Companies Without Much Debt Are Hammering Levered Rivals

Companies Without Much Debt Are Hammering Levered Rivals

By NORM ALSTER,

In early 2007, as private equity firms pushed up prices on all sorts of assets, Penn National Gaming emerged as a target. Fortress Investment and Centerbridge Partners were willing, they said, to pay $6.1 billion for the riverboat and racetrack slot operator.

But as credit markets chilled and asset prices tumbled, the big-buck buyers, toes frozen, backed off.

Shareholders may have been disappointed at the time. But Penn National (PENN) was spared the onerous debt of a leveraged buyout. Now it's one of the few players poised to play a bigger role in the crippled gaming industry.

"They're much less leveraged. They're in a much better financial position," said Michael Paladino, senior director with Fitch Ratings.

Many leveraged casino operators are starting to look as penniless and hopeless as the bleary-eyed losers on Vegas streets. The threat of credit downgrades and even bankruptcy hangs over Harrah's, MGM Mirage (MGM), Las Vegas Sands (LVS) and others. But Penn National and off-Strip operator Boyd Gaming (BYD) are poised to strike.

"They both have the liquidity to potentially close a major transaction," said Paladino.

Boyd has been eyeing its main rival, Station Casinos, itself the indebted victim of a 2007 LBO.

Gaming is just one sector where companies with strong balance sheets can put the hammer down on leveraged rivals via takeovers, grabbing market share or making long-term investments.

"We are seeing this play out in multiple industries," said Sam Silvers, national practice leader for finance transformation at Deloitte.

It's a global story as well. Chinese companies, often backed by the dollar-flush Chinese government, have been on a buying spree. Since the start of 2008, Chinese firms have announced more than 300 foreign takeovers totaling nearly $68 billion, says Dealogic.

In the U.S., drug giants Merck (MRK) and Pfizer (PFE) this year have unveiled deals to buy Wyeth (WYE) and Schering-Plough (SGP), respectively.

Tim Nolan, a partner with Boston Consulting Group, expects more but smaller deals. "There are a lot of very strong pharma companies that have very long acquisition lists. Many small biotechs are running out of capital," he said.

More broadly, "in a tight credit environment, companies that are not at the mercy of Wall Street and the bankers tend to do better," said Eric Cinnamond, portfolio manager of Intrepid Small Cap Fund .

Academic research backs that up. Low-leverage firms have more of an advantage when revenue is falling, according to a 2003 study by a University of Illinois researcher.