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Acquisitions and Other Investments | 12 Months Ended
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Dec. 31, 2018
Business Combinations And Other Investments [Abstract] |
Acquisitions and Other Investments | Acquisitions and Other Investments Pinnacle Acquisition On October 15, 2018, the Company acquired all of the outstanding shares of Pinnacle for a total purchase price of $2,816.2 million, which consisted of (i) a cash payment of $20.00 per share of Pinnacle common stock, totaling $1,252.2 million; (ii) issuance of Penn common stock in the amount of $749.7 million; and (iii) the retirement of $814.3 million of Pinnacle debt obligations. As discussed in Note 1, “Organization,” in conjunction with the Pinnacle Acquisition, the Company divested the membership interests of certain Pinnacle subsidiaries which operated the Divested Properties to Boyd for $604.9 million of cash, subject to customary final working capital adjustments; GLPI acquired the real estate assets associated with the Plainridge Park Casino for $250.0 million, and concurrently leased back the real estate assets to the Company; and a subsidiary of Boyd acquired the real estate assets associated with Belterra Park from a subsidiary of GLPI, from which Penn received proceeds of $57.7 million. Additionally, as a part of the transaction, the Pinnacle Master Lease was assumed and amended by the Company. For more information on the Pinnacle Master Lease and related amendment, see Note 10, “Master Lease Financing Obligations and Lease Obligations.” The primary reasons for the acquisition are as follows: (i) the expectation that the Pinnacle Acquisition will create economies of scale and other geographic advantages by broadening the Company’s portfolio of properties to 40 properties across 18 jurisdictions; (ii) the opportunity to combine two of the top customer loyalty programs in the industry to drive incremental revenue while also benefiting from enhanced promotional opportunities in online and social gaming across the Company’s portfolio; and (iii) the identification of revenue and cost synergies driven by the elimination of corporate overhead redundancies and improved property level efficiencies, with limited incremental costs required to scale operations and integrate Pinnacle. In completing the acquisition, each share of Pinnacle common stock (other than treasury shares held by Pinnacle) outstanding as of October 12, 2018, on a fully-diluted basis, was automatically converted into the right to receive (i) 0.42 of a fully-paid and nonassessable share of Penn common stock (the “Share Exchange Ratio”) plus (ii) $20.00 in cash. The stock price used to determine the fair value of the stock portion of the purchase price, was based on the volume-weighted average price of a share of Penn common stock as quoted on NASDAQ Global Select Market for the ten trading days between September 28, 2018 and October 11, 2018, which was $29.80. The actual number of shares of Penn common stock issued to Pinnacle shareholders upon closing was 26,295,439 and the value of those shares was based on the closing price of Penn common stock on October 15, 2018, which was $28.51. The following table presents the calculation of the total purchase price:
(in thousands, except per share data) | October 15, 2018
Pinnacle diluted shares outstanding | 62,608,188 |
Share Exchange Ratio | 0.42 |
Shares of Penn common stock issued to former Pinnacle shareholders | 26,295,439 |
Price per share of Penn common stock | $ | 28.51 |
Fair value of Penn common stock issued to former Pinnacle shareholders | 749,683 |
Cash paid to former Pinnacle shareholders | 1,252,259 |
Cash paid by Penn to retire Pinnacle debt, inclusive of accrued interest | 814,273 |
Purchase price | $ | 2,816,215 |
The purchase price excludes $89.7 million of transaction costs, which were expensed as incurred and included in “General and administrative” within our Consolidated Statement of Operations for the year ended December 31, 2018. Due primarily to the scale and complexity of the Pinnacle Acquisition, the Company has not yet finalized its valuation analysis and is in the process of evaluating key assumptions that derive the fair value of the assets acquired and liabilities assumed, including the income tax balances. Therefore, the allocation of the purchase price is preliminary and subject to change. The following table reflects the preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, with the excess recorded as goodwill:
(in thousands) | October 15, 2018
Cash and restricted cash | $ | 124,231 |
Assets held for sale (1) | 667,036 |
Other current assets (2) | 80,622 |
Property and equipment - non-Pinnacle Master Lease | 318,856 |
Property and equipment - Pinnacle Master Lease | 3,984,119 |
Goodwill | 219,531 |
Other intangible assets |
Gaming licenses | 1,046,000 |
Trademarks | 298,000 |
Customer relationships | 22,400 |
Other long-term assets (2) | 38,767 |
Total assets | $ | 6,799,562 |
Long-term financing obligation, including current portion (3) | $ | 3,427,016 |
Other current liabilities (4) | 200,547 |
Deferred tax liabilities | 339,149 |
Other long-term liabilities (4) | 16,635 |
Total liabilities | 3,983,347 |
Net assets acquired | $ | 2,816,215 |
(1) | Assets held for sale represents (i) the proceeds and working capital adjustments related to the divested properties which were sold to Boyd; and (ii) proceeds received from GLPI related to the sale of the Belterra Park real estate assets.
(2) | Other current assets consist primarily of accounts receivable, prepaid expenses and inventories. Other long-term assets consist primarily of long-term notes receivables and deposits.
(3) | Long-term financing obligation, including current portion represents the financing obligation associated with Pinnacle Master Lease, as amended.
(4) | Other current liabilities consist primarily of accounts payable, accrued compensation and accrued taxes. Other long-term liabilities primarily relate to deferred compensation.
The Company used the income, market, or cost approach (or a combination thereof) for the valuation as appropriate and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to Penn in the principal or most advantageous market for the asset or liability. For certain items, the carrying amount was determined to be a reasonable approximation of fair value based on information available to Penn management. Property acquired is inclusive of (i) non-Pinnacle Master Lease property related to our operations (such as equipment for use in gaming operations, land/leasehold improvements and furniture and equipment), which was determined to have a fair value of approximately $319 million and (ii) Pinnacle Master Lease property (such as buildings, boats, vessels, barges, and implied land and land use rights), which was determined to have a fair value of approximately $3,984 million at the acquisition date. Land use rights represent the intangible value of the Company’s ability to utilize and access land associated with long term ground lease agreements that give the Company the exclusive rights to operate the casino gaming facilities associated with such agreements. Management determined the fair value of its (i) vessels based on valuations performed by third-party specialists; (ii) land and land use rights based on the land residual technique; (iii) office equipment, computer equipment and slot machine gaming devises based on the market approach; and (iv) other property based on the cost approach supported where available by observable market data which includes consideration of obsolescence. Acquired identifiable intangible assets consist of gaming licenses and trademarks, which are both indefinite-lived intangible assets, and customer relationships, which are amortizing intangible assets and have been assigned a useful life of 2.0 years. Management valued (i) gaming licenses using the Greenfield Method under the income approach, which estimates the fair value of the gaming license using a discounted cash flow model assuming the Company built a casino with similar utility to that of the existing facility and assumes a theoretical start-up company going into business without any assets other than the intangible asset being valued; (ii) trademarks using the relief-from-royalty method under the income approach; and (iii) customer relationships (rated player databases) using the with-and-without method of the income approach. All valuation methods are forms of the income approach supported by observable market data for peer casino operator companies. The goodwill is partially attributable to Penn reporting units that existed prior to the Pinnacle Acquisition as it is expected that these reporting units will experience revenue growth and cost synergies resulting from the combination of the Penn and Pinnacle businesses. Goodwill from the Pinnacle Acquisition, of which $92.4 million is deductible for tax purposes, has been preliminarily allocated to the Company’s reportable segments as follows:
(in thousands) |  | Goodwill
Reportable segment: |  |
Northeast |  | $ | 56,400 |
South |  | 48,300 |
West |  | 51,431 |
Midwest |  | 63,400 |
Total |  | $ | 219,531 |
The following table includes the financial results of the Pinnacle properties since the acquisition date which is included within our Consolidated Statement of Operations for the year ended December 31, 2018:
(in thousands) | Period from October 15, 2018 through December 31, 2018
Revenues | $ | 385,863 |
Net income | $ | 4,664 |
The following table includes unaudited pro forma consolidated financial information assuming our acquisition of Pinnacle had occurred as of January 1, 2017. The pro forma financial information does not necessarily represent the results that may occur in the future. The pro forma amounts include the historical operating results of Penn and Pinnacle prior to the acquisition, with adjustments directly attributable to the acquisition, inclusive of adjustments for acquisition costs.
| For the year ended December 31,
(in thousands, unaudited) | 2018 |  | 2017
Revenues | $ | 5,069,425 |  |  | $ | 5,036,559 |
Net income (loss) | $ | 83,155 |  |  | $ | (38,045 | )
Greektown Casino-Hotel On November 14, 2018, the Company announced that it had entered into a definitive agreement to acquire the operations of Greektown Casino-Hotel in Detroit, Michigan for approximately $300 million in cash. Simultaneous with the closing of the transaction, the Company will enter into a triple net lease agreement with VICI Properties, Inc. (“VICI”), a publicly-traded REIT, for the real estate assets used in the operations of the property. The lease will have an initial annual rent of $55.6 million and an initial term of 15 years, with four five-year renewal options. The transaction will be financed with a combination of cash on hand and debt. The transaction, which is expected to close in the second quarter 2019, is subject to approval of the Michigan Gaming Control Board and other customary closing conditions. 1 st Jackpot Casino Tunica and Resorts Casino Tunica On May 1, 2017, the Company acquired RIH Acquisitions MS I, LLC and RIH Acquisitions MS II, LLC, the holding companies for the gaming operations of 1 st Jackpot Casino Tunica and Resorts Casino Tunica, for total cash consideration of $47.0 million. The Company leases the underlying real estate assets associated with these properties from GLPI pursuant to the Penn Master Lease. For more information, see Note 10, “Master Lease Financing Obligations and Lease Obligations.” Rocket Speed On August 1, 2016, the Company acquired 100% of the outstanding equity securities of social casino game developer, Rocket Speed, for initial cash consideration of $60.5 million subject to customary working capital adjustments. The stock purchase agreement included contingent consideration payments over the next two years that were based on a multiple of 6.25 times Rocket Games’ then trailing-twelve-months earnings before interest, taxes, depreciation and amortization (“EBITDA”), subject to a cap of $110 million. Up to $10 million of the contingent consideration was accounted for as compensation as it was tied to continued employment over a two-year period. The fair value of the contingent purchase price was estimated to be $34.4 million at the acquisition date. In September 2017, PIV reached an agreement with the former shareholders of Rocket Speed to buy out the remaining contingent consideration, which resulted in a benefit of $22.2 million, which is included within “General and administrative” within our Consolidated Statements of Operations for the year ended December 31, 2017. Jamul Indian Village Development Corporation On April 5, 2013, the Company announced that, subject to final National Indian Gaming Commission approval, it and the Jamul Tribe entered into definitive agreements to assist the Jamul Tribe in the development of a Hollywood Casino-branded casino on the Jamul Tribe’s trust land in San Diego County, California. The definitive agreements were entered into to: (i) secure the development, management, and branding services of the Company to assist the Jamul Tribe during the pre-development and entitlement phase of the project; (ii) set forth the terms and conditions under which the Company would provide a loan or loans to the JIVDC to fund certain development costs; and (iii) create an exclusive arrangement between the parties. The Jamul Tribe is a federally recognized Indian Tribe holding a government-to-government relationship with the U.S. through the U.S. Department of the Interior’s Bureau of Indian Affairs and possessing certain inherent powers of self-government. The Jamul Tribe is the beneficial owner of approximately six acres of reservation land located within the exterior boundaries of the State of California held by the U.S. in trust for the Jamul Tribe (the “Property”). The Jamul Tribe exercises jurisdiction over the Property pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Jamul Tribe. In January 2014, the Company announced the commencement of construction activities at the site. The facility opened to the public on October 10, 2016. The Company provided a portion of the financing to the JIVDC in connection with the project and, following the opening, had managed and provided branding for the casino. The Company accounted for the development agreement and related loan commitment letter with the JIVDC as a loan (the “Loan”) with accrued interest in accordance with ASC Topic 310, “Receivables” (“ASC 310”). The Loan represented advances made by the Company to the JIVDC for the development and construction of a gaming facility for the Jamul Tribe on reservation land. As such, the Jamul Tribe owned the casino and its related assets and liabilities. Repayment of funds advanced to the Jamul Tribe was primarily predicated on cash flows from the operations of the facility. In December 2015, the Company entered into an agreement to purchase a $60 million subordinated note from the previous developer of the Jamul Indian Village project for $24 million. Interest on this subordinated note, as of the effective date and at all times thereafter until the Loan has been paid in full, were to accrue as follows: as of the effective date, no interest shall accrue initially; at the opening date, interest shall accrue at a simple fixed rate of 4.25% per annum. The subordinated note is subordinated to the Loan, and payments on the subordinated note may only be made after all necessary payments are made on the Loan subject to certain limitations. The Company recorded the subordinated note at its acquisition price of $24 million, which was considered to be its fair value. As described below, this subordinated note was repaid in connection with the Jamul Tribe refinancing of its existing indebtedness and the Company received a $6 million premium, which was accounted for as an origination fee on our new loan with the JIVDC. On October 20, 2016, the JIVDC obtained long-term secured financing, consisting of revolving and term loan credit facilities (the “Credit Facilities”) totaling approximately $460 million. The Credit Facilities, all of which were due in 2022, consisted of a $5 million revolving credit facility, a $340 million term loan B facility and a $98 million term loan C facility (the “Term Loan C”). The revolving credit facility was provided by various commercial banks; the term loan B facility was held by an affiliate of Och-Ziff Real Estate; and the Term Loan C was held by the Company. The Company accounted for the Term Loan C with the JIVDC as a loan in accordance with ASC 310. Additionally, on October 20, 2016, the Company was repaid a net amount of $274.9 million (consisting of reimbursements totaling $372.9 million less funds advanced of $98.0 million) of the advances to the JIVDC for the development and construction of the property as well as previously purchased Jamul Tribal debt. Although Hollywood Casino Jamul-San Diego opened to strong business and earnings volumes in October 2016, which met our expectations, results began to soften earlier and with a steeper drop-off than anticipated. As a result, we concluded the Term Loan C was impaired as of December 31, 2016 and at all time periods subsequent to this date. A loan is considered impaired when, based on current information, events and projections, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when contractually due under the terms of the loan agreement. The fair value of the Loan was not observable, nor secured by any significant levels of collateral. Therefore, the Loan was not measured using a practical expedient (observable market rate of interest or fair value of collateral) under ASC 310. As such, an impairment charge recorded to the extent the present value of expected future cash flows discounted at the loan’s effective interest rate exceeded the carrying amount of the loan. The Company recorded interest income on a cash basis to the extent a reserve was not required for the impaired loan. As of June 30, 2017, the JIVDC was effectively in breach of a financial covenant requirement with respect to debt-to-earnings ratios and as of September 30, 2017, the JIVDC was in active negotiations with its lenders to modify certain terms of its loan agreements, including the elimination of its June 30, 2017 financial covenant requirement. Amended terms that were negotiated during the fourth quarter 2017, were not accepted by the Jamul Tribe. As of December 31, 2017, the JIVDC was in default on its obligations. The Term Loan C was fully subordinated to the other lenders that had extended credit to the JIVDC. In February 2018, the Company and the Jamul Tribe mutually agreed that Penn would no longer manage the facility or provide branding and development services as of May 28, 2018. The Company performed a comprehensive analysis of the future cash flows that we expected to receive on the Term Loan C based upon our best estimates of the operations of the facility and the concessions we would grant to the JIVDC. The expected cash flows to be received by the Company on the Term Loan C were then discounted at the Term Loan C’s effective interest rate in accordance with ASC 310, which was less than its carrying amount as of December 31, 2017. Therefore, the Company recorded a charge of $86.0 million within its Consolidated Statements of Operations for the year ended December 31, 2017, of which $64.0 million was recorded to an allowance for loan loss and $22.0 million was recorded as a reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included in “Other noncurrent liabilities” within the Consolidated Balance Sheets as of December 31, 2017. In addition to the reserves mentioned above, the Company recorded charges of $3.8 million related to certain advances made to the JIVDC. The unpaid principal balance of the Term Loan C as of December 31, 2017 was $98.3 million and the net carrying amount was $20.9 million. The Company’s remaining exposure as of December 31, 2017 was $27.9 million, inclusive of future unfunded commitments on the Term Loan C. On May 25, 2018, the Company entered into a purchase agreement (the “Purchase Agreement”) with the senior lender under the credit facility for the gaming facility to sell them all of the Company’s outstanding rights and obligations under the Term Loan C and the JIVDC commitments. Pursuant to the Purchase Agreement and related agreements, the Company received cash proceeds of $15.2 million from the sale and has been relieved of all rights and obligations with respect to the JIVDC. The sale of the loan resulted in a recovery of loan losses and unfunded loan commitments of $17.0 million for the year ended December 31, 2018. Retama Park Racetrack We have a management contract with Retama Development Corporation (“RDC”), a local government corporation of the City of Selma, Texas, to manage the day-to-day operations of Retama Park Racetrack, located outside of San Antonio, Texas. In addition, we own 1.0% of the equity of Retama Nominal Holder, LLC, which holds a nominal interest in the racing license used to operate Retama Park Racetrack. Additionally, we own a 75.5% interest in Pinnacle Retama Partners, LLC (“PRP”), which owns the contingent gaming rights that may arise if gaming under the existing racing license becomes legal in Texas in the future. As of December 31, 2018, PRP held $16.9 million in promissory notes issued by RDC and $7.5 million in local government corporation bonds issued by RDC, at amortized cost. The promissory notes and local government corporation bonds, which are included in “Other assets” within our Consolidated Balance Sheets, have long-term contractual maturities and are collateralized by the assets of Retama Park Racetrack. The contractual terms of these promissory notes include interest payments due at maturity; however, we have not recorded accrued interest on these promissory notes because uncertainty exists as to RDC’s ability to make interest payments. We have the positive intent and ability to hold the local government corporation bonds to maturity and until the amortized cost is recovered.

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