No Fortress Here

“Your guess is probably as good as ours.”
—Peter Carlino, CEO Penn National Gaming, on the near-term outlook

Earnings season is underway—the chief reason for the paucity of updates here at NotMakingThisUp—and the conference calls are bleaker than any we have ever heard.

While we usually like to present highlights from the best and the worst of the quarterly calls here on these virtual pages, there are so few “best” and so many “worst” that it would be piling on.

But the most concise summary of the state of the world came from Penn Gaming, a racetrack and casino operator that may well go down as the poster child of the excesses of the liquidity bubble.

On June 15, 2007—just a week before the Blackstone IPO, which itself marked the absolute top of the credit cycle, in our view—Penn was the subject of a $67 a share, $8.5 billion buyout by the unfortunately named Fortress Investment Group, along with Centerbridge Capital.

That deal, of course, fell apart a year later, and the buyout group, despite the $1.5 billion termination fee, are probably glad it did: last trade in Penn Gaming was $13.35 a share.

The reason for the deal falling apart and the recent price of Penn shares is obvious. As Penn’s chief operation officer, Tim Wilmott, said on yesterday’s call, “September was probably the worst month I have ever seen in my 20-plus years in the industry. October has been a little better, but still not good, more like July and August.”

As for the future outlook, Penn management declined to give one.

“Your guess,” CEO Peter Carlino said at the top of the call, “is probably as good as ours about where this is all going as one looks at the economy and the things that affect our business.”

As for Penn’s stock price, and the prospects of further share repurchases, Penn’s CFO would say “we do find the price is compelling and interesting,” but declined to commit to the kind of share buyback Wall Street’s Finest are always pushing for on these calls.

After all, Penn paid $27.54 a share in the just-finished quarter to buy back a little over a million shares.

At $13.35 a share, or roughly 20% of the aforementioned $67 all-cash deal price, one would think those shares would appear much more than just “interesting.”

But with almost $3 billion of debt on the books prior to receipt of the termination fee—no fortress of a balance sheet there—management sounded frozen.

As have most management teams we’ve heard thus far.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

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