Description

Bally’s has been written up 2x before on VIC (2021 and 2023). Despite good thesis (IMO), neither has worked. Here’s hoping third time is the charm.

The thesis here is generally simple: BALY is a levered equity stub with a heck of a lot of asset value and optionality. As I’ll detail later, it’s likely materially undervalued without the event angle I’m about to discuss. BALY and insiders recognize that undervaluation; in Q4, almost every insider bought stock when the window was open, and the company repurchased ~10% of their shares outstanding (and ~20% of their free float given significant insider ownership and Sinclair’s non-publicly traded warrants) for ~$11.80/share.

That undervaluation came to a head Monday, when Standard General offered to buyout Baly for $15/share (BALY responded by forming a special committee Tuesday). BALY stock was trading ~$10.60/share before the offer, so the offer represents a substantial premium…. Yet, as this article will detail, I think it’s likely the bid highly undervalues BALY, and Standard General is likely to bump their bid in order to take BALY private now (and I think doing so will be a complete steal).

Let me start with the biggest pushback to thesis: with the stock currently trading <$14, the market clearly has some doubts about the offer going through (for comparison, RCM got a bid for $13.75 from a major shareholder last month and currently trades for ~$14/share; the two situations aren’t pure comparisons but there are a lot of similarities and I think BALY trading for a large discount while RCM trades for a slight premium shows you how seriously the market takes the deals). Perhaps that doubt is rightly placed; Standard has offered to buy Bally’s before, offering $38/share (a ~30% premium) in early 2022. That offer was eventually rejected by the company, who instead chose to pursue a large tender offer, which eventually resulted in them buying back ~$100m shares at $22/share (there are two humorous notes to that tender; first, it was well undersubscribed and second, Standard sold ~3% of their stake into the tender, which is kind of funny given they were trying to buy the wholeco for a huge premium a few months before).

Given that history, I’ve seen tons of skepticism on the current Standard bid. Are they just doing this to prop up the stock? Are they bidding to try to unearth another bidder with no intention of actually buying BALY themselves (as backup for this point, bears would point to Standard’s discussion on financing in their letter, which notes they’ve had discussions with financing sources but does not note definitive financing)?

I think both concerns are misguided; I’d suggest Occam’s Razor applies here: when a >20% shareholder offers to buy a whole company after an aggressive repurchase and a wave of insider buying, they’re doing it because they are serious and because they see huge unrecognized value in the stock. I think this bid is credible and likely to be completed… after a bump.

The most important part of this story is the undervaluation angle, so let’s cover that first. BALY is currently a hugely levered stub; at the bid price of ~$15/share, BALY would have a market cap <$800m against >$3.5B in debt for an EV of ~$4.3B.

The company is guiding to ~$675m in EBITDAR; with ~$125m in rent expense and ~$165m in capex (before Chicago and Tropicana), BALY is trading <8x EBITDA and ~11x EV / unlevered free cash flow. That valuation is roughly inline with where regional gaming operators trade (BYD, Penn, RRR, MCRI, GDEN).

Those are cheap-ish numbers, but peeling back the onion I think reveals significant add backs that would increase the cheapness / margin of safety.

The most obvious is the North America Interactive loss of ~$30m for 2024. In Q2’23, Bally’s signed a deal with Kambi group and White Hat that will dramatically reduce the cost of this segment. I’d encourage you to look at their Q1’23 earnings call to see how they were thinking about the partnership; they openly admit their current offering was subscale and “inefficient.” With the new, lower cost partnership fully rolling through in 2024 and BALY’s set to launch in Rhode Island in Q1’24 (where BALY will be the exclusive provider) plus annualizing a bunch of recent launches (BALY’s launched in 7 states in H2’23), I’d suggest interactive will swing from a loss to a profit for 2025. That swing alone would result in a significant reduction in the overall multiple. If I am wrong and Interactive turns out to be a black hole of losses, I’d note the online licenses have value in a “shut it all down and sell it” scenario (in particular, I believe Bally’s New York license could fetch a pretty penny; Penn paid $25m for Wynn’s NY license last month). I’d also note pure play online operators trade for wild multiples, so in an upside scenario where BALY gets this division profitable it could be a big tailwind.

The second area of cheapness is the Tropicana. The Oakland A’s are moving to the Tropicana, and Bally’s is shutting down / demolishing the Tropicana casino to prep for the new ballpark. So Tropicana’s earnings are barely reflected in this year’s earnings numbe…. But there’s obviously huge value in the Tropicana. Bally’s bought the Tropicana for $150m; per BALY’s Q3 call, the A’s are investing $1.5B into the site. What is that site worth? I have no idea, but connected to a brand new ballpark I’d suggest any development has the potential to be the crown jewel property on the strip. BALY bought it for $150m, or ~$3/share, and obviously none of that value is showing up in this year’s EV / EBITDA. It’s entirely possible the Tropicana alone is worth half (or more) the equity value here.

The third area for cheapness is Bally’s Chicago. This is a brand new facility that will begin construction in the back half of this year with a goal of opening in Q3’ 2026. This will require ~$1.1B in hard construction costs over the next two years. BALY’s has already sunk >$100m into the project (look at p. 24 of their Q3’23 10-q, and remember that’s just for the site!). I will admit that I’ve long been skeptical of the Chicago property, but there is no doubt significant money has already been invested here. I would also note that Standard has some benefit over us outside observers; the site will require financing and ultimately perhaps a partner, and Standard could have made this bid with information on how those discussions are going that we don’t have (so they may have a better view of value here).

The fourth area of value is Ferry Point. Bally’s took over the old Trump golf course there earlier this year, and they’re hoping to get a casino license for the site. If successful, this project could be worth an enormous sum as well. Will it be successful? Impossible to tell…. But if you go back to their Q3 call Bally’s notes that they are the only bidder “with local community support behind us.” I think the courses location makes a lot of sense for one of the three projects (you can’t have all three projects in downtown Manhattan, can you?), but this is admittedly a crap shoot….. though a potentially extremely valuable one.

So throw it all together and that is a heck of a lot of assets that BALY has that are currently producing limited or no earnings but have serious potential value (I’ll also throw out that Twin Rivers and Kansas City both completed expansions in 2023, so forward earnings should benefit from that capex a bit). I mentioned this a bit in the Chicago piece, but I think it’s worth reinforcing: the Tropicana, Chicago, and Ferry Point assets are all likely involved in multiple discussions around financing and value and regulation that Standard / Kim have some insight into in their role as largest shareholder / Chairman. That they are trying to buy this at $15 (and ok’d the huge share buybacks last quarter) probably gives you some insight into how those conversations are going / where they think value is.

Speaking of Standard, let’s talk about timing of the bid. I think what’s happening here is clear: BALY’s is on the cusp of multiple value unlocking transactions. There’s the financing and eventual opening of Chicago, the NYC license, and monetizing Tropicana in some way. All of those catalysts / unlocks will happen in the next 18 months. The reason the company was so aggressive with buybacks and Standard is making this bid now is because this is likely the cheapest the stock will ever be; once the value unlocks from those projects, the stock would be significantly higher. Being aggressive now let’s Standard capture all that upside for themselves (that, of course, assumes the projects are a success…. Perhaps a large assumption but again Standard should have some insight here!).

There’s one other thing that I think is worth noting here that shows how serious I believe Standard is: the language in the current offer has a lot of similarities to the language in the offer from early 2022,  but I think it differs in two key ways.

First, the new offer mentions “extensive discussions…. With potential financing sources.” While the prior offer suggested Standard’s deal would not have a financing contingency, it did not mention any prior discussions with financing sources. It’s a subtle change, but I think an important one. The change of language in the current bid shows how serious Standard’s bid is, and given the financing might include the sale of some assets or partnering on some of BALY’s growth assets, it suggests Standard already has a lot of their ducks in a row for realizing / unlocking value.

Second, the new offer allows stockholders to “roll-over” their investment into Standard’s deal. That roll-over was not available in Standard’s first offer in 2022. Standard’s first offer was ultimately rejected by the BALY’s board as undervaluing the business; given the share price and results since the rejection, I think you could probably pretty fairly Monday Morning quarterback that rejection, but I think Standard’s roll over offer is a big tell they want to get a deal done here. Standard probably has some indication of how the special committee looks at BALY’s value, and the roll over offer is a nice bridge that will let them get to a deal even if the special committee continue to think BALY’s value is way, way above the current share price (i.e. even if the special committee thinks fair value is $100/share, they could take a $15 or $20 price and just tell shareholders they think there’s a lot of value above that bid and they should roll).

How does this play out? Again, I think Standard’s offer is serious. I also think the board will share Standard’s view that fair value is a lot higher than current prices, and the 2022 process shows that the board will not just roll over. However, I think the board will also be a little chastened by how poorly the stock has performed since the last offer, and the combination of that embarrassment plus the ability to roll over will ultimately result in a deal getting done here. I know it would be a big bump from the first offer, but I think a deal around $20 makes sense for all parties. It would ultimately be a steal for Standard, and I think it would let the board walk away with a big win as it would be within the range of the 2022 tender offer and they could point to an enormous bump as well as a deal completed above 52 week highs.

Where could I be wrong?

I think four places.

First, casinos are obviously very economically sensitive businesses. A sudden downturn would almost certainly result in Standard pulling their bid as the whole sector retrenches.

Second, a big hiccup at any of the growth assets (i.e. issues with the Chicago casino construction) could make Standard question their bid…. Though I think the equity is so cheap Standard might go through with a deal (though maybe no bump!) even if one of the assets has bad news.

Third, the special committee could push back too hard on Standard and have unreasonable price expectations. This appears to have been the main driver of the 2022 deal not going through; it’s a risk here but given the egg on the committee’s face from the first deal plus the roll offer here, I think there is a deal to be struck for everyone.

Finally, I think the largest risk is financing. Standard does not have committed financing here, so they could have trouble financing a deal. I don’t think that’ll happen; as mentioned above, I think the language in Standard’s offer indicates they have a lot of knowledge where the funding for this is coming from. Standard also has a lot of experience with big and creative financing packages; for example, they partnered with Apollo for a ~$8.6B deal with Tegna (also worth reading this brief profile on Standard during the BALY / TGNA double bid days). Between creative partnerships and the possibility to sell off assets (International Interactive, for example, has previously been a standalone segment and doesn’t have much synergies with core BALY; selling that off could fetch an attractive multiple and fund a huge chunk of this deal) or continued sale leasebacks (Bally’s has done sale-leaseback with GLPI for most of their casinos, and they have several properties, most notably Twin Rivers, that could be an incremental source of financing in a sale-leaseback; that could be complicated by BALY’s leverage burden, but (again) Standard has lots of experience with complicated financing).

All of these concerns / risks are real…. But I think they are all misplaced. Standard has been invested in BALY for years. They control >20%, and they’ve already tried to take them private once. I think this process should be reasonably swift, result in a nice bump, and everyone goes home happy.

And what if I am wrong and this deal doesn’t happen? In the short term, I’m sure the stock heads back to ~$10. But, in the medium term, all of those positive options that Standard sees and was trying to take private will start paying off. Sure, any of them could come up empty, and BALY is cutting it close with the huge leverage….. but if a few of them pay off, the cash flow generation at BALY is going to be insane, and we already know BALY has no qualms with buying back shares at an absurd clip. The combination gives the stock multi-bagger potential once the initial dust settles. Again, the economy or any number of things could throw this off, but Standard is a sharp investor who sees value here, and I think that pays off over the next few years if this is still public.

Two last things to wrap this up.

First, I think Standard’s incentives are worth thinking about here. Their 13-F has them as effectively a one stock fund in BALY (though I believe they own a good deal of TGNA as well). Maybe you’re skeptical of the Standard bid and think they’re doing it to “paint the tape” as I’ve heard a few people say. I’d push back on that from a few angles.

• The timing of paint taping is off. If you really wanted to be that underhanded, at least do it towards the end of a quarter or the end of the year!
• Standard owns >20% of BALY and their founder is BALY’s chair. What does painting the tape for a short period of time do for them aside from inviting legal trouble and maybe get them kicked off the board as demolishing their reputation?
• Standard has had two bids in a row fail: their first BALY bid, and then the TGNA bid. Obviously Standard isn’t going to purchase BALY if the committee demands $100/share and won’t budge…. But I’d suggest Standard knows the market is going to look at any bid they make now skeptically, and Standard’s reputation would be harmed pretty seriously if this bid fizzles out (what future board is ever going to consider a BALY bid if they have two take privates in a row fail on top of the TGNA deal?). So while a bid isn’t guaranteed to go through, I think Standard would have to be very confident they have a path to getting this bid over the finish line before making it.

Second, the gaming space is known for M&A, and BALY has some assets that could be trophy / crown jewel assets (both the Chicago property and a post-A’s move Tropicana would be headliners in almost any casino companies portfolio), so it is possible a strategic gets involved here (I’ve also heard people suggest BALY made this offer to smoke out a strategic)……. But I’m pretty skeptical. ~Half of BALY’s earnings come from the international segment; that significantly limits the upside to a strategic acquirer as I don’t believe that unit would be a good fit with any of the natural buyers. I think Standard made this bid because they think BALY is on the cusp of a huge unlock and they see tons of upside they can capture, and a strategic would be more likely to get involved in a few years after Standard takes this private and can sell each of the pieces to the most natural buyer.

To finish, I’m just including a quote from Baly’s Chair / Standard’s PM. This is from BALY’s Q3’23 call; again, this doesn’t mean a deal can’t get done, but read this quote and think about how he’s thinking of value and ask if you think this is a “fake” bid or if he thinks shares are a steal and this bid is his way of being greedy just before all of their bets pay off. I think it’s the later, and I think he’s willing to bump his offer to close a deal before all of that value really starts to shine through (and, again, note the “multiple levers” for financing Chicago; obviously that’s just one project, but clearly he’s got views into the values being placed on that project and the levers he can pull to finance this bid).

Catalyst

Standard bumping their bid and completing the buyout