Two investment firms pulled the plug Thursday on their $5.82 billion acquisition of Penn National Gaming Inc. after the racetrack and casino operator's stock price tumbled.
But they will pay for pulling out. Penn National will get $225 million in cash as a termination fee, plus $1.25 billion in what amounts to no-cost capital until 2015.
The company said its board was unwilling to negotiate a reduced buyout price and that the settlement was preferable to suing the buyers to force the acquisition.
"Look at it as a zero-percent loan for seven years," said Nicholas Danna, senior gaming analyst at Sterne, Agee and Leach. The deal is "the first one of its kind that I've seen."
Still, disappointment was palpable during a conference call Penn National executives held with analysts Thursday.
"This is not the result we expected," said Chief Executive Peter Carlino. "If we had seen a clear and certain path in getting to closing, we would have taken it."
Messages left for representatives of the two potential buyers, Fortress Investment Group LLC and Centerbridge Partners LP, were not immediately returned.
A year ago, Fortress and Centerbridge agreed to pay $67 per share for Wyomissing-based Penn National. On Thursday, shares closed at $29.66, up $1.06, or nearly 3.7 percent, amid heavy volume..
Danna said the stock's fall reflects concerns about consumer spending.
The takeover also was bogged down by the state regulatory approval process. Analysts had doubts about the deal's close, saying banks appeared to be reconsidering funding commitments amid significant write-downs in the financial sector.
Of the $1.475 billion total due to Penn National, $700 million was being paid Thursday. The rest will arrive by July 18 after the issuance of preferred shares. If the stock purchase deal falls apart, Penn National can keep the $700 million without issuing any preferred shares.
If the stock deal goes through, Penn National will sell preferred shares substantially to Fortress and Centerbridge, with $45 million to Deutsche Bank and Wachovia, which initially planned to invest in the company after the acquisition.
The gaming operator will not pay a dividend on the preferred shares, unless the company starts paying dividends to all shareholders. The preferred shares don't have voting rights and are less senior than all debt, but above common shares.
Fortress Chairman and Chief Executive Wesley Robert Edens, 46, will join Penn National's board, which will expand to seven directors.
In June 2015, Penn National can buy back the preferred stock in cash, common stock or a combination of the two based on a stock price range of $45 to $67 per share. Danna said the repayment could be potentially steep for Penn National if its shares are below $45 since it's on the hook to repay at least that rate.
The company will use the cash to pay down debt, buy or develop gaming facilities or repurchase its common stock.
Penn National also expects to record $621.8 million and $657.4 million in net revenue for the second and third quarters. But analysts polled by Thomson Financial were expecting $656.4 million and $681.6 million, respectively. For the year, the company's projection of $2.54 billion in net revenue falls short of Wall Street's $2.62 billion forecast.
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AP Business Writer Jennifer Malloy in New York contributed to this report.