Activist hedge fund Orange Capital disclosed a 4.5% stake in casino operator Pinnacle Entertainment, Inc (NYSE:PNK) and is now pushing for the company to put its real estate holdings into an REIT (real estate investment trust) which would be distributed to shareholders in a tax-free transaction, reports Beth Jinks for Bloomberg Businessweek.
Pinnacle Entertainment, Inc (NYSE:PNK), which owns 14 casinos across the US in addition to its racetracks and other holdings, saw its stock price jumped almost 9% on the news, though it has since settled into a roughly 5.6% increase. If Pinnacle were to follow Orange Capital’s suggestions, it would follow competitor Penn National Gaming Inc. (NASDAQ:PENN) which put its properties into the first casino REIT last year.
Pinnacle releases positive, but vague response
Pinnacle Entertainment, Inc (NYSE:PNK) released a statement commenting on the news, but it didn’t shine much light on management’s intentions. It mentioned their commitment to driving shareholder value and engaging with shareholders to make sure their views are represented, but made no mention of either Daniel Lewis at Orange Capital or the possibility of putting its property into a REIT.
“Pinnacle values the views of its shareholders and regularly engages in a dialogue with its shareholders to solicit feedback on its strategy and performance with the goal of enhancing value,” the company wrote.
Expecting Pinnacle Entertainment, Inc (NYSE:PNK) management to have an immediate answer to the proposal is probably unrealistic, but it’s good that their first comments are constructive (if vague), leaving the door open for the two sides to cooperate, which generally leads to better outcomes for everyone involved. Now that activism is solidly in the mainstream, simply dismissing demands without giving them full consideration is becoming less acceptable for management teams.
Pinnacle management showcases recent moves to drive shareholder value
To shore up its pro-shareholder bona fides, Pinnacle Entertainment, Inc (NYSE:PNK) management also brought up its acquisition of Ameristar Casinos last year, which doubled the size of the company, improved cost efficiency, and gave the company geographic diversification, all the kind of values that an activist investor would typically like to see. Since then, Pinnacle’s share price has gone up 65% and the company has reduced its leverage by repaying $600 million in term loans.
“We are focused on executing the integration of Ameristar and on maximizing the cost and revenue synergies, cash flow and value created by this transformative combination,” the company wrote. While this focus suggests that the creation of an REIT is a low priority, the open letter explicitly leaves the door open for more discussion, so Orange Capital’s activism doesn’t have to turn antagonistic even if it is unlikely to back down easily.