Updated from 10:21 a.m. EDT

In a severe blow to shareholders Thursday,

Penn National Gaming

(PENN) - Get Report

has agreed to cancel its proposed buyout by

Fortress Investment Group

(FIG)

.

The two parties had agreed last year to a $67-per-share deal for Penn, but the racetrack and casino operator's stock plunged this year, signaling that investors were betting no deal would happen.

By cancelling the deal, Penn National will now receive $1.475 billion in cash, which will be structured as a $225 million termination fee and $1.25 billion preferred stock investment by Fortress and Centerbridge Partners, which originally had planned to buy out the entire company. Affiliates of

Wachovia

(WB) - Get Report

and

Deutsche Bank

(DB) - Get Report

, which had committed the debt financing on the buyout, will now be participating in the preferred equity investment.

Penn National said it intends to use the net proceeds from the investment and the after-tax proceeds from the termination fee to repay existing debt, to acquire or develop pari-mutuel and gaming facilities and to repurchase stock under a new $200 million share buyback. As of May 31, Penn National had outstanding debt of roughly $2.97 billion.

Rather than agreeing to terminate the deal, Penn National could have gone to the courts to enforce the buyout agreement if Fortress and its partners had tried to cancel the deal.

Penn National CEO Peter Carlino said, "The prospect of employing litigation to enforce performance of the merger agreement would inherently expose the company to the significant risk related to a protracted legal process. We may be in the gaming business, but we would never gamble the company's future and our shareholders' best interest in this or any other circumstance."

In a conference call with investors, Penn National said its appetite to enter the Las Vegas casino market is probably stronger than ever. Management also said it may use the proceeds from the preferred stock investment to purchase the debt of other casino companies as investments, since such bonds are trading at high yields.

After an initial decline Thursday morning, Penn shares were rising 9.6% to $31.35 as investors bet that management will be able to deploy the proceeds to increase shareholder value.