inc. saw its stock rise nearly 16%.

Moves to return cash to investors in the form of dividends is a sign of maturity in the casino industry, which has settled down from the high-growth days before the economic downturn.

"If this is seen immediately as a big value unlocker for Penn there's going to be pressure on other companies to look at doing the same thing," said Robert LaFleur, a gambling analyst for Cantor Fitzgerald.

Still, analysts said it isn't clear other companies will follow suit, since several of the biggest casino companies lose money and therefore don't pay U.S. income taxes, or pay most of their taxes to overseas governments. Many companies also have much higher levels of debt than Penn, which could make the REIT structure difficult.

Penn chief operating officer Tim Wilmott said he anticipated other regional U.S. casino companies with a similar profile as his could follow. "I can't tell you whether this is going to represent a trend or not," he said.

"We don't expect widespread acceptance of this kind of transaction," UBSUBSN.VX -2.66% analyst Robin Farley wrote in a research note.

Skeptics also say that in general, the REIT model could be more complicated and risky for the casino industry than some REIT businesses since the value of the casino's real estate is tied so closely to the gambling license itself. REITs also typically prefer to have a more diverse set of tenants, analysts say.

Mr. Wilmott said Penn's REIT, "will have the same opportunities as other REITs to evolve over time and diversify its tenant base."

Hotels moved aggressively in the 1990s to divide property and management into separate companies, creating more value for shareholders. Casino companies considered the idea but resisted the trend in order to hold on to earnings at a time of rapid expansion.

Under Penn's plan, shareholders will receive shares in the property company, which will receive around $450 million in rent from the operating company—around half of the operating company's projected cash flow, or earnings before interest, taxes, depreciation and amortization. It expects to pay out a special dividend of around $15.40 per share in cash and shares, as well as a regular dividend that it projects will be around $2.36 a share.

The property company will be run by Mr. Carlino, the current CEO, while Penn's current COO, Mr. Wilmott, will become the CEO of the operating company.

The company says it has gotten indication from the IRS that its proposed structure qualifies as a REIT. It still needs approval from gambling regulators.

Write to Alexandra Berzon at alexandra.berzon@wsj.com

A version of this article appeared November 17, 2012, on page B4 in the U.S. edition of The Wall Street Journal, with the headline: Gambling Firm Penn To Split, Create REIT.