10. Subsequent Events

On October 15, 2018, the Company acquired all of the outstanding shares of Pinnacle for $1,252 million in cash and issued $750 million of equity (excluding the repayment of $814 million in debt obligations). The primary reasons for the acquisition are as follows:

the expectation that the merger will create economies of scale and other geographic advantages by broadening the combined company’s portfolio of properties to 40 properties across 18 jurisdictions;

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 combined company’s portfolio;

the identification of at least $100 million in annual run-rate 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; and

the expectation that the merger will be immediately accretive to free cash flow in the first year. The strong free cash flow generation expected from the combined companies will enhance Penn’s ability to de-lever its balance sheet, pursue strategic opportunities and return capital to shareholders.

Contemporaneously with the closing of the merger, the Company divested the membership interests of certain Pinnacle subsidiaries which operated the casinos known as Ameristar Casino Resort Spa St. Charles (Missouri), Ameristar Casino Hotel Kansas City (Missouri), Belterra Casino Resort (Indiana), and Belterra Park (Ohio) to Boyd Gaming Corporation (“Boyd”) in exchange for $604.9 million of cash, subject to customary final working capital adjustments. Additionally, concurrently with the closing of the merger and Boyd divestitures, (i) GLPI acquired the real estate associated with the Plainridge Park Casino for $250 million, and concurrently leased back the real estate to the Company pursuant to the amended Pinnacle master lease for a fixed annual rent of $25 million and (ii) a subsidiary of Boyd acquired the real estate associated with Pinnacle’s Belterra Park casino in Cincinnati, Ohio utilizing mortgage financing from a subsidiary of GLPI from which Penn received proceeds of $57.7 million. The amended Pinnacle master lease includes an additional incremental rent of $13.9 million annually to adjust the payment terms to market conditions.

Financing Agreement

In connection with the merger, the Company obtained incremental Term Loan A and Term Loan B funding under the amended and restated senior secured credit facility. The Company’s total Term Loan A and Term Loan B borrowings after the merger are $707.7 million and $1,128.8 million, respectively. The final maturity dates for the Term Loan A and Term Loan B are October 19, 2023 and October 15, 2025, respectively. The interest rates per annum applicable to loans under the credit facility are, at Penn’s option, equal to either a LIBOR rate or a base rate, plus an applicable margin. The applicable margin for the Term Loan A borrowings, which has not changed, ranges from 1.25% to 3.00% per annum for LIBOR loans and 0.25% to 2.00% per annum for base rate loans, in each case depending on Penn’s total net leverage ratio. The interest rate on our Term Loan B borrowings has declined from LIBOR plus 2.50% to LIBOR plus 2.25%. In addition, the Company continues to maintain a $700 million revolving commitment under the amended and restated senior secured credit facility.

Merger Consideration

The fair value of the merger consideration, or the purchase price, is $2.8 billion. This amount is derived based on Pinnacle’s diluted shares outstanding at October 12, 2018. Each share of Pinnacle common stock (other than treasury shares held by Pinnacle) was automatically converted into the right to receive the merger consideration, consisting of (1) 0.42 of a fully paid and nonassessable share of Penn common stock plus (2) $20.00 in cash. The stock price used to determine the value of the stock portion of the merger consideration, is based on the volume weighted average price of a share of Penn common stock as quoted on NASDAQ 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 of the merger was 26,297,448, and the valuation of those shares was based on the closing price of Penn common stock on October 15, 2018.


		October 15 ,2018
		(in thousands)
Pinnacle diluted shares outstanding		62,613
Share exchange ratio		0.42
Shares of Penn common stock issued to former Pinnacle shareholders		26,297
Price per share of Penn common stock	$	28.51
Fair value of Penn common stock issued to former Pinnacle shareholders	$	749,740
Cash paid to former Pinnacle shareholders at $20 per share		1,252,259
Cash paid by Penn to retire Pinnacle debt, inclusive of accrued interest		814,273
Purchase price	$	2,816,272

The purchase price excludes transaction costs of $15.0 million and $4.6 million which were expensed as incurred in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2018 and 2017, respectively. The Company will account for the Pinnacle acquisition as a business combination under the acquisition method of accounting. As such, the purchase price will be allocated to the net assets acquired, inclusive of intangible assets, with any excess fair value recorded to goodwill. Since the closing date of the acquisition occurred subsequent to the end of the reporting period, the allocation of purchase price to the underlying net assets has not yet been completed. The Company will reflect the preliminary purchase price allocation in its financial statements for the fiscal year ending December 31, 2018.