Ardent Leisure Group (ALG.AX) – Large Asset Sale/Capital Return – Upside TBD

Current Price: A$1.35

Target Price: TBD

Upside: TBD

Expiration Date: 2022-2023

This idea was hinted by Jason.

 

Ardent Leisure Group announced a sale of its core business – 75% stake in family entertainment centers Main Event – for net proceeds of A$640m. The company intends to use the proceeds to repay debt and promptly return A$430m of capital to shareholders  – A$0.90/share, around 70% of the current market cap. ALG will also retain about A$168m of cash (A$0.35/share), including cash currently on hand, and will refocus on growing its remaining Australian theme parks business. At current prices theme park business EV stands at just A$45m (A$0.09/share) whereas the owned land alone is likely worth north of A$100m. The theme park business has historically generated A$35m in EBITDA, but has been unprofitable for several years now and is burning A$15-A$20m/year. However, with Australian lockdowns now lifted and the recent clearance of historical overhangs the performance is due to rebound strongly. Management’s comments on the early 2022 attendance suggest the same. Massive capital return coupled with strong financial performance, positive trading updates, and a reasonable/well-communicated plan for the use of retained cash might act as catalysts for the stub.

At the moment it is not clear how exactly will the sale proceeds be returned – through a taxable dividend or other more tax-efficient means. The possibility of taxes on distribution might partially explain the apparent cheapness of the stub.

Further detail regarding the quantum and form of the distribution, including in relation to any ATO (Australian Taxation Office) tax ruling and/or shareholder approvals, will be provided in the Notice of Meeting. The Board aims to distribute funds to shareholders expeditiously after completion of the Transaction.

ALG shares currently trade at pre-announcement levels. The risk of the core business sale failing seems low. The termination fee stands at A$50m (A$0.10/share), so in case the deal breaks, the downside should be well protected.

 

Main Event sale and conditions

Main Event business (venues featuring billiards, bowling, arcade games, laser tag, etc) has 50 locations in the US and is getting sold to Dave & Busters (ticker: PLAY), a North American dining+entertainment centers business operator with 145 locations. Both brands target slightly different demographics (Main Event – younger children, D&B – young adults). Each brand will continue to operate independently, but the merger will enable them to better differentiate the offering to core customers. The geographic rationale is there as well. The CEO of Main Event (who is well regarded in the industry) will become the CEO of the combined company’s.

Only approvals by ALG.AX shareholders and CFIUS are required. CFIUS shouldn’t be an issue (US company is acquiring assets in the US), whereas shareholder approval is a bit more uncertain, but I think should be eventually received as well. ALG chair with 4.8% supports the transaction and there are pretty much no other major shareholders out there.

Main Event is getting acquired at 9x TTM adj. EBITDA (before accounting for corporate overheads). Given the historical/pre-COVID growth and profitability, this seems to be a reasonable valuation, maybe a slightly better deal for the buyer than for the seller. Although it doesn’t exactly look like a homerun for ALG shareholders, the approval is likely to pass for one particular reason.

Back in Jun’20 at the peak of COVID, ALG sold a 24.2% stake in the Main Event business to private equity Redbird Capital Partners for US$80m. At the time of the sale, RedBird also received an option to buy an incremental 26.8% stake (to get to the controlling 51%) at 9x adj. EBITDA (same as the current sale price) between July 2022 and July 2024. So, basically, ALG has decided to sell the Main Event business before July’22 instead of passing over the controlling stake to the PE firm (from the sale document):

If RedBird exercised its option, Ardent would cease to have a controlling stake in Main Event and RedBird would have also had the right to compel Ardent Leisure into a sale of Main Event that may be less attractive to Ardent Leisure shareholders than the Transaction.

RedBird has also agreed to the proposed transaction and will receive sale proceeds of US$187m for its 24.2% stake.

Given this backdrop, the approval by ALG shareholders seems to be very likely – otherwise, they risk losing control of the Main Events business after Jul’22. Adding the prospect of capital return equal to 70% of the current price seems to make it a no-brainer.

The exact date of the meeting hasn’t been announced yet, but the company expects the sale to close in 3 business days after the meeting and then promptly return cash to shareholders.

 

Theme parks business

Ardent Leisure owns 2 co-located theme parks in Gold Coast, Queensland – Dreamworld (attractions+zoo) and WhiteWater (water park). Additionally, it owns a 270m high Skypoint observation deck atop the iconic Q1 building in Surfers Paradise, Queensland. Historically, the segment used to generate a stable A$30m+ EBITDA with maintenance CAPEX around $8-9m. Then in October 2016, Dreamworld had a tragic accident where 4 people died due to malfunctioning the Thunder River equipment (you can see how the ride looked here). Thunder River was closed and the park’s attendance went downhill both due to the damage to the park’s image/brand and the fact that it lost a major ride/selling point. In 2017, a well-regarded investor/activist Gerry Weiss (currently owns 4.8%) took over ALG.AX board in order to revive the business – initially the recovery was expected within 2 years). The new board managed to do really well with the US business Main Event, however, the Australian theme parks have been recovering much slower than expected. On top of that, Ardent Leisure was also having a legal overhang – the lawsuits over the 2016 incident (uncertainty regarding the size of charges, etc) and basically faced the threat of bankruptcy in 2020 when the COVID hit. The historical performance of the segments can be seen below. The fiscal year ends in June.

Note: Main Event business is present in its entirety including the 24.2% RedBird’s stake. Main Event is usually reported at USD. In the table above I’ve converted it to AUD at a fixed ex. ratio of 1.35x.

Eventually, the Main Events business saw very strong post-COVID recovery generating record-level LTM revenues, and is now being sold. The theme parks business might be nearing the inflection point as well.

The overhang of the coronial inquest (lawsuit and public hearings over the 2016 incident) was largely cleared when the company was finally charged A$3.6m fine in 2020, but the pressure from COVID (closed borders + local restrictions) persisted till Dec’21 when Australia finally re-opened the borders and in Feb’22 fully lifted the COVID restrictions. When the restrictions were lifted in Feb’22, ALG.AX share price temporarily spiked +20% from A$1.34/share to A$1.60/share.

Since the incident, Dreamworld park had been operating without its main attraction. In mid-Dec’21 the new main ride was finally opened – a 1.2km long rollercoaster Steel Taipan, which is expected to become a game-changer for the business (quote from the theme parks segment’s CEO):

Steel Taipan is clearly a game changer for Dreamworld and moreover we are very proud to be bringing what we think is the most significant piece of tourism infrastructure to southeast Queensland since the pandemic began. I know in my discussions with many other Gold Coast businesses that they have a very optimistic view on this attraction and its propensity to drive visitors to our destination more broadly.

POV of the Steel Taipan can be seen here. The comments on Youtube videos and theme park forums seem really positive and personally, the new ride looks way cooler to me than the infamous Thunder River, but clearly not as much of a family attraction.

Before Australia’s reopening the company was expecting a significant sufficient pent-up demand. So far these expectations are proving to be correct. The reported attendance in January/February has been “way ahead of expectations”. Ticket sales were up 75% in January and 111% in the 3 weeks of February, obviously, this is from very low comps last year, but management said that February ticket sales were the highest since FY16.

Management claims that their main goal now is to bring the business to “historical” profitability levels. So far, it’s not clear how fast the business can recover to 2016 levels (A$35m EBITDA), however, given that at current prices you’re buying the remaining stub at A$45m, even a partial short term recovery should have a very positive impact on the ALG.AX share price.

 

Theme park’s land

Ardent Leisure owns 60 hectares of land out of which the two theme parks take 35ha and the rest is unused. The photo below is taken from the Credit Suisse report Aug’17.

The company has been considering what to do with the unused land for several years now (2020 annual report):

The excess land that sits around the Dreaworld site is potentially of value. The park occupies just over 50% of the land that is owned and a process of determining the best use of this land is in progress. This may include a buid out of tourist related adjacencies around the park itself. The plan may also involve an element of other commercial and residential uses.

In 2017, Credit Suisse has reportedly valued ALG.AX land and theme parks (including buildings, equipment, etc) at A$225m. The 35 hectares of unused land received a A$70m price tag. Another article from AFR (from 2016, just after the incident) also quoted Credit Suisse saying that even if the park was to be liquidated, they believed the proceeds would be worth A$225m:

In our view, the worst case scenario is a closure of the park, […] Whilst we believe this is unlikely in the near term (with key stakeholders likely to want the asset to succeed), we do note that the site spans 850,000sqm (owned by AAD) and does sit in a growth corridor for residential housing. […] Our initial view is that AAD’s carrying value for DW of A$235m would be supported under this scenario.

It’s difficult to verify this valuation and check how relevant it is today, however, an independent appraisal (as referenced in the annual report) of ALG theme parks in June’16 (pre-incident) estimated the total value of the lands + buildings/attractions/equipment, etc at A$235m. The land value was not separated, but it still gives some confidence that Credit Suisse’s estimates might’ve been directionally correct. All in all, I think the land value here is significant and should be way over the current stub EV of A$45m.

 

Risks

• At the moment it is not clear how exactly will the sale proceeds be returned – through a taxable dividend or other more tax-efficient means. The possibility of taxes on distribution might partially explain the apparent cheapness of the stub.
• The recent attendance rebound will prove to be temporary and theme parks will continue to burn cash.
• COVID restrictions return.
• Management will announce the plan on how they will use the retained A$168m cash and the market will not like it (e.g. some questionable commercial properties/new theme park, etc.).