Description

Bally’s is in the final stages of closing what is a merger of equals with Gamesys group (GYS:LON) out of the UK. As a long time shareholder of Gamesys group (aka Jackpotjoy aka Intertain) I have come to appreciate the fabulous management team that went from a start-up in 2001 to become the 235mm GBP EBITDA, highly cash generative business it is today. Looking to keep my exposure to this business I got up to speed on Ballys and believe today’s trading price provides an attractive entry point.

Once the merger is complete sometime in Q4, the company can be valued on a SOTP: the brick and mortar regional casino business of Bally’s, the Gamesys assets and the igaming opportunity. At today’s price we are effectively getting the I-gaming optionality for free, despite large investments being made into the Sinclair relationship.

Ballys must appreciate this management group as well, as it is rare to see the CEO of the acquired business go on to run the combined entity.  As well, Gamesys founders and management have elected to take the share exchange option on buyout, which at current prices works out to 12.00 GBP vs the 18.50 GBP cash offer for independent shareholders such as myself. For management to get the same value as independent shareholders, they will need to drive Ballys stock up 54% from these levels.  With the pending deal close expected in October or November the time to get up to speed on the name is now.

Quick summary of the 3 businesses:

Gamesys

Gamesys is a leading operator of online casino and bingo led brands. Roughly 58% of the business is in the UK, 30% in Asia, 9% Europe and 3% ROW/America. It has previously been written up 3 times on VIC, first by Avahaz in 2016 (when it was trading in Canada as Intertain), by myself in 2018 (when it was trading in the UK as Jackpotjoy) and most recently in 2019 by gary9 as Gamesys (GYS:LON). I will provide a brief timeline of the important corporate events since its founding in 2001:

All in, the founder Noel Hayden has cashed out about 335mm GBP by my count, and still retains 15mm shares which at the cash offer takeout price is currently worth 278mm GBP. He’s done alright for himself. 

This entire business was grown using internally generated capital. They should grow EBITDA to 235mm GBP this year, which is up from 158.4mm in 2019 (22% CAGR last two years). Revenue should come in at 829mm which is up from 505mm in 2018, good for a 3 year CAGR of 18%. They did this by being leaders in the space, first through online bingo led sites.

Gamesys was a covid beneficiary as people stuck at home tend to gamble more. I provided the long term numbers to show it has been a consistent grower and is not just a covid beneficiary. Historically Gamesys has been a 10-15% top line grower with last year the exception at 28.7%. Growth should come in at 14% this year. In H1 ’21 growth came in at 17% but this was heavily weighted towards Q1 where it was 27% and we saw tough comps result in an implied 7% growth rate for Q2 ’21. That said, this was the toughest comp of the year, and management recently disclosed in a proxy statement that their application for the deal financing was forecasting close to 18% revenue growth in 2021. 

Margins are very stable, with most of the costs being variable. Adjusted ebitda margins should be just north of 30%. Note margins were a bit higher before UK POCT changes in 2019 which resulted in a one time step down (taxes taken here are above ebitda line item.

Capex is extremely light, being an IP business, they run 3%. ROIC is off the charts (literally) if we back out intangibles and goodwill. Hard long term assets were 46mm at year end and with negative working capital, the denominator in the ROIC calculation is negative. 

The company is a well run cash machine with dominate market share, that has consistently grown. No wonder Ballys wanted it, and it’s management team for their I-gaming push.

Ballys:

Ballys is a regional casino rollup play. They currently have 16 properties in 15 different states. It was initially called Twin River Casino, and had been private until 2019 when it did a reverse takeover of publicly listed Dover downs. It is partially controlled by its chairman, Soo Kim who’s hedge fund Standard General is the largest owner at 23%. They acquired their stake in 2016 while it was still private. As you can see below they have been very active on the roll-up strategy, particularly during 2020 when multiples were reasonable.

The company talks about the total properties having done pro forma north of 300mm in EBITDA in 2019 and with some capex having been put into the properties since that time, expect them to be above that number under normalized conditions.

In Q2 Ballys generated 83.8mm EBITDA (including corp expenses and some online losses) so they are clearly on track for that number. I don’t view this as a great growth business like Gamesys, but should be a stable cash generative business with easy to transact assets. The company has pursued a mixed real estate model where they own over 2/3rds of their properties but have recently funded some acquisitions through sale-leasebacks. Long term they will continue to own a minimum of half their real estate with the rest available for financing should the need arise. 

I model the B&M segment to do 312mm in cash EBITDA in 2022 (ebitda – rent expense), pretty much flat from this year. Most casinos have been over earning in Q2 and Q3 as guests have come back, but marketing and service levels (read costs) are down. This isn’t sustainable long term (though management claims some of the labor savings are) so I model a return to more normal margin levels. 

The company is led by CEO George Papanier who has been with Ballys since 2004 first as COO and then CEO. Post merger he will effectively be the President of the B&M division, which is sort of a demotion but more in line with his skill sets. Sellside analysts I spoke to describe him as very competent. While he isn’t a star he is good at the blocking and tackling of running a casino. We aren’t reinventing the wheel here.

I-Gaming:

With the 2018 Supreme court decision to allow individual states to legalize sports betting, there has been a slow roll out state by state of legislation. The bigger players in the industry have all been preparing to make a push into what is effectively a land grab in this nascent industry. While a small opportunity today, the TAM at maturity if all states were to legalize is a gross gaming revenue of anywhere from 20 to 50 billion, based off extrapolations from what the earlier states to have legalized are seeing today. 

Bally’s has thrown their hat into the ring as well, and has stated they are aiming for a 10% market share in the states where they operate. Generally, an online operator is required to have a B&M presence, or partnership with a B&M operator, to gain an online license. Therefore having a large, diverse footprint is beneficial as it gives you a broader reach. This is partially why Ballys pursued an aggressive M&A strategy. You can see here the states they are positioned in: