Current Price – $69.75
Acquisition Price - $74.26+
Upside – 6.5%+
Expiration Date – H2 2018
Tropicana Entertainment (TPCA) - majority owned subsidiary of Icahn Enterprises - has agreed to sell its real estate assets as well as casino/hotel operations to two separate entities, for a total of $1.85bn. After certain deductions for expected taxes per share consideration is $74.26 resulting in 6.5% spread. On top of this TPCA shareholders will receive proceeds from the sale of Aruba operations, which are excluded from the current agreements. Merger is not conditioned on financing or shareholder approvals but is subject to Aruba operations sale, regulatory approval and other customary closing conditions. I believe this is a relatively safe deal and current spread is too wide. The spread on a more complex 4 party stock/cash transaction for Pinnacle Entertainment stands at 1.4% only.
Few points why the transaction is expected to close:
- TPCA is 83% controlled by Carl Icahn's IEP. In the recent tender offer IEP increased ownership in the company from 72% to 85% by acquiring 3m shares at $45 each. So current asset sale represents material value improvement event relative to newly acquired shares. At the same time Carl Icahn's control is expected to ensure fast progress on the deal with no unnecessary fund leakage.
- This announcement has been well received by shareholders of all involved entities - Gaming and Leisure Properties (GLPI) up +4%, Eldorado Resorts (ERI) up +16% and Tropicana Entertainment (TPCA) +27%.
- Agreement includes 30 day go shop period - so there is also potential upside from a competing bid. Keeping in mind share price reaction of acquiring companies (ERI market cap increased by $440m), there seems to be plenty of scope for an improved offer.
- Termination fees on both sides at $92.5m.
Any incremental upside from Aruba operations is likely to be minimal. Aruba assets make up only tiny portion of the company. From latest 10-K:
Separate operating metrics for Aruba operations are not disclosed, but taking pro-rata valuation in terms of square footage and hotel rooms, suggests that Aruba operations are unlikely to be valued at more than 1%-6% of the current transaction size - most probably this will end up towards lower end of the range (or even below it) due to lack of scale. My expectations are for incremental $1-$2 per share from the sale of Aruba assets, which puts current arbitrage spread at 8%-9%.
Sale of Aruba operations is one of the conditions for the closing of the transaction, however in the event that buyer cannot be found in time, these assets could be simply spun-off to stockholders with Carl Icahn continuing to hold the wheel through majority ownership.
- Transaction is subject to regulatory approval(s). While I am not sure how large of a risk this represent, a bigger transaction for Pinnacle Entertainment has been approved by state regulators even though this made Penn National the largest gaming operator in US.
- Unaffected price is $55/share - downside of 20%.
- Transaction costs and taxes might end up higher than outlined in the announcement which would reduce eventual per share consideration.
- I still have not figured out why this relatively large spread exists, despite what I consider to be quite safe bet - so I might be missing an important piece of the puzzle.