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Penn National hits near 5-year high on split plan

NEW YORK (AP) -- Shares of Penn National Gaming Inc. hit their highest price since early 2008 on Friday, after the casino and racetrack operator said it plans to split its business into two separate public companies.

It will complete the separation by spinning off its real estate assets into a real estate investment trust. Its gaming business will then stand alone. The split is subject to gaming regulatory approval, which Penn expects to receive in the next nine to 12 months. It expects to complete the spinoff of the REIT in the second half of 2013.

The REIT is expected to initially own 17 casinos on 3,200 acres of land and encompassing 6.9 million square feet of building space. The company expects this number to increase through future acquisitions. Penn currently has 29 casinos in Colorado, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Canada.

Once the deal is complete, the REIT would lease back the casinos to Penn National Gaming under a 35-year agreement. In addition to operating the gaming facilities, Penn would also continue to own and operate other assets, including a casino management contract, a 50 percent joint venture interest in Hollywood Casino at Kansas Speedway, gaming licenses, seven non-casino racetracks and gaming equipment.

Penn shareholders will receive a tax-free dividend equal to about about $15.40 per Penn share. The dividend would be made up of about $5.35 cash per Penn share, with the remainder comprised of 1 share in the REIT for each Penn share they own.

Shareholders in the REIT would be entitled to an ordinary dividend of about $2.36, based on next year's earnings guidance.

Last month, Penn said its third-quarter net income fell 35 percent as gamblers spent less on games and food and drinks, and operating expenses rose. Last year's quarter also included a hefty gain related to sale of interests in the Maryland Jockey Club.

The company boosted its full-year revenue forecast, but lowered its earnings outlook. It gave fourth-quarter earnings and revenue forecasts above Wall Street expectations.

Harry Curtis, an analyst at Nomura Securities, said the proposal indicates that "nothing has changed" in Penn's core business outlook.

"The spinoff is essentially a multiple expansion strategy," which in Nomura's view indicates management believes there are limited growth opportunity earnings before interest, tax and amortization expenses. "In the current low interest rate environment where investors are looking for yield, Nomura thinks this yield-oriented structure is appealing and should command a high valuation," Curtis wrote.

He kept a "Neutral" rating and $48 price target on the stock.

David Bain, an analyst with Sterne, Agee, also saw the proposal as a positive. "In essence, the Penn move is a tax efficient way to return capital to shareholders," he wrote in a note to clients. He kept a "Buy" rating and a $53 price target.

Shares around midday rose $10.94, or 29.1 percent, to $48.55, after earlier hitting a high of $50.50. The last time the stock was that high was February 2008. Volume was greater than 10 times normal daily trading by midday.