Gaming and Leisure Properties Inc (GLPI) Bid For Pinnacle Entertainment, Inc (PNK)’s Real Estate Assets: Did Hedge Funds See This Untapped Value?

Gaming and Leisure Properties Inc (NASDAQ:GLPI) is upping the stakes in its bid to acquire the real estate assets of Pinnacle Entertainment, Inc (NYSE:PNK). The firm has revealed that it has sent a letter to Pinnacle’s Board of Directors raising its prior March 9 offer of 0.5517 GLPI common shares per Pinnacle real estate asset share by 54% to 0.85 GLPI common shares. Under the proposed deal, Pinnacle’s real estate assets and its operating business will be spun off into two separate publicly traded companies, consequently merging the real estate assets company into GLPI. The new offer increases the implied enterprise value of the real estate assets of Pinnacle to $5 billion, or about 13.3x the initial year’s adjusted EBITDA of that side of the business, and sent shares of Pinnacle Entertainment to 7.74% gains in early morning trading. Gaming and Leisure Properties Inc (NASDAQ:GLPI) also had some choice words for Pinnacle Entertainment, Inc (NYSE:PNK) which also has its own proposed separation plan. “Pinnacle continues to make new demands, delaying the signing of a definitive agreement and denying its shareholders a value-creating transaction that is clearly superior to Pinnacle’s [own separation plan],” GLPI says in a statement. GLPI, which says in the letter that it is “disappointed” by Pinnacle’s rejection of its revised proposal, says it has “committed financing in place” and expects the transaction to be closed six months from finalizing the deal, which it is ready to do immediately.Pinnacle Entertainment Inc (PNK), NYSE:PNK, Gaming and Leisure Properties Inc (GLPI), NASDAQ:GLPI,

The enthusiasm of GLPI for Pinnacle, at least for the casino and entertainment establishment operator’s real estate assets, is opposite of the colder treatment the entirety of the company has received from hedge funds lately. Heading into the second quarter, a total of 30 of the hedge funds tracked by Insider Monkey were long in this stock, a drop of 9% from the previous quarter, while the total value of their holdings also dropped. Despite what may be viewed as a 2.98% increase in aggregate value of holdings to $651.26 million by the end of the first quarter from $632.41 million following the prior quarter, the stock jumped 60.54% from January 2 to March 31, showing that smart money had actually pulled a great deal of capital out of the stock, and perhaps weren’t anticipating an even greater offer. The catalyst for this massive jump was the March 9 offer from Gaming and Leisure Properties Inc, with stares remaining mostly steady since then, save for the latest spike this morning.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 135% and beating the market by more than 80 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise rather than large-cap stocks.

We also track insider trades of shares to see whether these insiders are betting on or against their firm’s shares. For Pinnacle Entertainment, there are no recorded purchases of shares by insiders in 2015. Executive Vice President John Godfrey, however, sold 50,000 shares of the firm on March 9 following the spike.

With all of this in mind, let’s take a look at the key action regarding Pinnacle Entertainment, Inc on the following page .

How have hedgies been trading Pinnacle Entertainment, Inc (NYSE:PNK)?

According to hedge fund intelligence website Insider Monkey, HG Vora Capital Management, headed by Parag Vora, holds the most valuable position in Pinnacle Entertainment, Inc (NYSE:PNK). HG Vora Capital Management has 5.0 million shares worth about $180.5 million, comprising 22.5% of its 13F portfolio. Sitting at the Number two spot is Orange Capital, led by Daniel Lewis, holding a $106.1 million position of 2.94 million shares; the fund has 7.7% of its 13F portfolio invested in the stock. Remaining peers with similar optimism contain David E. Shaw’s D.E. Shaw & Co., L.P., Joshua Friedman and Mitchell Julis’ Canyon Capital Advisors, and Paul Reeder and Edward Shapiro’s PAR Capital Management.

Seeing as Pinnacle Entertainment, Inc (NYSE:PNK) has faced declining sentiment from the smart money, we can see that there lies a certain “tier” of hedgies that slashed their positions entirely in the first quarter. Interestingly, Roberto Mignone‘s Bridger Management said goodbye to the biggest investment out of the more than 700 funds tracked by Insider Monkey, valued at an estimated $50.6 million and comprised of 2.72 million shares, while David Warren of DW Partners was right behind this move, as the fund cut 2.0 million shares worth about $45 million.

Due to the bearish sentiment of hedge funds, and the fact that the new offer is already being priced into the shares as of this moment, we don’t see Pinnacle Entertainment, Inc (NYSE:PNK) as a particularly strong stock to buy at the moment, with little potential upside from the sale of its assets and its remaining business operations.

Disclosure: None