Description

Thesis:  Since the beginning of 2021, BYD has traded in a choppy $20/sh range, and it is now in the bottom of that range.  Over that period, BYD has been steadily repurchasing its shares and has reduced its total share count by 15%.  It has also reduced its debt from $4.0bn to $2.9bn, or net leverage of just 2.5x (including leases).  All of this, while continuing to invest in its properties.  On an enterprise level, BYD trades at 6.5x EBITDAR and a mid-teens% FCF yield to the equity.  When backing out the value of its stake in FanDuel and the implied value of its Las Vegas Locals segment, BYD’s regional casinos business trades at just 2.7x EBITDAR.  This reflects a deep and unwarranted discount to BYD’s historical trading multiple range of 7-10x EBITDAR.  The value in BYD could be unlocked through a PE take-private or acquisition by FLUT, as BYD represents a uniquely attractive acquisition target.        

Recent History:  Gaming stocks have broadly performed poorly since the end of 2021.  Initially, this was due to recession concerns, deflation of the sports-betting “bubble”, and high balance sheet leverage across the group.  BYD outperformed its peers, given (i) its operations held stable despite economic slowdown fears, (ii) BYDs sports-betting (“OSB) strategy was a highly profitable partnership with FanDuel rather than the massive investments made by peers like CZR and PENN, and (iii) its balance sheet leverage was well below that of peers and well under 3x EBITDAR.  Gaming revenue trends have remained stable, despite concerns about the economy and the industry over-earning during the post-covid boom in leisure spend.  Historically, regional gaming has proven to be resilient during economic slowdowns.

Business: BYD is a geographically diversified regional gaming operator, with a longstanding, stable and dependable management team.  BYD operates ~30 wholly-owned casino properties in Nevada and 9 other US states.  Most of its properties are resorts/hotels that feature pools, full casinos, restaurants, shops, and on-site entertainment options for guests.  The company also has a partnership with digital gaming company FanDuel, where it uses their technology for its own online, mobile gambling, and sports betting services.   BYD does not own any Las Vegas Strip properties, with 1/3 of its revenues from LV Locals and Downtown and 2/3 from other regional markets.  Importantly, the business has proven resilient in economic downturns due to its loyal player base, and it should benefit in an inflationary environment - owing to its largely fixed cost structure and owned real estate.

Overlooked Value:  BYD has four primary sources of value: (1) its 5% stake in FanDuel, the subsidiary of publicly traded Flutter Entertainment (FLUT); (2) its Las Vegas segment, which includes both Locals and Downtown casinos; (3) its other regional casinos and management contracts; and (4) its real estate, most of which is wholly owned.  

• The value of the FanDuel stake can be estimated based on 50% (excludes international businesses) of FLUT’s market cap.  This 5% stake amounts to $875mm currently, or about $9.20 per BYD share.

• RRR is a pureplay peer in the Las Vegas market, currently trading at nearly 11x EBITDAR.  This would imply a valuation of $5.7bn for BYD’s Las Vegas segment.  

• When the value of these two assets is subtracted from BYD’s EV of $8.6bn, it implies a $2bn valuation for BYD’s other regional casinos, or just 2.7x EBITDAR.

• Lastly, most of BYD’s casinos (including those in Las Vegas) are owned real estate.  This distinguishes BYD from its peers, most of which have already sold their real estate to REITs such as VICI and GLPI.  These REITS, trading at mid-teens EBITDA multiples, can pay in excess of 10x EBITDA for the real estate of gaming assets.  

Unlocking the Value: The best way to unlock BYD’s value would be through a transaction.  As a family business, the Boyd leadership would need to be willing sellers.  I have no insight as to their current willingness to transact.  I would only note that the entire team is in the twilight of their careers and the stock has underperformed the broader market now for over three years.  

• Private equity sponsors have been active in the gaming industry.  Casinos’ real estate and steady cash flow makes these companies attractive targets for PE.  BYD is a uniquely attractive asset, given its low leverage and owned real estate.  PE could buy BYD for 8x EBITDAR, sell the real estate for over 10x EBITDAR, and sell the FanDuel stake for over 14x EBITDAR (FLUT currently trades at 14.5x EBITDAR, and that includes the slower growth international segments).  

• Alternatively, FLUT could acquire BYD.  FLUT is well acquainted with BYD’s assets, through its market access partnership.  Conveniently, BYD owns a 5% stake in FanDuel that would help to finance the transaction, as FLUT would essentially be repurchasing its own shares at a large discount to their public trading value.  Ultimately, such a transaction would secure the market access FLUT requires, while also allowing FLUT to acquire BYD’s share of OSB revenue and its casino operations at a multiple highly accretive to FLUT.  

PENN rumors: New activist involvement in PENN has resulted in press rumors of BYD’s interest in acquiring PENN.  More recently, there have also been press rumors of FLUT acquiring parts of PENN.  (Going only based on what has been reported in the press), I find these rumors to be implausible.

• PENN’s operations are by all accounts efficiently managed, with few likely synergies to BYD in a tie-up.  Furthermore, PENN has substantial overlap with BYD’s geographic footprint, creating dyssynergies through forced divestitures.  Lastly, PENN’s management has given no indication it is willing to entertain such a transaction, and they have instead barreled headlong into a (heretofore disastrous) OSB strategy.  Unwinding their partnership with ESPN would be problematic in a transaction.

• BYD management has shown itself to be disciplined and conservative regarding capital deployment.  As CZR and PENN were dumping capital into standing up their own OSB segments, BYD more prudently partnered with FanDuel and has since reaped steady and robust cash flow (rather than the negative cash flow of its peers).  BYD has passed on many new development and acquisition opportunities, which others have chosen to pursue (and later regretted doing so).  Further back into history, when the GFC was taking hold, they were quick to halt (and later divest) their Echelon development, choosing not to throw good capital after bad (and thereby minimizing losses).  With BYD’s stock trading at a depressed multiple, there is little valuation accretion to be achieved through a PENN acquisition, and I do not believe management would undertake such a potentially value-destructive transaction.

• Regarding FLUT, why would the market leader wish to acquire the OSB assets of PENN?  Presumably FLUT had the chance to bid on the ESPN rights, and they either chose not to or bid far less than PENN.  What FLUT needs is market access, and they already have that through the BYD partnership.  It makes far more sense for FLUT to acquire BYD than to engage in a messy transaction with PENN.

• Ultimately, I view these rumors leaked to the press as likely sourced from either PENN shareholders or bankers trying to compel some kind of transaction.  The more logical transactions would involve unlocking BYD’s hidden value as a seller. 

Conclusion: In healthy economic environments, BYD has historically traded in the 8.5-10x EBITDAR range.  This multiple range today implies $95-128 per share (+75-140% upside).  There are clear catalysts that could unlock this value, and I believe BYD management will ultimately find themselves incentivized to pursue one.           

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.  

Catalyst

Acquisition of BYD