Description

Intro

The equity and bonds of Bally’s Corporation (“BALY”, “Bally’s”, or the “Company”) are incredibly compelling and timely investments.  The shares trade at $15.98 and we estimate that today’s intrinsic value is $70+.  We believe that investors with long time frames will have 9x their investment (37% IRR) over 7 years when the shares hit $150.  The 2029 bonds yield over 12% and trade at 71.  The shares last traded at current levels when the Company’s properties were closed during the pandemic and generated no cash flow.  The shares ended 2020 above $50, and then climbed to the mid-$70s in March 2021.  Since then, the shares have been in a sharp downward trend.  The company is levered, though the leverage is intentional and very manageable.  Additionally, Bally’s has over $400 million in cash on its books.  The shares are not very illiquid since average daily trading volume is only $7 million and Standard General owns over 10 million shares (out of a 59 million fully diluted share count) and Gamesys founder (Gamesys was acquired by BALY in October 2021) Noel Hayden owns another 5 million shares.  The illiquidity discourages meaningful blue-chip institutional ownership of the shares.     

Other names in the gaming space, such as Caesars Entertainment (CZR) and Penn Entertainment (PENN) are also very cheap.  Tom Reeg, the CEO of CZR, goes into great detail on the recent (5/4/23) earnings call explaining his view on the long-term valuation of his stock.  Similarly, Jay Snowden of PENN has publicly expressed his views on valuation on earnings calls and at conferences such at G2E in Las Vegas.  BALY is my preferred gaming play because the downside is protected, the spring constant is high, and the displacement is substantial – BALY has significant elastic potential energy.  

This is due to a cheap valuation, unmonetized real estate, its ability to grow its digital assets internationally, its ability to improve margins in the land-based casino segment, it not getting any credit for its North American digital business, the benefits from the megacasino project it is constructing in Chicago, and the disciplined capital allocation of Standard General.     

The company has complicated the story in the past year due to the large development project in Chicago.  The Chicago project adds significant value to the Company, and we value Chicago separately.  The Chicago project will be done in an unrestricted subsidiary owned ~75% by BALY.  We value the Company by valuing the non-Chicago assets and then adding an estimate for the NPV of Bally’s share of the Chicago project.  Some of the cash on the balance sheet will be used for the Chicago project, but we take this into account in the NPV.        

In all my tables, $ are in USD millions, except for per share amounts which are in actual $.        

Below I show ex-Chicago 2024 cash flow.  Off the current share price, the free cash flow yield is 21%, and if you back out the $425 million of cash ($439 million at 1/3/2023 and then note the reduced share count in the proxy), the FCF yield is 39%.  If the business is sustainable, which it is, then this is an incredibly cheap valuation.  The fully-diluted equity market capitalization is $936 million, and 45% of that is in cash.    

(Note that the multiples in the VIC submission table are ex-cash and I equate EPS and FCF for simplicity; also I back out North America Interactive losses for 2023).  

Above is one way to frame the current cheapness.  Given the evolution of the businesses and our views on their long term potential, we employ a DCF approach which yields a current price of $70, or $75 including Chicago, and those assumptions are provided further below.  Our 2023 steady-state EBITDA is $540 million which backs out North American Interactive losses and excludes Chicago.  Below are some more statistics. 

I show metrics on 2023 and 2024 numbers.  North American Interactive will be breakeven in 2024.  The Company is in significant growth mode, but is very cheap on existing cash flows.  The 2024 unlevered yield is 10% for instance.  The meaningful cash flow growth and leverage massively amplify our returns, and we expect future capital allocation to be thoughtful.  Also note that even if you accept today’s valuation as accurate, the LTV on the bonds is about 75% for 12% paper.    

This is not a melting ice cube – the assets produce significant cash flow and are growing and becoming integrated under a global unified brand.  Below we start with the history of the Company and a discussion of the assets in order to build familiarity with the Company.  

History

The multi-strategy hedge fund Standard General is the largest shareholder of Bally’s.  Standard General and its CIO Soo Kim (who is also the board chair of BALY) completed numerous shrewd acquisitions to build Bally’s into its current form.  About 10 years ago, the company consisted of a single property, the Twin River casino in Rhode Island.  In 2014, Twin River acquired the Hard Rock Biloxi.  In 2018, Twin River announced the merger with Dover Downs and the Tiverton Casino Hotel opened in Rhode Island.  The merger closed in 2019, and the Company listed under NYSE: TRWH.    

In 2020, the Company’s leverage heading into the pandemic was modest and the Company owned all of its own real estate.  Net leverage at 12/31/2019 was only 3.2x EBITDA.  While other operators struggled to make lease payments as gaming facilities were closed (for instance, Penn National sold the Tropicana on the Las Vegas strip for rent relief), Twin River (it changed its name to Bally’s in 2H 2020) was able to go on an acquisition spree and accumulate several properties at very low prices.  It is also worth noting that the Company did not issue any equity in 2020.  On January 24, 2020, the Company acquired three casinos in Black Hawk, CO.  In April 2020, the Company announced that it has entered into agreements to purchase El Dorado Shreveport in Shreveport, Louisiana, the MontBleu Resort Casino & Spa in Lake Tahoe, Nevada, and Bally’s Atlantic City Hotel & Casino.  In July 2020, it completed its acquisitions of the casinos in Kansas City, Missouri, and Vicksburg, Mississippi.  On October 1, 2020, the Company announced its agreement to acquire Jumer’s Casino & Hotel and the Tropicana Evansville casino, both in Illinois.  On November 9, 2020, the Company changed its name from Twin River Worldwide Holdings to Bally’s Corporation.  On November 18, 2020, Bally’s announced its definitive agreement to acquire Bet.works, a U.S. based sports betting platform to operators in NJ, Iowa, Indiana, and Colorado.  On the same day, it announced a long-term sports betting and i-Gaming strategic partnership with Sinclair Broadcast Group.  Like other operators, in going through the tedious exercise of closing and reopening casinos in 2020, management has uncovered numerous efficiencies which has led to higher margins.  

In 2021, Bally’s continued to evolve in important ways.  In January 2021, it signed a framework with Ira Lupert to jointly design, develop, construct, and manage a Category 4 licensed casino in Pennsylvania.  Ira is a very experienced investor (co-founded Lupert Adler) with a strong track record in Pennsylvania gaming.  Bally’s has a majority equity interest and will have 100% of the economic interests in all the retail sports betting, online sports betting, and i-Gaming activities.  On January 25, 2021, Bally’s announced the acquisition of Monkey Knife Fight, one of the fastest growing daily fantasy sports (DFS) sites in North America.  The rationale was to enter the high-growth DFS market and incorporate it into Bally’s omnichannel portfolio of land-based casinos and i-Gaming platforms.  On February 8, 2021, Bally’s announced it was acquiring SportCaller, a leading global B2B free-to-play game provider for sports betting and media companies across North America, the UK, Europe, Asia, Australia, Latin America, and Africa.  SportCaller is an enterprise software solution used as a key customer acquisition and retention tool.  

The most important development was the acquisition of Gamesys Group plc which closed on October 1, 2021.  Below is an interview clip which played shortly after the closing of Gamesys.     

Bally's Chairman & CEO: There's unlimited potential for growth in gaming

Bally’s issued shares at $55 in April 2021 to help fund the Gamesys deal.  At the same time it announced the Gamesys transaction, Bally’s also announced it was acquiring the Tropicana Las Vegas.  On July 13, 2021, Bally’s closed on the Association of Volleyball Professionals, the premier professional beach volleyball organization and host of the longest-running domestic beach volleyball tour in the U.S.  On August 9, 2021, Bally’s acquired Telescope, the leading provider of real-time audience engagement solutions for live events, gamified second screen experiences, and interactive livestreams.  

In January 2022, as the market traded lower, Standard General made a $38/share bid for the equity it did not own in Bally’s.  Below is a CNBC interview regarding the offer.  

Bally's chairman on proposed takeover

On May 5, 2022, the board rejected the offer, and Standard General reiterated its long-term commitment to Bally’s.  In conjunction with rejecting the $38/share offer, the board announced it would do a $300 to $500 million tender offer structured as a Dutch auction format.

On May 5, 2022, Bally’s was selected as the preferred bidder for Chicago’s megacasino.  Bally’s Chicago is a $1.7 billion destination casino, entertainment, and hotel project.  More details on Chicago are later in this memo.      

The tender offer for BALY shares expired on July 22, 2022 and the company purchased $103 million in shares at a tender price of $22.  Interestingly, there was not much volume that transacted in the tender.  

The acquisition of Tropicana Las Vegas closed on September 27, 2022, and on November 21, 2022, Bally’s announced it was partnering with a private investor (Oak Street Real Estate Capital) on the sale leaseback for the future site of Bally’s Chicago.  On December 14, 2022, Chicago’s City Council authorized zoning for Bally’s Chicago.  

On January 4, 2023, Bally’s closed on the sale leaseback transactions on the Tiverton and Biloxi properties with GLPI for a total consideration of $635 million (transaction structured as a tax-free capital contribution) and the rent on the Company’s Master Lease increased by $48.5 million, implying a 7.6% cap rate.  The Company stated that a substantial portion of the proceeds will be used to reduce debt.  

The last major update was on February 13, 2023, when in conjunction with releasing solid Q4 2022 earnings the Company announced that Robeson Reeves was replacing Lee Fenton as CEO of Bally’s.  Lee Fenton was the CEO of Gamesys for many years, where he worked alongside Robeson who was the COO of Gamesys.  While Lee is talented, Robeson will be more aggressive in pursuing the opportunity in North America Interactive while expanding Gamesys globally.    

The slide below from the Company shows the evolution of the company over the past decade.  

As you can see, the transformation has been extreme. 

This pace of change has been difficult for some investors to digest.  We have spoken to some original Gamesys shareholders (Gamesys traded on the UK exchange) that rolled into the BALY deal and they are unaccustomed to levered capital structures and U.S. gaming.  And many original TRWH investors who continue to own BALY shares do not fully appreciate the quality of the Gamesys business.        

Segments

The Company has three segments – Casinos & Resorts, International Interactive, and North American Interactive.  

Casinos & Resorts

As mentioned before, Bally’s has a national footprint of regional casinos which is depicted below.  These were accumulated thoughtfully, and numerous examples follow to support this view.  The key point is that the team is good at not only acquiring properties, but also developing and improving properties.

Rhode Island - Twin River Casino Hotel 

Rhode Island consists of the Twin River Casino Hotel and the Tiverton Casino Hotel.  The Twin River Casino Hotel is in Lincoln, Rhode Island and is about 6 miles from Providence, RI and 60 miles from Boston.  This is the original flagship property and a full-service 24/7 casino.  Prior to the recent expansion, it had 162,420 square feet of gambling space, 4,108 slot machines, 111 table games (including 23 poker tables), 16 restaurants, 7 bars, and close to 30,000 square feet of event space.  In April 2023, the Company opened up another 40,000 square feet of new gaming space in a landmark expansion of its casino floor.  The new gaming area includes 355 slot machines, 57 table games, 27 stadium-style games, and a first-class, high limit gaming area.  The expansion also included other amenities such as a new food hall, an exclusive private dining area, and a new casino car and cigar lounge.  The location hosts simulcasting of thoroughbred and greyhound racing from around the U.S.  In 2018, the Company opened a new hotel on the Twin River Casino Hotel property which has 136 rooms.  Sports betting was introduced at Twin River Casino Hotel towards the end of 2018.  Twin River Casino was negatively impacted by the opening of Wynn’s Encore Boston Harbor in 2H 2019.  Promotional activity by Encore was significant and revenue at Twin River Casino was down over 20% in the most heavily impacted months.  By the end of the year this had moderated, and in early 2020 pre-covid, Rhode Island cash flows were on track to run-rate at the same level as 2019.  The Tiverton property helped cushion the Encore impact.        

Rhode Island - Tiverton Casino Hotel 

Twin River acquired the Newport Grand Casino for $21.8 million in July 2015.  In Q4 2016, the company received referendum approval to terminate the Newport Grand gaming license and have a new gaming license issued to a new casino to be developed in Tiverton, Rhode Island.  In May 2018, the company sold the land and building associated with the Newport Grand for $10.2 million.  On August 18, 2018, Newport Grand was closed and on September 1, 2018, the Tiverton Casino Hotel was opened.  The net cost to fully develop Tiverton was about $135 million which equates to less than 7x 2019 EBITDA of $20 million.  Tiverton is a good example of management having a vision and executing on it.  The Company had a view that there was an opportunity for operational improvement and significant revenue growth, and it successfully executed on a greenfield development.  It was a complicated development that involved significant wetland and bedrock issues.  

Mississippi - Hard Rock Hotel & Casino (“Hard Rock Biloxi”)

Hard Rock Biloxi is a waterfront casino resort located in a desirable Gulf Coast location serving southern Mississippi and the Gulf Coast.  The licensing agreement with Hard Rock Hotel, Licensing, Inc. is through September 2025 and the company has the option to renew for two successive 10-year periods.  The property can be impacted by weather.  In 2005, before its opening, Hurricane Katrina did so much damage that the property had to be rebuilt.  Hurricanes Harvey and Nate also impacted visitation numbers in 2017.  Bally’s pays a lease to the state for access to 5 acres of submerged tidelands.  The primary term ends in 2037 with BALY having the option to extend for 30 years.  Hard Rock Biloxi also has a lease agreement with the city of Biloxi for parking rights and air space access.  This arrangement expires in 2043 and has a 25-year renewal at the company’s option.

Hard Rock Biloxi is another illustration of management and the board’s ability to create value.  The Company purchased the asset for $250 million (10x EBITDA) in 2014.  The Company has invested about $10 million in capex, so the all-in $260 million cost translates into 7x 2019 EBITDA.  The property has been able to optimize costs since the shutdown.       

Mississippi - Casino Vicksburg + Missouri - Casino KC

This transaction for these two casinos was announced in 2019 and closed July 1, 2020.  This was a $230 million acquisition from Eldorado.  Casino Vicksburg is the rebranded Lady Luck Casino Vicksburg and Casino KC is the rebranded Isle of Capri Casino Kansas City.  Based on conversations we have had with industry veterans, we agree with management’s assessment that these properties expand the Company’s footprint into solid markets and there is significant upside potential from property redevelopment and operational improvements.  In Vicksburg, the team has improved the table game and slot offerings and added a sportsbook.        

At Casino KC, the company is investing $40 million of capex .  The property is very under-amenitized and will have restaurants, retail, and a sportsbook.  Management is improving the external appearance of the boat and building a new building on land near the boat which will house many F&B, retail, and other amenities to create significantly more space on the vessel for gaming.  This will also allow for an indoor entrance directly from the parking garage on the second floor of the boat to create a better arrival experience.  Work on this project commenced in Q1 2021.  In Q2 2021, Casino KC was officially re-branded as Bally’s Kansas City.  The investments in Kansas City will be completed by 2023.          

The EBITDA for these assets pre-acquisition was ~ $27 million (8.4x EBITDA entry).  The all-in cost (including growth capex) will be $270-$280 million and the all-in pro forma multiple should be around 7x.  

Delaware - Dover Downs (“Dover”)

The Dover Downs acquisition not only enabled the company (then Twin River) to be publicly listed, but also it had compelling economics and provided diversification.  Twin River purchased Dover in 2019 primarily via stock for about $100 million (9x EBITDA entry) net of cash acquired.  Dover shareholders got common stock in Twin River equal to about 7.2% of the combined company’s equity.  In 2018, Dover did $11 million of EBITDA.  As of early 2020, Dover was at a run rate of $23 million of EBITDA.  The bulk of the value creation was from relocating the table game area (the table games used to be upstairs and were not immediately noticeable), refreshing the marketing programs, and eliminating the prior owner’s top-heavy management structure.  It is interesting to note that in June 2020, the company sold the Dover real estate in a sale leaseback transaction with GLPI whereby it received $144 million for the real estate and agreed to a $12 million annual lease.  So the Company received $44 million above its original cost and is still entitled to half the cash flow.  Jeffrey Rollins was the major original shareholder of Dover, and he rolled his stake into the Company’s stock and is currently a director on the board.  More recently at Dover, the 1970s style plain garden cafe was replaced by a Longo’s Meatballs & Martini’s and a Sugar Factory American Brasserie also opened.  Smoking has been banned in Delaware, but BALY is adding a smoking porch where one can smoke and gamble.   

Colorado - Golden Gates Casino, Golden Gulch Casino, Mardi Gras Casino (collectively, “Black Hawk”)

The acquisition of these three casinos was completed on January 24, 2020.  The company paid $51 million at a purchase multiple slightly above 10x EBITDA.  The management team has high conviction that through operational improvements EBITDA can rise to $7-$8 million, bringing the multiple below 7x.  With this deal the company also acquired the right to 3 sports betting licenses in Colorado with the passage of Proposition DD on November 5, 2019.  The use of these licenses will significantly reduce the purchase multiple.  BALY launched mobile sports betting in CO on May 1, 2020, in conjunction with strategic partners FanDuel and DraftKings.  BALY also launched a retail sportsbook in connection with DraftKings at the Mardi Gras Casino.  The 3 casinos are close to each other along a half-mile strip of casino and hotel properties in the historic mining town of Black Hawk, CO.  

Eldorado Shreveport Resort and Casino + Nevada - MontBleu Resort Casino & Spa

This transaction was announced on April 24, 2020.  The Company agreed to purchase these two assets from Eldorado for a total purchase price of $155 million (4.1x trailing EBITDA).  The Shreveport transaction closed on December 23, 2020, and MontBleu on April 7, 2021.  The Company acquired Shreveport’s operations and real estate and MontBleu’s operations.  The Shreveport property is a top-tier property which has been very well-maintained.  This property used to be Hollywood Casino Shreveport before Eldorado owned it. 

The Mont Bleu acquisition established Twin River in the Nevada market.  The Company has entered into an agreement with Mont Bleu’s landlord to extend the lease term to 2035.  This Tahoe asset is an attractive property which just completed a $25 million renovation, and a recently approved convention center is being built next to it.  The team is focused on cross-marketing and making this a destination property for its customer base, as well for Asian gamblers on the West Coast.  The Company has had success making Biloxi a destination property for a certain segment of its customer base, and we believe the same can be done here.  

New Jersey - Bally’s Atlantic City Hotel & Casino

The Company announced on April 24, 2020, that it entered an agreement with Caesars and Vici Properties to acquire Bally’s Atlantic City Hotel & Casino for $25 million, or 2.1x trailing EBITDA.  The Bally’s name was not part of the deal, and per the purchase agreement with Caesars the Company would have six months to make the name change.  But then on October 13, 2020, the Company announced that it had purchased the Bally’s brand and will license the name back to Caesars for its Las Vegas property.  The Bally’s Atlantic City Hotel & Casino acquisition closed on November 18, 2020.  Many investors are familiar with this property given its AC location and proximity to NY.  Bally’s AC is in a prime Boardwalk location and a room refurbishment (property has ~1,200 rooms) has recently started and will last a few years.  The Dennis Tower is part of the asset purchase.  The Company is keeping the indoor connections between Bally’s, Caesars, and the Claridge Hotel.  The Company is adding some unique restaurant brands and taking advantage of physical aspects of the property which have been underappreciated, such as the 80,000 square feet of convention and meeting space.  There are also opportunities to reestablish the once-prominent Bally’s spa.  Bally’s corporate loyalty program has replaced the Caesars awards program.  Phil Juliano is focused on getting the right offers to the right people at the right time and is cross marketing (with Dover, Rhode Island, etc.) whenever appropriate.  We expect the Dover-AC link to be strong and Tiverton and Lincoln are not far away.  And then destination opportunities such as Biloxi and Tahoe will appeal to a certain customer segment.  This investment was incredibly cheap, gets the company into the large and lucrative NJ sports betting and online casino markets, and will also benefit from Atlantic City finally moving in the right direction.       

Illinois - Jumer’s Casino & Hotel

The company announced on October 1, 2020, that it will acquire Jumer’s Casino & Hotel in Rock Island, IL for $120 million, or 7.4x 2019 EBITDA.  This deal closed on June 14, 2021.  This transaction allowed Bally’s to get into the growing IL gaming market and capitalize on lucrative sports betting (physical and mobile) in the state.  The first legal sports wager in IL took place in March 2020 and mobile went live in the summer of 2020.  

Las Vegas - Tropicana Las Vegas Hotel & Casino

On April 13, 2021, Bally’s announced that it agreed to purchase the Tropicana Las Vegas from GLPI (Gaming and Leisure Properties, Inc., a public gaming REIT) for $308 million.  Bally’s paid $150 million for the non-land assets, and then agreed to lease the land underlying the Tropicana property from GLPI for an initial term of 50 years at annual rent of $10.5 million, subject to increases over time.  Bally’s and GLPI also entered a sale-leaseback transaction relating to the Black Hawk, CO and Rock Island, IL casino properties for $150 million, payable to GLPI.  The Tropicana Las Vegas acquisition closed on September 26, 2022.  

Having a property on the Las Vegas Strip will enhance Bally’s customer and player database since the Strip is visited by over 40 million players and guests per year.  The Tropicana Las Vegas Hotel and Casino is in Las Vegas on a 35-acre parcel on the corner of Tropicana Boulevard and Las Vegas Boulevard.  

It has 1,470 guest rooms, 50,000 square feet of casino space with 1,000 gaming positions, a 1,200-seat performance theater, and 100,000 square feet of convention and meeting space.  The development potential of the 35-acre plot provides the Company with significant optionality.   

Indiana - Tropicana Evansville

On July 4, 2021, Bally’s acquired the Tropicana Evansville casino operations from Caesars.  As part of the transaction, Bally’s also acquired the unencumbered rights to the Evansville sports betting and i-Gaming skins, which provide Bally’s with greater access to the growing Indiana gaming market. 

Bally’s acquired the Tropicana Evansville for $140 million.  As part of the transaction, GLPI acquired the real estate associated with the Tropicana Evansville casino for $340 million, which it is leasing to Bally’s for $28 million per year, subject to escalation.  GLPI also acquired the real estate associated with Bally’s Dover Downs casino for $144 million, which it is leasing back to Bally’s for $12 million per year, subject to escalation.  Both leases are governed by a master lease agreement with GLPI, which has an initial term of 15 years and includes four, five-year options.  No cash outlay was required by Bally’s at closing. 

 Tropicana Evansville maintains 79,000 square feet of enclosed space, including 45,000 square feet of casino floor, four dining venues, a race and sportsbook, and back of house space.  The complex also includes 11,000 square feet of convention space adjacent to the casino, and a Riverfront Event Center located across the street, which includes 10,000 square feet of convention space overlooking the Ohio River.  Accommodations include a 243-room hotel tower and a 95-room boutique hotel.     

Pennsylvania - Centre County newbuild

On January 4, 2021, Bally’s announced that it signed a framework agreement with Ira Lubert to jointly design, develop, construct, and manage a Category-4 licensed casino.  The Pennsylvania Gaming Board awarded Lubert the right to apply for a Category-4 slot machine license for a casino to be located within a 15-mile radius of Unionville Borough, Centre Country, Pennsylvania.  This is anticipated to come online in 1H 2024.  The property will house up to 750 slot machines and 30 table games, in addition to retail sports betting, online sports betting, and online gaming.  As mentioned already, Bally’s has a majority equity interest and will have 100% of the economic interests in all the retail sports betting, online sports betting, and i-Gaming activities.                

Chicago

As mentioned above, on May 5, 2022, Bally’s was selected as the preferred bidder for Chicago’s megacasino.  Bally’s Chicago will ultimately be a $1.7 billion destination casino, entertainment, and hotel project.  Chicago put out a formal RFP on April 22, 2021 making clear that it wanted a world-class entertainment destination.  This will be Chicago’s first-ever casino, and various parties in Chicago have been pursuing this for three decades in one form or another.  With about 9.5 million people, the Chicago MSA is the third largest in the country and the city’s gross regional product is nearly $700 billion.  It also has a massive tourist population.  

The five submissions included Bally’s McCormick, Bally’s Tribune (which won), Hard Rock Chicago, Rivers 78, and Rivers McCormick.  Bally’s Tribune best addresses the core goals of the RFP which included economic and financial benefits to the city, job creation, equity, and design/planning/amenities/transportation considerations.  Bally’s benefited from its ability to work with the unions and also not have a competing property nearby.  Union Gaming was the city’s consultant in analyzing the proposals (below).  

Bally’s Tribune was selected and the rendering is below: 

The first phase of the project will include the one million square feet casino building, 500-room hotel, 3,000-person event space, dozens of infrastructure improvements in the surrounding area, and a significant amount of public open space.  There are estimated to be 3,000 construction jobs and 3,000 permanent jobs.  The permanent location is located on the 30-acre Chicago Tribune Publishing Center at the intersection of Chicago Avenue and Halsted Street.  The temporary location will be up and running in 2H 2023 and the permanent location should be in operation Q1 2026.   

Union Gaming’s forecasts are below:

Excluding the benefit from i-Gaming (which should be substantial when approved), we estimate that the NPV of Chicago for BALY is approximately $6/share after taking into the financing structure.  This assumes a ramp to $250 million of EBITDAR (the real estate partner will be paid $35 million annually) and 75% BALY ownership of the Chicago subsidiary.  Going through the assumptions, we feel that this is very reasonable.  

International Interactive

Gamesys is an amazing company with an exciting history, but this is not always clear from the annual BALY filings.  To get a flavor for the goals and culture of Gamesys, one needs to read the prior (2020 and before) Gamesys annual reports.      

Gamesys is a leading international online gaming operator that provides entertainment to a global consumer base.  Gamesys currently offers bingo and casino games to its players using brands that include Jackpotjoy, Virgin Games, Botemania, Vera & John, Heart Bingo, Megaways, Rainbow Riches Casino, and Monopoly Casino, and focuses on building a diverse portfolio of distinctive and recognizable brands that deliver best-in-class experiences and gaming content.     

 The acquisition of Gamesys ($3.042 billion, 10.7x 2020 EBITDA) by Bally’s was announced on April 13, 2021 and closed on October 1, 2021.  For each Gamesys share, Gamesys shareholders could choose to receive 1,850 pence or 0.343 BALY shares, or a combination thereof.  Gamesys was listed on the premium listing segment of the Main Market of the London Stock Exchange.  Bally’s issued approximately $700 million of shares at $55/share to help finance the transaction.  As mentioned previously, the Gamesys CEO and other senior Gamesys managers rolled their entire ownership stakes into BALY stock.

JPJ Group acquired Gamesys in a reverse merger in September 2019.  JPJ Group was a leading global bingo-led operator with a strong portfolio of online gaming brands.  Even taking into account the JPJ combination, Gamesys has had very impressive organic growth.  Sales were up 29% in 2020 and 6.5% in 2021.  

Although 2021 was an up year for Gamesys, numbers started softening in Q4 2021 but have rebounded in Q4 2022.  Based on our own work, we estimate that the UK will be up high-single digits in Q1 2023.    

The slide below is from 2021 but the majority of the statistics still hold.  Gamesys EBITDA margins are now above 30%.  Gamesys has the number one casino-led market share in the UK, one of the world’s largest regulated online gaming markets, and generates industry leading EBITDA margins. 

The UK whitepaper has finally come out, and Gamesys has already been implementing a number of the recommendations.  There are approximately 200 players in the UK and this should consolidate down to a small fraction of that (some say there will simply be 6 scaled players, for instance) which will benefit Gamesys tremendously.

Gamesys has significant growth ahead of it both in the UK, Asia, and in other parts of the world such as Brazil.  The Asia part of Gamesys is primarily Japan, and this is a long-term growth market where Gamesys is a market leader in i-Casino.  A new team in Asia with a strong track record has come on board recently and this is expected to propel further growth.    

North American Interactive

The North American Interactive segment consists of i-Gaming and online sports betting in the United States and Canada.  OSB in North America has been incredibly competitive with players burning significant marketing dollars to garner initial share positions.  In Q2 2021, Bally’s closed on Bet.Works during the land grab for digital OSB assets, and recently essentially wrote off the acquisition.  Reeves was upfront on the Q4 2022 call saying “On sports, we recognized the Bet.Works acquisition did not give us the platform required to develop a competitive product.  We did not react fast enough and this will not happen again.”  While some useful technology, OSB know-how, and personnel came from the acquisition, Bally’s has pivoted and entered into an exclusive long-term sportsbook partnership with Kambi Group plc.  Kambi will support the expansion and enhancement of Bally’s online and retail sportsbooks with the provision of Kambi’s fully managed sportsbook.  Bally’s is planning to be powered by Kambi in at least seven U.S. states and at four retail gaming locations by year end.  Bally’s has the option down the road to acquire the license to a limited part of Kambi’s online and technology source code.  Our projections do not assume any cash flow from OSB for Bally’s, but long-term we certainly believe Bally’s will generate OSB profits, especially given the Kambi partnership. 

Bally’s is currently doing approximately $50 million in i-Gaming run-rate GGR in New Jersey at very attractive margins.  The Company is targeting 6-8% i-Gaming market share in NJ which is very achievable given its current growth trajectory and the strength of its product offering.  Bally’s i-Casino was launched in December 2021 and the CAC is sub $250.  The growth in deposits below is a precursor to the GGR growth to follow.   

Bally’s success in NJ, a large and competitive market, demonstrates that the Company can be incredibly successful nationally.  Trends for BALY look good in Ontario and PA will be up and running shortly for BALY.   Progress is being made on legislation that would legalize i-Gaming in Illinois.  With a megacasino in Chicago, BALY will be a huge beneficiary of i-Gaming approval in Illinois.  

Even a more mature market like NJ will be in growth mode for many years.  NJ had $726 million of i-Gaming GGR in 2019, $1.3 billion in 2020, $2.1 billion in 2021, and $2.4 billion last year.  It is forecasted to have $3.3 billion in 2026.  And by 2026, the PA market is estimated to be similarly sized.  Nationally, i-Gaming GGR was $1 billion in 2019, $3 billion in 2020, $7.8 billion in 2021, $12.4 billion in 2022, and should be around $24 billion by 2026.   

Rhode Island is also likely to be a great market for Bally’s North America Interactive segment.  https://www.casino.org/news/ballys-wins-over-rhode-island-senate-president-for-igaming/

2023 Guidance

My numbers are net of stock compensation and exclude Chicago, but otherwise my 2023 is consistent with guidance.  The CFO guided to (1) $460 million of EBITDAR and $1.4+ billion of revenues in the Casinos & Resorts segment, (2) 30%+ EBITDA margins in International Interactive, (3) a $40-$50M adjusted EBITDA loss in North America Interactive, (4) $55 million of corporate expense, (5) $124 million of rent expense, and (6) capital expenditures of $170 million, consisting of $125 casino expansion & maintenance and $45 million in Interactive software development costs.     

Given that weather was uniquely bad for Bally’s in Q1 2022, I expect Q1 2023 earnings to be a solid comp.  We are very confident in the Company hitting guidance.  The CFO Bobby Lavan is very talented and did an excellent job reducing the cost structure at his last public company.  He worked in the hedge fund industry for many years and has been a public company CFO before.  He has taken concrete steps to reduce the cost structure of North America Interactive: 

Based on his above actions, $40-$50 million of losses in North America Interactive (with breakeven next year likely) is very reasonable.  Bobby is managing corporate costs, and International Interactive is already at 30%+ EBITDA margins.  

So is the $460 million of Casino & Resorts EBITDAR reasonable?  In 2022, we had about $400 million of EBITDAR in the segment.  Atlantic City EBITDAR should go from -$5 million to $5 million.  This property is a turnaround but it is coming along.  This Atlantic City property at one point generated $20 million in EBITDAR.  The incremental capital expenditures that went into Kansas City should result in a $10 million gain.  The IGT joint venture will add $7 million of EBITDA.  The additional capital expenditures at Lincoln should add $10 million, and then the temporary facility in Chicago will add $25 million. This is sufficient to bridge from 2022 to guidance.  

Management

Robeson Reeves is the new CEO and previously was President of Interactive.  He joined with the Gamesys transaction.  He served as COO of Gamesys since July 2015 until joining Bally’s.  He joined Gamesys in 2005 and held numerous positions, including becoming Director of Gaming Operations and joining the Gamesys board in 2010. 

Bobby Lavan became the CFO of Bally’s in April 2022.  He previously was the CFO of Turning Point Brands, a publicly traded tobacco company.  Prior to that, he was the CFO of General Wireless.  Bobby has extensive buyside experience as well.  Bobby has developed an expertise in acquisition integration, controlling costs, complex systems integration, and streamlining reporting analytics.    

George Papanier was President and CEO of the Company from 2011 until the Gamesys acquisition in October 2021.  He is now the President of Casinos & Resorts.  From 2004 to 2011 he served as the COO.  He has more than 35 years of experience in the gaming industry and has a reputation as a strong operator.  He has worked in several gaming geographies, some of which overlap with the BALY’s acquisitions.  He started his career with Sands Hotel and Casino, and then worked in finance for the Trump Plaza Hotel in Atlantic City before serving in executive operations roles for Hemmeter Enterprises in Colorado.  He then had CFO positions for Sun International Hotels Limited in the Bahamas and Mohegan Sun Casino in CT before returning to Atlantic City in the late 1990s as COO of Resorts Casino Hotel.  He became the COO for Peninsula Gaming properties in Iowa and Louisiana before becoming the COO at Twin River. 

Phil Juliano is an Executive VP and the Chief Marketing Officer on the Retail side.  He is originally from Atlantic City and has been in the industry for 35 years.  He joined Twin River in 2009.  He has worked at Wynn, Trump, and Binion properties.  Phil has successfully evolved the company’s advertising, marketing, and promotional activities. 

Craig Eaton is an Executive VP and the General Counsel & Compliance Officer and has been with the company for 15 years.  

Soohyung Kim, the managing partner of Standard General, is the Chairman of the board.  He was appointed Chairman in December 2019 and has been a director since 2016.  We have found Standard General to be an excellent steward of capital.  While Standard General’s positions are frequently less liquid than many other equities we purchase, that is more than compensated for by the firm’s value-with-a-catalyst style and long-term approach.    

Valuation Assumptions

We value BALY based on the following assumptions: 

2023: Casinos & Resorts (ex-Chicago) revenues and EBITDAR of $1.3 billion and $429 million, respectively, and $124 million of rent expense.  International Interactive revenues and EBITDA of $1.0 billion and $321 million, respectively.  And North American Interactive EBITDA losses of $45 million.  Corporate expense of $55 million, and $31 million of stock compensation expense.  This yields $495 million of EBITDA ex-Chicago.  

We grow Casinos & Resorts sales at 2.5% over several years and take EBITDA margins up from 33% in 2023 to 36% over a 10-year horizon.  Keep in mind that Atlantic City and the Tropicana are lower margin properties.  We grow International Interactive at 5% with 32% EBITDA margins, and North American Interactive we scale to $500 million eventually with $125 million of EBITDA.  

Outside of Chicago, there is about $95 million of Casino & Resorts growth capex over the next two years ($50 million in 2023 and $45 million in 2024), and we also model in the cash outflows related to the Sinclair naming rights (currently $6 million, going to $8 million and then $10 million).  

Our unlevered exit P/E is slightly below 15x, and this yields a current value of $70.  We then layer in Chicago as a separate unit/SPV and this takes the total value above $75.  A multi-year valuation approach is our preferred method here given the waterfall of various projects coming online.  One can also look at the value over several years.  For instance, we believe $10 of FCF/share (with debt below 2x) is achievable by 2030 (the permanent Chicago facility comes online in 2026).  This would put the shares at $150, for a 37% IRR over the next 7 years.   

Obviously if BALY were to monetize the real estate below and receive cash well above today’s market cap, that would be interesting, but for many reasons this will not happen for a few years.  We do not include it in our valuation model described above, but it is a nice lever to be employed at some point.  

Risks & Concerns

• Thoughts on the former CEO Lee Fenton recently departing?  

  • Lee is a great manager with a strong record, but Robeson is closer to the analytics and development of i-Gaming products and we will benefit from him directly attacking North American Interactive in addition to continuing to scale the Gamesys side of the business.  Robeson also made a sound decision in choosing Kambi and aiming to convert a significant proportion of costs in North America Interactive from fixed to variable.  The Casino & Resorts segment is in great hands with George Papanier.  

• Leverage

  • Leverage will be coming down steadily as the Company pays down debt and grows cash flows.  A significant amount of the Company’s debt is floating rate, so they will benefit from rates eventually settling to lower levels over time.  

  • The Company is in compliance with the Rhode Island covenant and this metric will be improving.  

• Why not own Penn National or another regional gaming name instead?  

  • Refer to the spring schematic in the introduction.  

  • A lot of the preference by investors to own other names is due to BALY lagging in OSB.  Keep in mind that my numbers above assume North American Interactive cash flows stem completely from i-Gaming.  Also, if we assume North American Interactive produces $0 of EBITDA over time, we get a value of $60 per share for BALY.  Given the performance of BALY in NJ, this will not happen, but it helps to segment the value.   

• Liquidity risk – why own this when Standard General has such a large stake? 

  • I view Standard General’s involvement as a huge positive.  

    • Standard General was a driver of the contrarian M&A in 2020 during the pandemic. 

    • It also led the Gamesys acquisition which will prove to be a great acquisition.

    • It encouraged the Company to do the tender offer last summer.

    • It has substantial experience working with gaming companies and levered issuers.

Catalyst

1. 2023 guidance is very reasonable.  Earnings reports should be catalysts.  

2. Execution on Chicago.  The team is incredibly focused on this.   

3. Growth in International Interactive.

4. Growth in North American Interactive.

5. Margin improvement in Casinos & Resorts.