Current Price – $248
Tender Price – $230 – $265
Upside – 7% ($1700 for odd-lots if priced at the upper limit)
Expiration Date – 7th of Feb 2018
No proration for odd lot holders
Churchill Downs has finalized sale of Big Fish Games division for $990m and now is returning $500m of proceeds to shareholders through dutch tender offer. Shares will be purchased between $230-$265. A total of 12%-14% of outstanding shares will be repurchased. Shareholders of less than 100 shares will be accepted on priority basis.
Upper limit pricing is unlikely
If tender gets priced at the upper limit, this is a very lucrative opportunity for odd lots. However, I do not believe upper limit pricing is likely:
– CHDN is selling at all times high even-though revenue growth stagnated over the last year. Company is already expensive at pro-forma PE>30. The sold division has generated 37% of revenues, so after the sale there will likely be pressure on earnings from negative operating leverage.
– Recent share price increase was likely driven by expectation of the tender offer. Company announced its intentions to return $500m of sale proceeds to shareholders right after the sale was signed on 30th of Nov, 2017.
– Insiders own 13% of the company and are allowed to participate in the tender. Couple of them (albeit smaller holders) have already indicated their intentions to tender.
– Previous largest owners (Duchossois family) sold c. half of their stake in June 2017 back to the company at $159/share, below market price at the time. If they are allowed to participate, then current tender price should look very attractive to them.
– Other larger owners have built their stakes in CHDN when shares were materially cheaper and some have been reducing their stakes over the recent year.
Keeping the above in mind I would expect the tender to be significantly oversubscribed and therefore being priced at or close to the lower limit. If market prices approach lower limit, this would definitely be an interesting odd lot opportunity. No position currently.