MTR GAMING GROUP INC MNTG 11.5%
April 27, 2013 - 2:29pm EST by
opco
2013 2014
Price: 104.50 EPS NA NA
Shares Out. (in M): 28 P/E NA NA
Market Cap (in $M): 98 P/FCF 9.3x 9.3x
Net Debt (in $M): 481 EBIT 66 66
TEV ($): 579 TEV/EBIT 8.8x 8.8x

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  • Gaming
  • Gambling
  • Undervalued Bond

Description

MTR Gaming is a regional operator of middle-market casinos and horseracing tracks.  The stock has been written up twice on VIC, both times as a long.  The stock was first written up as a long in June 2001 when the stock was at $11.88, and subsequently as a long in December 2004 when the stock was at $10.00. Currently the stock is at $3.54.  While I understand the allure of the levered equity at this price, I am recommending a less exciting but still attractive investment in the bonds.  The MNTG 11.5% bond due August 2019 is 6-year paper yielding 10.5% to maturity and 10.2% yield to worst call (961 bps spread) if called in August 2017.  The bonds are essentially the entire capital structure.   

If the bonds trade to an 8.5% yield in a year, we achieve a 17% total return, attractive for a credit given the equity-like return.  For individual investors, I would recommend making the investment out of an IRA.

Negative covenant protection.  Call protection - bonds cannot be called until 8/1/2015 (106 call price).  Drops to 103 on 8/1/2016 and then par on 8/1/2017.

Note: The P/FCF multiples given above do not back out excess cash.  Ex-cash, the FCF multiples are much lower. 


Business Description

The company currently has 3 properties: Mountaineer Casino, Racetrack & Resort in WV; Presque Isle Downs & Casino in Erie, PA; and Scioto Downs in Columbus, OH.  A meaningful driver of value is that Scioto Downs recently opened a VLT gaming facility.  

Mountaineer has 2,062 slot mahines, 47 tables games, 12 poker tables, 106,000 gaming square ft, a thoroughbred racetrack, 354 hotel rooms, 376 acres.        

Presque Isle Downs has 1,931 slot machines, 44 tables games, 9 poker tables, 59,000 gaming square feet, a thoroughbred racetrack, 272 acres.  

Scioto Downs has a harness racetrack and gaming facility, 2,107 VLTs, 65,000 gaming square feet, 208 acres.  The market does not fully appreciate the full potential of Scioto Downs.  Once fully ramped, I expect Scioto Downs to generate around $50 million of EBITDA.  

MTR has a customer base with 1.7 million players in loyalty programs.  

Jeffrey Jacobs owns 18% of the shares and is the CEO of Jacobs Entertainment http://jacobsentertainmentinc.com/about-us/.  

Jeffrey's father Richard was a major real estate developed and owned the Cleveland Indians.  


Current Capital Structure

$ in millions except per share amounts

 

52-week high (6/11/2012)               $5.72

52-week low (11/23/2012)              $2.74 

Share price                                        $3.54

Outstanding shares                            27.7

Market capitalization                          $98

 

Cash                                                 $90    (Had $115 million of cash as of 12/31/2012, and I am deducting $25 million for a license fee to be paid in June)

Revolver 8/1/2016                               0     ($20 million of availability)

Sr. secured 2nd lien note 8/1/2019    571

Net debt                                            $481 

TEV (total enterprise value)                $579

 

2012 EBITDA                                     $94

TEV / 2012 EBITDA                            6.1x

 

Maintenance capex                             $15 (but will spend closer to $20 million in 2013)

EBITDA less maintenance capex          $79

TEV / EBITDA - maint capex                7.3x

 

Competition

Mountaineer and Presque Isle Down have both been impacted by the new Horseshoe Cleveland casino.  I believe that Mountaineer and Presque Isle Downs have felt the full impact of this competition in Q4 2012.  Analysts are worried that Mountaineer will be impacted by Penn National's planned casino in Youngstown, OH which will probably come online at the end of 2014.  My work indicates that this property will not have a large impact on MTR.  In the markets near Mountaineer and Presque Isle Downs, new competition will come online in the form of Nemacolin Woodlands (summer 2013), Thistledown (commencing VLT operations in spring 2013), Northfield Hard Rock (December 2013),  and Penn's future property in Youngstown (end of 2014).  While these new facilities will impact Mountaineer and Presque Isle Downs, it will not be nearly as impactful as the impact which Horseshoe Cleveland had.  Additionally, I expect the difference to be made up in the form of Sciotto Downs which has been ramping operations and is constructed.  The best way to get comfortable with the competitive landscape is to talk to the company, competitors, and the gaming commissions as well.  


P&L - consolidated

Revenues     2007 2008 2009 2010 2011 2012
Gaming     $371.0 $418.1 $400.6 $382.5 $385.3 $445.8
   growth       12.7% -4.2% -4.5% 0.7% 15.7%
Pari-mutuel commissions 13.3 14.5 12.8 11.2 10.2 10.4
   growth       8.5% -11.4% -12.7% -8.7% 1.6%
Food, beverage, lodging   29.4 36.0 32.0 32.3 32.6 36.5
   growth       22.2% -11.1% 0.9% 1.1% 11.9%
Other     8.1 10.3 8.8 8.7 11.1 11.4
   growth       27.3% -14.9% -0.3% 26.7% 2.9%
Gross revenues   $421.8 $478.8 $454.1 $434.7 $439.2 $504.1
   growth       13.5% -5.1% -4.3% 1.0% 14.8%
Less: promotional allowances (6.0) (7.9) (10.0) (9.8) (11.1) (14.1)
   % gross revenues   1.4% 1.7% 2.2% 2.3% 2.5% 2.8%
Net revenues     $415.8 $470.9 $444.2 $424.9 $428.1 $490.0
   growth       13.2% -5.7% -4.3% 0.8% 14.5%
                 
Operating expenses              
Gaming     232.5 265.1 251.1 239.4 244.3 267.2
   % gaming revenues   62.7% 63.4% 62.7% 62.6% 63.4% 59.9%
Pari-mutuel commissions 11.7 14.2 12.5 11.3 11.4 11.1
   % pari-mutuel revenues 87.6% 97.9% 97.8% 100.8% 111.8% 106.9%
Food, beverage, lodging   25.2 28.8 23.6 23.2 23.7 28.6
   % food, bev, lodging revs 85.6% 80.0% 73.9% 72.1% 72.7% 78.3%
Other     7.1 8.8 6.2 6.1 6.3 7.4
   % other revenues   87.8% 85.4% 71.2% 70.3% 56.7% 64.7%
Marketing & promotions 17.6 15.9 19.6 12.8 12.6 16.9
   % net revenues   4.2% 3.4% 4.4% 3.0% 2.9% 3.5%
G&A     61.3 67.1 66.7 54.1 53.0 62.7
   % net revenues   14.7% 14.3% 15.0% 12.7% 12.4% 12.8%
Project opening costs   5.6 0.0 0.0 1.4 0.2 2.7
   % net revenues   1.3% 0.0% 0.0% 0.3% 0.0% 0.6%
Depreciaton     27.8 29.8 29.3 28.7 27.9 27.5
Impairment loss   0.0 0.0 11.9 0.0 0.7 0.0
(Gain)/loss on the sale/disp prop 0.1 3.0 0.2 0.1 0.5 (0.1)
Total operating expenses 388.9 432.6 421.3 377.1 380.5 424.0
                 
Operating income   $26.9 $38.2 $22.8 $47.8 $47.6 $66.0
   % margin     6.5% 8.1% 5.1% 11.2% 11.1% 13.5% 


2012 Quarterly P&L - segment

      Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012
Mountaineer              
Revenues     $59.0 $58.7 $57.4 $47.0 $222.0
   growth     14.7% 2.0% -3.4% -15.7% -0.9%
Adj EBITDA   12.8 12.3 11.2 7.2 43.5
   margin     21.6% 21.0% 19.6% 15.3% 19.6%
               
Income from continuing ops 10.0 9.5 8.5 4.8 32.8
Interest (income) expense, net 0.0 0.0 0.0 0.0 0.0
Income taxes     0.0 0.0 (0.0) 0.0 (0.0)
Depreciation     2.8 2.8 2.8 2.4 10.8
(Gain) loss on sale/disposal prop (0.0) 0.0 0.0 0.0 (0.0)
Loss on debt mod/extinguishment 0.0 0.0 0.0 0.0 0.0
Impairment loss   0.0 0.0 0.0 0.0 0.0
Adj EBITDA   $12.8 $12.3 $11.2 $7.2 $43.5
               
Presque Isle Downs            
Revenues     $48.9 $47.8 $47.6 $36.9 181.2
   growth     4.4% -8.2% -13.0% -22.3% -9.9%
Adj EBITDA   10.8 9.9 8.6 5.8 35.1
   margin     22.2% 20.7% 18.0% 15.7% 19.4%
               
Income from continuing ops 7.1 7.4 5.8 1.9 22.3
Interest (income) expense, net (0.0) (0.0) (0.0) (0.0) (0.1)
Income taxes     0.6 0.6 0.6 1.7 3.6
Depreciation     3.2 2.0 1.9 1.9 9.0
Other reg. gaming assessements (0.1) (0.1) 0.2 0.4 0.4
(Gain) loss on sale/disposal prop 0.0 0.0 0.0 (0.0) (0.0)
Impairment loss   0.0 0.0 0.0 0.0 0.0
Adj EBITDA   $10.8 $9.9 $8.6 $5.8 $35.1
               
Scioto Downs            
Revenues     $0.1 $12.6 $41.7 $32.4 86.8
   growth     NM NM NM NM NM
Adj EBITDA   (0.7) 1.7 15.1 10.8 26.9
   margin     NM 13.5% 36.2% 33.4% 31.0%
               
Income from continuing ops (0.7) 1.4 11.9 7.7 20.3
Interest expense, net   (0.2) (0.9) (0.1) 0.0 (1.2)
Income taxes     0.0 0.1 0.1 (0.2) (0.0)
Depreciation     0.2 1.1 3.2 3.3 7.8
Gain on debt extinguishment 0.0 0.0 0.0 0.0 0.0
Adj EBITDA   ($0.7) $1.7 $15.1 $10.8 $26.9
               
Corporate              
Loss from continuing operations ($19.6) ($20.4) ($20.9) ($20.0) (80.8)
Interest expense, net of int income 17.2 17.2 17.3 17.4 69.1
Income taxes     0.0 (0.0) 0.0 0.0 0.0
Depreciation     0.0 0.0 0.0 0.0 0.0
(Gain) loss on sale/disposal prop 0.0 0.0 0.0 0.0 0.0
Loss on debt extinguishment 0.0 0.0 0.0 0.0 0.0
Impairment loss   0.0 0.0 0.0 0.0 0.0
Adj EBITDA    ($2.4) ($3.1) ($3.5) ($2.6) ($11.6)
               
Consolidated              
Mountaineer     $59.0 $58.7 $57.4 $47.0 222.0
   growth     14.7% 2.0% -3.4% -15.7% -0.9%
Presque Isle Downs   48.9 47.8 47.6 36.9 181.2
   growth     4.4% -8.2% -13.0% -22.3% -9.9%
Scioto Downs   0.1 12.6 41.7 32.4 86.8
   growth     NM NM NM NM NM
Corporate     0.0 0.0 0.0 0.0 0.0
Total revenues   108.0 119.1 146.7 116.3 490.0
   growth     9.8% 7.8% 26.8% 12.2% 14.5%
               
Mountaineer     12.8 12.3 11.2 7.2 43.5
   margin     21.6% 21.0% 19.6% 15.3% 19.6%
Presque Isle Downs   10.8 9.9 8.6 5.8 35.1
   margin     22.2% 20.7% 18.0% 15.7% 19.4%
Scioto Downs   (0.7) 1.7 15.1 10.8 26.9
   margin     NM 13.5% 36.2% 33.4% 31.0%
Corporate     (2.4) (3.1) (3.5) (2.6) (11.6)
Total EBITDA   $20.5 $20.8 $31.4 $21.2 $93.8
   margin     19.0% 17.4% 21.4% 18.2% 19.1%
 

Q4 2012

The most recent results are from Q4 2012.  The company reports Q1 results on 5/7/2013.  Analyzing the Q4 results is crucial since you can see the very powerful impact competition had on Mountaineer and Presque Isle Downs.  Furthemore, it is evident that Scioto Downs was also impacted by the Hollywood Columbus.  For 2013 EBITDA, I model in Scioto Downs doing $49 million, Presque Isle Downs doing $23 million (down from $35 million in 2012), and Mountaineer doing $33 million (down from $44 million).  Deducting another $11 million in corporate costs, I get roughly $94 million of EBITDA, or similar to 2012 levels.
  

Questions/Concerns

Why purchase a security with capped upside when the company could go bankrupt?  I think the downside is relatively well-protected long term.  Let's assume EBITDA collapses to $70 million and let's place a 5x EBITDA valuation on the business.  So here we have a large drop in EBITDA coupled with meaningful multiple compression.  At a $350 million firm value in bankruptcy, today's 2nd lien holders would probably get a package of first lien debt plus all the equity in the company.  If the 1st lien is 2.5x levered, they would get a $175 million first lien which would be the only debt.  Of course there can be many permutations of post-restructuring capital structures, but the company would emerge with much less leverage.  At $70 million of EBITDA, this business would produce roughly $28 million in free cash flow to equity (i.e. real FCF, not unlevered FCF or pre-tax FCF).  Pricing the equity at a 10% yield, which is fair to conservative with the new capital structure, today's 2nd lien holders would get $175 million of first lien + $280 million of equity value, equating to $455 million in value, or a 77% recovery excluding interest.  Given the high coupon, if this scenario happened a few years from now and we got 2+ years of coupon, we would basically have recovered all of our capital.  This will not be a fun experience, but I do think we would emerge whole taking into accont interest.  The bonds are heavily owned by distressed firms which would work on our behalf in a restructuring.  There is no meaningful amount of first lien.  This bankruptcy scenario is given here: 

 

Valuation mutliple in bankruptcy          5x

EBITDA                                              $70

Implied valuation                                $350

 

New capital structure...

 

1st lien                                               $175 (2.5x leverage)

Implied equity                                     $175

Total value                                         $350

 

EBITDA                                               $70

Maintenance capex                              (15)

Interest                                               (12)

Cash taxes                                          (15)

FCF                                                     $28

 

Pro forma value @ 10% FCF yield

1st lien                                               $175

Equity                                                 $280 

Total value                                          $455 

 

What do you think about the equity?  The equity is definitely intriguing, especially since the business currently produces cash flow and the cash balance is very high.  If the market felt today's free cash flow was stable, the equity would be substantially higher.  For example, the company right now has $90 million of adjusted cash, and about $63 million of excess cash since roughly $27 million of cash is required for keep for casino operations.  On $95 million of EBITDA, one gets about $9 million of free cash flow taking into account full taxes and maintenance capex.  Applying a 10% yield to that FCF and then adding the excess cash would yield a stock price 60% higher.  If the numbers were to improve, they could eventually do a highly accretive refinancing additionally (11.5% on $570 million in a lot of expensive interest) which would add substantially more value.  They could in that scenario do some combination of bank and bond refinancing to bring down the blended debt cost to 8%.  All this being said, there is no margin of safety in the trade in a prolonged downturn, which is why I am avoiding the equity.       

CEO recently left the company.  My sources indicate that he was not forced out, but decided to leave for personal reasons.  There are strong managers at the individual properties and the CFO has a long tenure with the company and is competent.  

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Continued growth at Scioto Downs.  

Robust free cash flow. 

Market realizing bonds are covered and pricing accordingly.  

    sort by    

    Description

    MTR Gaming is a regional operator of middle-market casinos and horseracing tracks.  The stock has been written up twice on VIC, both times as a long.  The stock was first written up as a long in June 2001 when the stock was at $11.88, and subsequently as a long in December 2004 when the stock was at $10.00. Currently the stock is at $3.54.  While I understand the allure of the levered equity at this price, I am recommending a less exciting but still attractive investment in the bonds.  The MNTG 11.5% bond due August 2019 is 6-year paper yielding 10.5% to maturity and 10.2% yield to worst call (961 bps spread) if called in August 2017.  The bonds are essentially the entire capital structure.   

    If the bonds trade to an 8.5% yield in a year, we achieve a 17% total return, attractive for a credit given the equity-like return.  For individual investors, I would recommend making the investment out of an IRA.

    Negative covenant protection.  Call protection - bonds cannot be called until 8/1/2015 (106 call price).  Drops to 103 on 8/1/2016 and then par on 8/1/2017.

    Note: The P/FCF multiples given above do not back out excess cash.  Ex-cash, the FCF multiples are much lower. 


    Business Description

    The company currently has 3 properties: Mountaineer Casino, Racetrack & Resort in WV; Presque Isle Downs & Casino in Erie, PA; and Scioto Downs in Columbus, OH.  A meaningful driver of value is that Scioto Downs recently opened a VLT gaming facility.  

    Mountaineer has 2,062 slot mahines, 47 tables games, 12 poker tables, 106,000 gaming square ft, a thoroughbred racetrack, 354 hotel rooms, 376 acres.        

    Presque Isle Downs has 1,931 slot machines, 44 tables games, 9 poker tables, 59,000 gaming square feet, a thoroughbred racetrack, 272 acres.  

    Scioto Downs has a harness racetrack and gaming facility, 2,107 VLTs, 65,000 gaming square feet, 208 acres.  The market does not fully appreciate the full potential of Scioto Downs.  Once fully ramped, I expect Scioto Downs to generate around $50 million of EBITDA.  

    MTR has a customer base with 1.7 million players in loyalty programs.  

    Jeffrey Jacobs owns 18% of the shares and is the CEO of Jacobs Entertainment http://jacobsentertainmentinc.com/about-us/.  

    Jeffrey's father Richard was a major real estate developed and owned the Cleveland Indians.  


    Current Capital Structure

    $ in millions except per share amounts

     

    52-week high (6/11/2012)               $5.72

    52-week low (11/23/2012)              $2.74 

    Share price                                        $3.54

    Outstanding shares                            27.7

    Market capitalization                          $98

     

    Cash                                                 $90    (Had $115 million of cash as of 12/31/2012, and I am deducting $25 million for a license fee to be paid in June)

    Revolver 8/1/2016                               0     ($20 million of availability)

    Sr. secured 2nd lien note 8/1/2019    571

    Net debt                                            $481 

    TEV (total enterprise value)                $579

     

    2012 EBITDA                                     $94

    TEV / 2012 EBITDA                            6.1x

     

    Maintenance capex                             $15 (but will spend closer to $20 million in 2013)

    EBITDA less maintenance capex          $79

    TEV / EBITDA - maint capex                7.3x

     

    Competition

    Mountaineer and Presque Isle Down have both been impacted by the new Horseshoe Cleveland casino.  I believe that Mountaineer and Presque Isle Downs have felt the full impact of this competition in Q4 2012.  Analysts are worried that Mountaineer will be impacted by Penn National's planned casino in Youngstown, OH which will probably come online at the end of 2014.  My work indicates that this property will not have a large impact on MTR.  In the markets near Mountaineer and Presque Isle Downs, new competition will come online in the form of Nemacolin Woodlands (summer 2013), Thistledown (commencing VLT operations in spring 2013), Northfield Hard Rock (December 2013),  and Penn's future property in Youngstown (end of 2014).  While these new facilities will impact Mountaineer and Presque Isle Downs, it will not be nearly as impactful as the impact which Horseshoe Cleveland had.  Additionally, I expect the difference to be made up in the form of Sciotto Downs which has been ramping operations and is constructed.  The best way to get comfortable with the competitive landscape is to talk to the company, competitors, and the gaming commissions as well.  


    P&L - consolidated

    Revenues     2007 2008 2009 2010 2011 2012
    Gaming     $371.0 $418.1 $400.6 $382.5 $385.3 $445.8
       growth       12.7% -4.2% -4.5% 0.7% 15.7%
    Pari-mutuel commissions 13.3 14.5 12.8 11.2 10.2 10.4
       growth       8.5% -11.4% -12.7% -8.7% 1.6%
    Food, beverage, lodging   29.4 36.0 32.0 32.3 32.6 36.5
       growth       22.2% -11.1% 0.9% 1.1% 11.9%
    Other     8.1 10.3 8.8 8.7 11.1 11.4
       growth       27.3% -14.9% -0.3% 26.7% 2.9%
    Gross revenues   $421.8 $478.8 $454.1 $434.7 $439.2 $504.1
       growth       13.5% -5.1% -4.3% 1.0% 14.8%
    Less: promotional allowances (6.0) (7.9) (10.0) (9.8) (11.1) (14.1)
       % gross revenues   1.4% 1.7% 2.2% 2.3% 2.5% 2.8%
    Net revenues     $415.8 $470.9 $444.2 $424.9 $428.1 $490.0
       growth       13.2% -5.7% -4.3% 0.8% 14.5%
                     
    Operating expenses              
    Gaming     232.5 265.1 251.1 239.4 244.3 267.2
       % gaming revenues   62.7% 63.4% 62.7% 62.6% 63.4% 59.9%
    Pari-mutuel commissions 11.7 14.2 12.5 11.3 11.4 11.1
       % pari-mutuel revenues 87.6% 97.9% 97.8% 100.8% 111.8% 106.9%
    Food, beverage, lodging   25.2 28.8 23.6 23.2 23.7 28.6
       % food, bev, lodging revs 85.6% 80.0% 73.9% 72.1% 72.7% 78.3%
    Other     7.1 8.8 6.2 6.1 6.3 7.4
       % other revenues   87.8% 85.4% 71.2% 70.3% 56.7% 64.7%
    Marketing & promotions 17.6 15.9 19.6 12.8 12.6 16.9
       % net revenues   4.2% 3.4% 4.4% 3.0% 2.9% 3.5%
    G&A     61.3 67.1 66.7 54.1 53.0 62.7
       % net revenues   14.7% 14.3% 15.0% 12.7% 12.4% 12.8%
    Project opening costs   5.6 0.0 0.0 1.4 0.2 2.7
       % net revenues   1.3% 0.0% 0.0% 0.3% 0.0% 0.6%
    Depreciaton     27.8 29.8 29.3 28.7 27.9 27.5
    Impairment loss   0.0 0.0 11.9 0.0 0.7 0.0
    (Gain)/loss on the sale/disp prop 0.1 3.0 0.2 0.1 0.5 (0.1)
    Total operating expenses 388.9 432.6 421.3 377.1 380.5 424.0
                     
    Operating income   $26.9 $38.2 $22.8 $47.8 $47.6 $66.0
       % margin     6.5% 8.1% 5.1% 11.2% 11.1% 13.5% 


    2012 Quarterly P&L - segment

          Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012
    Mountaineer              
    Revenues     $59.0 $58.7 $57.4 $47.0 $222.0
       growth     14.7% 2.0% -3.4% -15.7% -0.9%
    Adj EBITDA   12.8 12.3 11.2 7.2 43.5
       margin     21.6% 21.0% 19.6% 15.3% 19.6%
                   
    Income from continuing ops 10.0 9.5 8.5 4.8 32.8
    Interest (income) expense, net 0.0 0.0 0.0 0.0 0.0
    Income taxes     0.0 0.0 (0.0) 0.0 (0.0)
    Depreciation     2.8 2.8 2.8 2.4 10.8
    (Gain) loss on sale/disposal prop (0.0) 0.0 0.0 0.0 (0.0)
    Loss on debt mod/extinguishment 0.0 0.0 0.0 0.0 0.0
    Impairment loss   0.0 0.0 0.0 0.0 0.0
    Adj EBITDA   $12.8 $12.3 $11.2 $7.2 $43.5
                   
    Presque Isle Downs            
    Revenues     $48.9 $47.8 $47.6 $36.9 181.2
       growth     4.4% -8.2% -13.0% -22.3% -9.9%
    Adj EBITDA   10.8 9.9 8.6 5.8 35.1
       margin     22.2% 20.7% 18.0% 15.7% 19.4%
                   
    Income from continuing ops 7.1 7.4 5.8 1.9 22.3
    Interest (income) expense, net (0.0) (0.0) (0.0) (0.0) (0.1)
    Income taxes     0.6 0.6 0.6 1.7 3.6
    Depreciation     3.2 2.0 1.9 1.9 9.0
    Other reg. gaming assessements (0.1) (0.1) 0.2 0.4 0.4
    (Gain) loss on sale/disposal prop 0.0 0.0 0.0 (0.0) (0.0)
    Impairment loss   0.0 0.0 0.0 0.0 0.0
    Adj EBITDA   $10.8 $9.9 $8.6 $5.8 $35.1
                   
    Scioto Downs            
    Revenues     $0.1 $12.6 $41.7 $32.4 86.8
       growth     NM NM NM NM NM
    Adj EBITDA   (0.7) 1.7 15.1 10.8 26.9
       margin     NM 13.5% 36.2% 33.4% 31.0%
                   
    Income from continuing ops (0.7) 1.4 11.9 7.7 20.3
    Interest expense, net   (0.2) (0.9) (0.1) 0.0 (1.2)
    Income taxes     0.0 0.1 0.1 (0.2) (0.0)
    Depreciation     0.2 1.1 3.2 3.3 7.8
    Gain on debt extinguishment 0.0 0.0 0.0 0.0 0.0
    Adj EBITDA   ($0.7) $1.7 $15.1 $10.8 $26.9
                   
    Corporate              
    Loss from continuing operations ($19.6) ($20.4) ($20.9) ($20.0) (80.8)
    Interest expense, net of int income 17.2 17.2 17.3 17.4 69.1
    Income taxes     0.0 (0.0) 0.0 0.0 0.0
    Depreciation     0.0 0.0 0.0 0.0 0.0
    (Gain) loss on sale/disposal prop 0.0 0.0 0.0 0.0 0.0
    Loss on debt extinguishment 0.0 0.0 0.0 0.0 0.0
    Impairment loss   0.0 0.0 0.0 0.0 0.0
    Adj EBITDA    ($2.4) ($3.1) ($3.5) ($2.6) ($11.6)
                   
    Consolidated              
    Mountaineer     $59.0 $58.7 $57.4 $47.0 222.0
       growth     14.7% 2.0% -3.4% -15.7% -0.9%
    Presque Isle Downs   48.9 47.8 47.6 36.9 181.2
       growth     4.4% -8.2% -13.0% -22.3% -9.9%
    Scioto Downs   0.1 12.6 41.7 32.4 86.8
       growth     NM NM NM NM NM
    Corporate     0.0 0.0 0.0 0.0 0.0
    Total revenues   108.0 119.1 146.7 116.3 490.0
       growth     9.8% 7.8% 26.8% 12.2% 14.5%
                   
    Mountaineer     12.8 12.3 11.2 7.2 43.5
       margin     21.6% 21.0% 19.6% 15.3% 19.6%
    Presque Isle Downs   10.8 9.9 8.6 5.8 35.1
       margin     22.2% 20.7% 18.0% 15.7% 19.4%
    Scioto Downs   (0.7) 1.7 15.1 10.8 26.9
       margin     NM 13.5% 36.2% 33.4% 31.0%
    Corporate     (2.4) (3.1) (3.5) (2.6) (11.6)
    Total EBITDA   $20.5 $20.8 $31.4 $21.2 $93.8
       margin     19.0% 17.4% 21.4% 18.2% 19.1%
     

    Q4 2012

    The most recent results are from Q4 2012.  The company reports Q1 results on 5/7/2013.  Analyzing the Q4 results is crucial since you can see the very powerful impact competition had on Mountaineer and Presque Isle Downs.  Furthemore, it is evident that Scioto Downs was also impacted by the Hollywood Columbus.  For 2013 EBITDA, I model in Scioto Downs doing $49 million, Presque Isle Downs doing $23 million (down from $35 million in 2012), and Mountaineer doing $33 million (down from $44 million).  Deducting another $11 million in corporate costs, I get roughly $94 million of EBITDA, or similar to 2012 levels.
      

    Questions/Concerns

    Why purchase a security with capped upside when the company could go bankrupt?  I think the downside is relatively well-protected long term.  Let's assume EBITDA collapses to $70 million and let's place a 5x EBITDA valuation on the business.  So here we have a large drop in EBITDA coupled with meaningful multiple compression.  At a $350 million firm value in bankruptcy, today's 2nd lien holders would probably get a package of first lien debt plus all the equity in the company.  If the 1st lien is 2.5x levered, they would get a $175 million first lien which would be the only debt.  Of course there can be many permutations of post-restructuring capital structures, but the company would emerge with much less leverage.  At $70 million of EBITDA, this business would produce roughly $28 million in free cash flow to equity (i.e. real FCF, not unlevered FCF or pre-tax FCF).  Pricing the equity at a 10% yield, which is fair to conservative with the new capital structure, today's 2nd lien holders would get $175 million of first lien + $280 million of equity value, equating to $455 million in value, or a 77% recovery excluding interest.  Given the high coupon, if this scenario happened a few years from now and we got 2+ years of coupon, we would basically have recovered all of our capital.  This will not be a fun experience, but I do think we would emerge whole taking into accont interest.  The bonds are heavily owned by distressed firms which would work on our behalf in a restructuring.  There is no meaningful amount of first lien.  This bankruptcy scenario is given here: 

     

    Valuation mutliple in bankruptcy          5x

    EBITDA                                              $70

    Implied valuation                                $350

     

    New capital structure...

     

    1st lien                                               $175 (2.5x leverage)

    Implied equity                                     $175

    Total value                                         $350

     

    EBITDA                                               $70

    Maintenance capex                              (15)

    Interest                                               (12)

    Cash taxes                                          (15)

    FCF                                                     $28

     

    Pro forma value @ 10% FCF yield

    1st lien                                               $175

    Equity                                                 $280 

    Total value                                          $455 

     

    What do you think about the equity?  The equity is definitely intriguing, especially since the business currently produces cash flow and the cash balance is very high.  If the market felt today's free cash flow was stable, the equity would be substantially higher.  For example, the company right now has $90 million of adjusted cash, and about $63 million of excess cash since roughly $27 million of cash is required for keep for casino operations.  On $95 million of EBITDA, one gets about $9 million of free cash flow taking into account full taxes and maintenance capex.  Applying a 10% yield to that FCF and then adding the excess cash would yield a stock price 60% higher.  If the numbers were to improve, they could eventually do a highly accretive refinancing additionally (11.5% on $570 million in a lot of expensive interest) which would add substantially more value.  They could in that scenario do some combination of bank and bond refinancing to bring down the blended debt cost to 8%.  All this being said, there is no margin of safety in the trade in a prolonged downturn, which is why I am avoiding the equity.       

    CEO recently left the company.  My sources indicate that he was not forced out, but decided to leave for personal reasons.  There are strong managers at the individual properties and the CFO has a long tenure with the company and is competent.  

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Continued growth at Scioto Downs.  

    Robust free cash flow. 

    Market realizing bonds are covered and pricing accordingly.  

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