Current Price: $35.38
Offer Price: $38.00 (increase expected)
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.