Bally’s (BALY) – Expected Tender Offer – Upside TBD

Current Price: $35.38

Offer Price: $38.00 (increase expected)

Upside: 6%+

Expiration Date: TBD

This idea was shared by Tom.

  • IMPORTANT – the case has been updated, please refer to this comment for the latest overview of the situation. The write-up below refers to an earlier expected Bally’s privatization offer and serves as a background for the current tender offer.

 

A short note on potential privatization in the US gaming sector.

US casino and online gaming operator Bally’s received a non-binding takeover proposal from its largest 21% shareholder Standard General at $38/share. SD’s founding partner is also the chairman of Bally’s. Hence, the offer is not conditioned on due diligence, however, requires approval of the special committee comprised of independent directors and also approval from a majority of disinterested shareholders. The latter condition is non-waivable. There’s a 6% spread to the current offer, however, on a quick glance, the setup seems like an interesting bet on a higher offer.

Downside to pre-announcement price stands at 20%, however, the whole sector has already started rebounding (peers are up 6%-8% already since then), so I expect the actual downside to be lower. Valuation wise the company seems to trade slightly above peers so there is some risk to that, however, it is not clear if such comparison carries any real weight due to massive industry consolidation and numerous acquisitions over the last two years.

There are several points to argue that shareholders will not agree to the current bid:

  • The offer looks highly opportunistic and was timed pretty much perfectly into the recent general market sell-off. Just 4 months ago Bally’s was trading at $50+/share and since October’21, the gaming sector has begun trading downwards. The sell-off reached its peak just before the offer announcement. In the recent interview, the buyer/Bally’s chairman pretty much admitted that they’re using the opportunity to acquire the company on the cheap and that there’s a risk of a competing bid.
  • In the Q3 conf. call last November, when Bally’s shares were at $43 (i.e. above the current offer), the CEO clearly said he considers the company to be undervalued:

Stephen, if I can also add to that maybe a little more directly, that if our stock remains as low as it is, we will be buying it.

  • Moreover, in November, management made minor stock purchases (around 20k shares) at $44-$45/share.
  • In April’21 Bally’s raised $670m worth of equity issuing 12.6m shares, around 30% of outstanding shares at the time, at $55/share, way above the current offer price.
  • In Oct’21, BALY closed its merger with UK’s major online casino/gaming operator Gamesys for $2.7bn (transaction was announced in Apr’21). Interestingly, Gamesys CEO became the CEO of the combined firm, and management with 26% ownership of Gamesys opted for stock instead of cash consideration, although the latter would have provided a 20%+ higher pay-off. Previous management of Gamesys now owns 14% of the combined company. Bally’s was trading at $50+/share at the time. Clearly, Gamesys management and its well-regarded CEO Lee Fenton showed strong belief in Bally’s long-term prospects and share price performance. In comparison, at the current buyout offer price Gamesys stock would be valued at only £9.60/share, vs £18.50 cash or £15.00 stock consideration just four months ago.
  • Several large activist hedge funds and other smaller PE firms have acquired shares in Bally’s H1’21. HG Vora (1m shares), Paulson & Co (1m shares), and Potrero Capital (390k shares, 4.5% of the AUM) acquired their stakes when the stock was trading around $50-$70/share. Another PE firm Solu Alternative Asset Management bought 354k in Q4’20. These four funds own around 4% combined.

However, the buyer Standard General is not that naive and in the recent interview said that a definitive offer will likely include a roll-over option. Given the offer price, I guess that the key shareholders might join in the privatization of the company. Assuming that Gamesys management and Bally’s media partner Sinclair (through ownership of penny warrants) jumps in, the consortium would already have 43% shares in the pocket.

The important part here is the required majority of disinterested shareholder approval. I am pretty certain that the rolling shareholders would be counted as affiliated parties, so the approval threshold could quickly narrow down to <30% of outstanding shares. Given the points above, it’s fair to expect substantial pushback from the minority shareholders that could prompt Standard General to increase the price. Something closer to at least $43-$45/share levels seen in November would be more reasonable. The presence of activist hedge funds is reassuring as well, however, there is a risk they will join buyer’s consortium. Lastly, Standard General is a sophisticated buyer and I don’t think they would put the company into play like that without being ready to raise the price.

The biggest caveat here is valuation or, to be more specific, the difficulty of being able to say anything about Bally’s valuation with any accuracy. Comparison to peers is messy as the sector is going through a massive consolidation, while the recent 9M’21 earnings were pretty explosive due to potentially one-time post-pandemic recovery. Bally’s closed the Gamesys acquisition just a few months ago and there’s been no earnings report for the combined company yet (while Gamesys has reported only H1’21 so far). In the latest Q3 call, the CEO gave some color on the combined company’s performance flashing $5/share annualized Q3 FCFE earnings power (would put the company at 14% FCFE yield). However, it’s likely that the normalized level would be materially lower. Meanwhile, Bally’s is just beginning to fight for online gaming market share in the US and intends to spend at least 20% of FCF on that.

Back of the envelope comparison with peers on pre-COVID 2019 pro-forma EBITDA (adjusted for large acquisitions) shows Bally’s trading at 13x 2019 EBITDA, PENN at 9x (adj. for Score Media acquisition), CZR 11x (adjusted for Eldorado and William Hill acquisitions), and MGM at 12x multiples. But again, not sure if that comparison provides any insights as Bally’s and its peers are very different companies vs two years ago.

Published on: May 17, 2022  •  Published by:
Category: M&A
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12 COMMENTS

  1. Grayson

    Special committee of directors reject the Standard General’s bid to take private at $38/sh.
    “Bally’s simultaneously announced that its board of directors determined that Bally’s should pursue initiating a cash tender offer for its shares. It is anticipated that the tender offer will involve $300 million to $500 million, and will be structured in a Dutch auction format. The commencement of the offer is subject to, among other things, obtaining necessary financing and final approval by Bally’s board.”

    Any take on the dutch auction/rejection?

    1. Oracle_Of_Vancouver

      The share price has been plummeting. $23 per share. Even if board offers $38 per share to tender, that is massive 70% upside. I think standard general can definitely come back with a slightly higher offer and that provides a huge upside for short term investors, so many ways to win here. Does anyone know if standard general can come back with an offer at any time? Unlikely, but even if standard general offers a lower bid, $35 per share to stick it to the board, as a short term trade that is still pretty juicy profits

  2. rd128

    If this is a creeping takeover – buy back shares to increase Standard General’s % ownership, their incentive is to tender shares at the lowest price possible to clear the tender. In this market (see CZR), the clearance price will likely be materially lower than $38 or $35.

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  3. Tomuk

    Sorry for a late update, my thoughts below.

    Given how the strategic review ended and Soo Kim’s comment about remaining a “supportive, long-term investor” it doesn’t feel like Standard General will come back with an offer anytime soon. So my original thesis in the post above has clearly failed.

    However, the set-up with a tender still seems interesting:
    – The share price has been beaten down to below pre-COVID levels.
    – Just 6 months ago, management was buying shares at mid $40’s and repeatedly saying the shares are cheap. In Q4’21, the company repurchased over 2m shares (3% diluted share count) at just below $40/share and in Q1’22 bought another 350k shares at $38/share.
    – Two weeks ago, BALY reported solid Q1 results and reiterated 2022 adj. EBITDA guidance of $560-$580m. The company currently trades at 8.3x-8.7x forward earnings, below larger peers like MGM or CZR, peers don’t provide guidance, but its around 10x-13x 2022 adj. EBITDA according to my estimates.
    – The estimated tender range is $300m-$500m will allow the company to repurchase very substantial amount of free float (a quarter to one third or even more) and clearly indicates management’s confidence in the current undervaluation. This is not surprising given the previous comments and actions. Wouldn’t be surprised if Standard General also played their part in pushing the idea of a large tender during the negotiations once it became clear that the takeover is not going to materialize. The tender will allow insiders to significantly increase their stake (over 34% right now) at currently very attractive prices.
    – Estimating tender range at $27-$30/share should be conservative enough for it not to get materially undersubscribed. That would price BALY at 9x-9.3x forward earnings.
    – The financing condition is likely to get done. BALY generates a lot of cash and the manner in which management has proceeded with this tender so far also indicates strong confidence on their part.

    3
    1. ka_yoyo

      BALY had negative free cash flow in 2 out of the last 4 years. When they did generate free cash, it was paltry.

  4. dt

    As per Tom’s note above, we are closing BALY’s privatization quick idea with at 31% loss.

    However, I agree with Tom that this pending tender offer seems really attractive. The tender is likely to be announced at premium prices compared to current levels. BALY is trading at a low valuation and management is incentivized to prove their words with action after the rejected takeover offer as well as previous comments on business undervaluation. Therefore, we are opening BALY tracking portfolio position at $24.3/share as a play on this pending tender offer.

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  5. simcha123

    Any thoughts as to the timing of the tender offer being launched?

  6. paulum

    Tender offer is out: $190m (possibly +2%) for $19.25-$22.00
    Features odd-lot provision
    Standard General has not determined yet wether or not to tender.

    1
  7. paulum

    The BALY Jul15’22 20 PUT now trades for $0.90. This should provide either a risk-free odd-lot tender (if assigned – effective $19.10 below lower bound – sell 1 remaining share) or $90 in premium if it expires. As we say here; every dime helps, esspecially in a bear market.

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  8. dt

    I have sold-out of my Bally’s position at a loss. Obviously, my expectations of a higher tender price have not panned out. Insiders’ hesitation to announce whether they are participating in the tender or not, seems also puzzling. On top of that, BALY just issued its 3-year cash flow forecast. Apparently, no more buybacks are planned for this year, and repurchases in 2023 and 2024 will only amount to 10% of the current mcap.

    With seemingly no short-term catalysts on the horizon, I am out. SD might come back with another offer, but do not want to bet on waiting for it.

    3-year cash flow forecast – https://s1.q4cdn.com/542913765/files/doc_presentations/2022/06/Bally's-Three-Year-Cash-Forecast.pdf

    Tom, thanks for sharing and for the updates. Let me know if you have a different opinion on this.

    1
    1. MitMassUndZiel

      Although it looks like you are out, Standard General (SG) just disclosed they tendered 360,000 shares for the Dutch auction closing next week. This represents 3.15% of their holdings and 4.17% of the tender amount if the high price is hit (3.65% on low end).

      Low probability it ends up being oversubscribed or doesn’t land on the high end of the range. I jumped in as the price deviated towards the lower end of the range as a tender arb given that it was unlikely SG’s shares were a risk for oversubscription.

      I don’t think a good entry price will present itself again to take part in the tender after that news, but wondering if the outcome doesn’t end up giving a bullish signal pushing it back up beyond the $22 level.

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