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Daniel Lewis’ Orange Capital Boosts Stake in Pinnacle Entertainment, Inc (PNK) and Proposes a Real Estate Spin-Off

In a new filing with the Securities and Exchange Commission, Orange Capital, managed by Daniel Lewis, revealed raising its exposure to Pinnacle Entertainment, Inc (NYSE:PNK). The fund reported an activist stake, which contains some 2.64 million shares of the company, versus about 1.78 million shares held earlier. The position is equal to 4.5% of the company’s stock. At the same time, the fund filed a letter sent to the company’s board, in which it states that together with derivative agreements, the fund holds around 6.7% of Pinnacle’s common stock.

Daniel Lewis - Orange Capital

Moreover, the letter stated that Pinnacle Entertainment, Inc (NYSE:PNK) should conduct a spin-off of its real estate into an independent publicly listed real estate investment trust (PropCo Transaction), which would be distributed to shareholders through a tax-free spin-off transaction. According to the shareholder, the transaction could increase the share price of Pinnacle by 61%-92%, which would lead to a pro-forma valuation in the range of $35 to $42 per share.

Importantly, we believe a PropCo Transaction offers several corporate-level benefits, including:

1. Accelerated de-leveraging whereby consolidated net debt/EBITDA would improve to approximately 5.1x;

2. Reduction of Pinnacle’s cost of capital allowing the Company to more efficiently invest in existing or new gaming assets and strategic acquisitions; and

3. Additional growth opportunities associated with PropCo’s capability to acquire third-party gaming, entertainment, and lifestyle properties.

Orange Capital also considers that Pinnacle Entertainment, Inc (NYSE:PNK)’s acquisition of Ameristar Casinos, Inc. and the de-leveraging of the balance sheet, has brought significant value for shareholders, but the company is still valued at a discount in comparison to its closest peer, the combined Penn National Gaming, Inc (NASDAQ:PENN) and its real estate owner, Gaming and Leisure Properties Inc (NASDAQ:GLPI).

The full text of the letter can be accessed below:

Orange Capital’s Letter to Pinnacle Entertainment

In a press release issued on Monday, Pinnacle Entertainment, Inc (NYSE:PNK) commented the filing issued by Orange Capital saying, among other things, that since the announcement of the acquisition of Ameristar, the price of Pinnacle surged by around 65%. The company intends to take further actions and take into account all strategies necessary to obtain more value for its shareholders.

An example of this is the acquisition of Ameristar Casinos in 2013. As a result of this accretive transaction, we doubled the size of the Company, realized meaningful cost synergies, and significantly enhanced our scale and geographic diversification. We now have the largest owned portfolio of premium gaming entertainment properties in the U.S., which spans nine states and 13 regional markets.

Parag Vora’s Hg Vora Capital Management is also a significant shareholder of Pinnacle Entertainment, Inc (NYSE:PNK), which as at the end of 2013, held a total of 3.4 million shares of the company.

Disclosure: none

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