Bally’s Investor Urges Against Takeover Bid, Suggests Alternatives for Chicago Casino

K&F Growth Capital, which is one of the largest Bally’s (NYSE: BALY) shareholders, today sent a letter to the company’s board of directors urging it to reject a recently proposed takeover bid and to mull alternatives for large-scale projects, including a Chicago casino hotel.

Bally’s on the Atlantic City Boardwalk. An investor is urging the operator to reject a takeover offer. (Image: Press of Atlantic City)

Noting that Bally’s stock is undervalued, K&F said the $15 per share acquisition offer proposed last month by Standard General, the hedge fund controlled by Bally’s director Soo Kim, is an effort by the suitor to capitalize on weakness in the stock to buy the gaming company “at a fraction of its fair value, using as a source of funds Bally’s own already overstretched balance sheet.”

Shareholders will be denied the opportunity to earn into what may be double the offered value per share; bondholders will be left in an even more levered entity (alongside potentially having valuable assets sold from their collateral); and the incremental leverage will divert precious capital that otherwise could have been invested into the casino resorts to increase revenues, at the expense of employment and tax generation,” wrote the money manager.

Current sentiment indicates Bally’s is unlikely to accept the offer, though some analysts argue it probably should. The company has formed a special committee of independent directors to evaluate the bid and recently hired an investment bank and a law firm to assist in the process.

While acknowledging Standard General is attempting to exploit weakness at the company in which it is the largest shareholder, K&F chided Bally’s for “moon shot bets” on large casino projects, flawed online gaming moves, some lagging regional casinos, and buying back $69 million worth of stock in the fourth quarter instead of deleveraging the balance sheet.

Bally’s Should Reject, Refocus, Says K&F Growth

K&F Growth Capital pointed out that Bally’s has some solid regional casinos in its portfolio. As such, the operator should reject the Standard General bid and refocus on core competencies over expensive, grandiose projects in Chicago, Las Vegas, and New York.

In less than two months, all three major ratings agencies have downgraded Bally’s credit grade further into junk territory, highlighting elevated leverage that could further expand as the operator seeks $800 million to complete its Chicago casino hotel.

K&F said the Chicago, Las Vegas, and New York ventures have been distractions to Bally’s management at a time when the firm’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margins badly trail those of rival regional casino operators.

“Bally’s core casino operating margin performance materially lags peers, generating 400bps+ lower EBITDA margins than several regional competitors. Each 100bps of margin is roughly equivalent to $15 million of EBITDA,” added K&F.

The asset manager said an increase of 400 basis points in EBITDA margins would equate to a $7 jump in the share price, which “is owed to the public shareholders, not to Standard General post having acquired the Company for a low-ball offer.”

Proposed Tactics for Bally’s in Big Cities

Of Chicago, Las Vegas, and New York, the Windy City project is the most feasible and tangible for Bally’s, prompting K&F to say the gaming company should purse a partner for the integrated resort. A partnership could create value argues the asset manager, noting some analysts are suspect of Bally’s ability to generate adequate return on invested capital on its own in Chicago.

Regarding Las Vegas, where the Tropicana closed this morning and will be demolished later this year, K&F said it believes Bally’s should sell the operating rights to the venue because it doesn’t have the ability to fund redevelopment there while also tending to Chicago and pursuing a New York casino license.

“New York: our strategy is simple — as we believe it is highly unlikely Bally’s wins one of the three down-state New York licenses and the pursuit of the license is an enormous management distraction and financial cost, Bally’s should immediately withdraw its application to refocus management on core operations,” observed the money manager.

Ideas for Bally’s Online Operations

Through a series of acquisitions, Bally’s built an expansive portfolio of domestic and international online gaming assets, but missteps along the way hindered the operator’s ability to adequately capitalize on those purchases.

K&F Growth Capital proposed the company sell its non-core international digital assets, noting such a move would likely receive widespread interest among potential suitors and could assist in paring debt. The asset manager said US investors don’t properly value Bally’s international online gaming exposure and that could be a negative factor in terms of the company’s ability to access capital.

In calling Bally’s approach to US iGaming and sports betting “an unmitigated disaster,” K&F implored the company to halt future investments in online sports wagering and focus on bringing something unique to the internet casino space.

“We cannot continue to throw good money after bad. Bally’s should curtail all online sports activity to a business that is purely an amenity offering (akin to Boyd) and employ a holistic rethink of all online casino to focus all activities on the core physical-casino customer,” opined K&F.

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