BOYD GAMING CORP BYD
February 04, 2014 - 3:19pm EST by
Fletch
2014 2015
Price: 10.00 EPS -$0.34 $0.15
Shares Out. (in M): 108 P/E NM 66.6x
Market Cap (in $M): 1,084 P/FCF 7.4x 6.1x
Net Debt (in $M): 3,452 EBIT 193 259
TEV ($): 4,537 TEV/EBIT 23.5x 17.5x

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  • Gambling
  • M&A Catalyst
  • NOLs
 

Description

Company Description

 

Boyd Gaming owns and operates 6 Las Vegas Local Casinos, 3 Casinos in Downtown Las Vegas, 12 Casinos throughout the Midwest and is a 50% owner of the Borgata Casino in Atlantic City

 

Capital Structure & Relevant Financial Metrics

     

Capital Structure

 

Coupon

Maturity

9/30/13

 

$600 Million Boyd Revolver (L+300)

3.236%

8/14/2018

293.4

 

Boyd Term A (L+300)

 

3.236%

8/14/2018

250.0

 

Boyd Term B (L+300; 100 Floor)

4.000%

8/14/2020

900.0

 

$50 Million Peninsula Revolver (L+400)

4.236%

11/14/2018

12.4

 

Peninsula Term B (L+325; 100 Floor)

4.250%

11/20/2017

813.8

 

Total Senior Secured Debt

   

2,269.6

 

 

       

 

Peninsula Senior Bonds

 

8.375%

2/15/2018

350.0

 

Boyd Senior Bonds

 

9.125%

12/1/2018

500.0

 

Boyd Senior Bonds

 

9.000%

7/1/2020

350.0

 

Holdco Note & Other

 

6.000%

7/1/2020

147.8

 

Total Debt

     

3,617.4

 

Cash

     

165.0

 

  Net Debt

     

$3,452.4

 

 

 

Shares

Price

 

 

Equity Cap Class A

 

107.816

$10.06

1,084.6

 

Total Equity Value

     

$1,084.6

 

 

       

 

  Total Enterprise Value

 

 

 

$4,537.1

 

 

 

       
           

Wholly Owned Assets

2012

LTM

E. 2013

E. 2014

E. 2015

Revenues

$2,261.8

$2,218.4

$2,216.7

$2,257.9

$2,309.1

EBITDA Margin

21.9%

21.3%

21.3%

22.1%

22.1%

Adj. EBITDA

$496.0

$472.6

$473.1

$499.0

$509.7

CAPEX

$91.2

$91.2

$114.4

$100.9

$87.9

Interest Expense

$288.8

$204.0

$204.0

$204.0

$176.5

Cash Taxes

$0.5

$0.0

$6.7

$15.8

$29.2

FCF

$115.5

$177.4

$148.1

$178.4

$216.3

Earnings

($923.1)

($961.0)

($37.1)

$16.3

$30.1

EV/EBITDA

9.1x

9.6x

9.6x

9.1x

8.9x

FCF/Revenues

5.1%

8.0%

6.7%

7.9%

9.4%

Price / FCF

9.4x

6.1x

7.3x

6.1x

5.0x

 

 

         

 

                     

 


Recent History & Current Situation

  • Due to the large investment in the Echelon (prior to its construction delay in 2008, it was going to be a major Las Vegas strip casino) and the financial crisis of 2008, BYD was saddled with a large amount of debt relative to its cash flow.  Currently they maintain a 8.0x Debt to EBITDA ratio at their wholly owned casino’s
  • In March 2010, BYD took effective control on the Borgata Hotel in Atlantic City and therefore started to consolidate its financials
    -    Borgata is highly leveraged, with very little equity value and is Bankruptcy remote from Boyd
    -    Boyd, owns 50% of the economics in the Borgata
    -    Atlantic City has been hit very hard.  While the Borgata is the best performing hotel in Atlantic City, the EBITDA at the Borgata has decreased from $169 million in 2010 to an estimated $116 million in 2013
    -    The Borgata’s performance, now consolidated, has optically hurt Boyd’s overall financials
  • In November 2012, BYD acquired Peninsula gaming increasing their “Wholly Owned Casino” revenues” by approximately 23% and EBITDA by 29%
    -    Peninsula’s Casino’s are situated in places with better competitive dynamics and therefore are able to maintain higher EBITDA margins
  • On March 4 2013, BYD completed the sale of its Echelon property for $350 million after writing down the value of the asset by approximately $1 billion in the 4th quarter of 2013.  As a result, Boyd’s NOL increased
  • In November 2013, New Jersey started to allow online gaming.  Thus far, the Borgata’s web site (in partnership with MGM & PartyPoker) has been the most successful in the state of New Jersey

 

Investment Thesis

  • Boyd is a misunderstood company, that trades at a very cheap relative to free cash flow, and has multiple “free options” that can greatly increase its value including a “free option” on the success of online gaming
  • Due to its recent merger with Peninsula and its consolidation of the Borgata hotel, Boyd is a difficult company to analyze
    -    Since the merger with Peninsula was done in November of last year, LTM numbers don’t include a full 4th quarter of Peninsula
    -    While the top line has been soft and profitability has been low, the cash flow generation of Boyd’s wholly owned assets are very strong.
  • Large D&A (much larger in fact than its CAPEX expense), mostly due amortization related to its merger with Peninsula, has caused Net Income to materially lag free cash flow
  • 2013 Estimated free cash flow is expected to be 6.7% of revenues while 2014 is expected to grow to 7.9%
  • Boyd has a very large refinancing opportunity.  Due to its merger with Peninsula, Boyd has a convoluted debt structure with two credit facilities and some high coupon legacy bonds.  A refinancing of the credit facilities into one facility and a refinancing of two bond issues that are callable this year, should create $27.5 million of additional free cash flow for Boyd.
    -    Expect Boyd to conduct a large refinancing when the 8.375% bonds become callable in August
    -    Pro Forma for the refinancing, FCF would grow to 8.7% of Revenues
  • While Boyd pays very little tax due to its low Net Income, even when Amortization drops over the next two years this will not materially increase their Income Tax due to the $1 billion+ NOL which will shield earnings from taxes over the next few years
  • The combination of its ownership stake in the Borgata, and having casino’s in 8 states, and its partnership with Bwin.Party Digital Entertainment (aka PartyPoker) makes Boyd one of the best investments in online gaming.
    -    Since there is no near term legislation for federal online gaming, all online gaming will be done on a state-by-state basis
    -    Boyd operates in 8 states, with a total population of over 44 million people
    -    Online gaming in New Jersey just launched in November and Boyd’s market share thus far has been 45%
    -    Partnership with PartyPoker allows Boyd to license PartyPoker’s software (which has an excellent user interface) and gives Boyd the right to purchase 10% of Bwin.Party’s ownership of PartyPokers websites in the states in which Boyd operates
    -    Optionality related to Boyd partnering with other casino’s in other states, most specifically with a tribe in California, which would add further scale to its online offering
  • While the decline of gaming revenues in New Jersey has made their stake in the Borgata to be worth very little, an upcoming refund from the state of New Jersey, refinancing opportunities, closing of other underperforming casinos in Atlantic City and online gaming make their ownership stake very attractive
  • Performance of wholly owned properties has been stable
    -    Strength in the Las Vegas Locals & Downtown markets has offset the weakness in the Midwest and South.  The Las Vegas market is expected to continue to show strength in 2014 with the recovery in housing and in the positive momentum in visitation & conventions
    -    Additionally, with the sustainable cost cutting measures implemented in Las Vegas in 2012 & 2013, revenue growth at those properties will increase margins
  • M&A
    -    Boyd is considering selling some assets in the Midwest and South - With PENN & GLPI (the new Casino REIT) looking for assets, there is a possibility that Boyd can sell some assets at an attractive price and use proceeds to pay down debt
    -    Boyd is also open to tuck-in acquisitions.  They really are only focused on purchasing properties that have limited competition (like the Kansas City Star)

 

Valuation

  • Boyd’s wholly owned Casino’s are expected to generate $178 million of Free cash flow in 2014 and pro-forma for refinancing’s, the FCF would be $196 million
    -    The average of other casino’s trade at 9x E. 2014 FCF, which would equal $14.89 a share assuming no refinancing and $16.39 a share assuming a refinancing
  • Assuming a 9.0x FCF multiple for The Borgata (or 7.5x EBITDA) would equal $86.7 million of equity value (or $0.80 a share) to Boyd
  • Together – this values Boyd’s core operations between $15.69 and $17.19 a share
  • Additional upside is available through:
    -    Online Gaming: It is difficult to value the online gaming business at this point because of the small revenues and lack of clarity regarding margins.  However, when looking at the valuations given to the online assets of CACQ, Boyd’s online gaming should carry significant value and offer investors tremendous upside for FREE at current levels.  Morgan Stanley estimates the value between $1 and $10 a share to Boyd
    -    Boyd has over $1 billion of NOL’s, which it should start using in the next few years
    -    Tax refund close to $50 million to the Borgata, which will used to pay down debt increasing Boyd’s value of the Borgata by $25 million or $0.23 a share
    -    August refinancing of Borgata bonds which should save the Borgata $8 million a year in interest expense

 

 

Why Does This Opportunity Exist?

 

  • Confusion caused by the full consolidation of Borgata and the lack of full year consolidated financials from Peninsula
  • Disconnect between free cash flow and earnings.
    -    Earnings are less and expected to be less than FCF.  Much of this is due to amortization associated with the purchase of Peninsula related to the value of their customer lists
  • Investors focus on EBITDA metrics and not the more important actual Free Cash Flow metrics
    -    Boyd is currently trading at 9.6x wholly owned EBITDA or 8.6x when including their proportional ownership of Borgata EBITDA.  These metrics make Boyd look “fully valued”.  However, now that Boyd can easily support its debt load (and has pushed out most maturities until after 2018), free cash flow to the equity is more relevant
  • High leverage scares many investors and unfamiliarity with the refinancing opportunity
  • Recent weakness in the Midwest & South which makes up 39% of wholly owned revenues and 26% of wholly owned EBITDA

 

Risks

  • Continued weakness in the Midwest and South and further deterioration of value in Atlantic City
  • Reversal of positive trends in Las Vegas
  • Failure to scale online gaming
  • Weakening of the credit markets, thereby hurting their refinancing opportunity

 

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

  • Borgata Tax refund - expected in May 2014
  • Refinancing of Peninsula credit facility and senior bonds – expected in August 2014
  • Further progress of online gaming
    -    Borgata reports monthly numbers
    -    Legislation legalizing online gaming in other states – California is expected soon and Illinois later in 2014
    sort by    

    Description

    Company Description

     

    Boyd Gaming owns and operates 6 Las Vegas Local Casinos, 3 Casinos in Downtown Las Vegas, 12 Casinos throughout the Midwest and is a 50% owner of the Borgata Casino in Atlantic City

     

    Capital Structure & Relevant Financial Metrics

         

    Capital Structure

     

    Coupon

    Maturity

    9/30/13

     

    $600 Million Boyd Revolver (L+300)

    3.236%

    8/14/2018

    293.4

     

    Boyd Term A (L+300)

     

    3.236%

    8/14/2018

    250.0

     

    Boyd Term B (L+300; 100 Floor)

    4.000%

    8/14/2020

    900.0

     

    $50 Million Peninsula Revolver (L+400)

    4.236%

    11/14/2018

    12.4

     

    Peninsula Term B (L+325; 100 Floor)

    4.250%

    11/20/2017

    813.8

     

    Total Senior Secured Debt

       

    2,269.6

     

     

           

     

    Peninsula Senior Bonds

     

    8.375%

    2/15/2018

    350.0

     

    Boyd Senior Bonds

     

    9.125%

    12/1/2018

    500.0

     

    Boyd Senior Bonds

     

    9.000%

    7/1/2020

    350.0

     

    Holdco Note & Other

     

    6.000%

    7/1/2020

    147.8

     

    Total Debt

         

    3,617.4

     

    Cash

         

    165.0

     

      Net Debt

         

    $3,452.4

     

     

     

    Shares

    Price

     

     

    Equity Cap Class A

     

    107.816

    $10.06

    1,084.6

     

    Total Equity Value

         

    $1,084.6

     

     

           

     

      Total Enterprise Value

     

     

     

    $4,537.1

     

     

     

           
               

    Wholly Owned Assets

    2012

    LTM

    E. 2013

    E. 2014

    E. 2015

    Revenues

    $2,261.8

    $2,218.4

    $2,216.7

    $2,257.9

    $2,309.1

    EBITDA Margin

    21.9%

    21.3%

    21.3%

    22.1%

    22.1%

    Adj. EBITDA

    $496.0

    $472.6

    $473.1

    $499.0

    $509.7

    CAPEX

    $91.2

    $91.2

    $114.4

    $100.9

    $87.9

    Interest Expense

    $288.8

    $204.0

    $204.0

    $204.0

    $176.5

    Cash Taxes

    $0.5

    $0.0

    $6.7

    $15.8

    $29.2

    FCF

    $115.5

    $177.4

    $148.1

    $178.4

    $216.3

    Earnings

    ($923.1)

    ($961.0)

    ($37.1)

    $16.3

    $30.1

    EV/EBITDA

    9.1x

    9.6x

    9.6x

    9.1x

    8.9x

    FCF/Revenues

    5.1%

    8.0%

    6.7%

    7.9%

    9.4%

    Price / FCF

    9.4x

    6.1x

    7.3x

    6.1x

    5.0x

     

     

             

     

                         

     


    Recent History & Current Situation

     

    Investment Thesis

     

    Valuation

     

     

    Why Does This Opportunity Exist?

     

     

    Risks

     

    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

    • Borgata Tax refund - expected in May 2014
    • Refinancing of Peninsula credit facility and senior bonds – expected in August 2014
    • Further progress of online gaming
      -    Borgata reports monthly numbers
      -    Legislation legalizing online gaming in other states – California is expected soon and Illinois later in 2014

    Messages


    SubjectRambling Gambling Willie
    Entry02/12/2014 12:34 PM
    MemberMencken

    Thanks for the interesting idea Fletch. Having done some work on this, I’ve got two observations and two questions:

    (1) “Peak” Cycle Profitability = Revenues at Las Vegas Locals, Downtown Las Vegas, and Legacy Boyd's Regional Gaming Casinos are down about 25% (or $550m) from the ’05-06 peak. With ~40% flow-through to EBITDA, that translates to about $220m of incremental EBITDA (vs. the ~$350m they’re generated today). How close to that ’05-07 peak we’ll return is anyone’s guess given the concurrent Vegas real estate boom and absence of legal online gaming alternatives, but things will work out fine for BYD if consumer behavior comes within a stone’s throw of repeating itself.

    (2) Multiple = the Company is currently trading at 9.0-9.5x Forward EBITDA. With M&A comps in the ~7x range (see the Ameristar proxy here -- http://www.sec.gov/Archives/edgar/data/912145/000104746913003323/a2213804zdefm14a.htm), it strikes me that we’re really playing for some combination of (i) a return to historical low-teens gaming multiples, (ii) GLPI paying 10-12x multiples for regional gaming properties and the market then reading-through those numbers to BYD’s properties (which, incidentally, we just paid 7x EBITDA to buy the Peninsula assets 18 months ago), and (iii) some “juice” associated with the call option value from the 10% interest in New Jersey online poker. I disagree with the notion that there’s any confusion with the profitability numbers or “hidden assets” here – Peninsula is clearly in the pro forma “Wholly-Owned” numbers that people are working with, and the sellside is all over the online poker call option. But that said, maybe one (or all) of those multiple appreciation elements will come true and we’ll get paid handsomely on the equity here due to the 3:1 leverage.

     

    Questions

    (1) Cash Taxes = thanks to Echelon, we’re sitting on a ~$1 billion NOL. Are there minimum taxes that I’m overlooking in the projections? $20-30m of after-tax FCF isn’t a lot vs. a $4.6 billion EV, but it is for a situation as levered as this one.

    (2) July 2013 Equity Raise, in which the Boyd Family didn’t participate = the Company upped guidance twice before dropping a bomb right after Q2 by raising ~$200m of equity (and with the stock trading at 8.5x EBITDA, a full turn lower than where the valuation sits today). Normally I like to see large founding shareholders in highly-levered situations because they’re highly incented to claw their way out, but my antennas go way up when 40% owners are OK with being diluted by 25% when we’ve got plenty of covenant headroom and all we’re doing is delevering from 6.5x --> 6.0x. What got you comfortable with this negative signaling?


    SubjectRE: Rambling Gambling Willie
    Entry02/12/2014 02:33 PM
    MemberFletch
    1) regarding taxes - There are some minimum taxes, but they are small.  Either way, even if you fully tax their pre-tax earnings, their taxes are small because of the large D&A.  Not sure what you mean by $20-30 million of after-tax FCF.  According to my calculations, I am getting to $170 million of after-tax fcf in 2014 for their wholly owned assets (EBITDA of 490, less interest of $204 less Capex of 103 less Taxes of $13).
     
    2) I hear you on the non-participation in the equity raise.  Tough to answer that one.  It should keep your antennas up, but not precent you from investing.  
     
    3) Regarding the multiple - the only thing that really matters (for me at least) is recurring Free Cash Flow and on that multiple the stock is really cheap (point #2)

    SubjectRE: RE: Rambling Gambling Willie
    Entry02/12/2014 02:46 PM
    MemberMencken
    Regarding taxes, I was referring to the $15.8m and $29.2m cash taxes you contemplate in your projections.

    SubjectRE: RE: RE: Rambling Gambling Willie
    Entry02/12/2014 03:18 PM
    MemberFletch
    I was assuming in that calculation that they pay 35% on their pretax number.  So really most of that amount can be added back to true FCF.

    SubjectWho is in your comp base?
    Entry02/16/2014 11:48 PM
    Memberbaileyb906
    Regional gaming assets are clearly in secular decline in this country, primarily because of new competition (new jurisdictions legalizing gaming or additional gaming), but also because of an aging slot playing population (younger people aren't becoming slot players as they grow up) and I suspect also because of an ever widening income distribution (the bottom 60% of households getting more and more squeezed when it comes to discretionary income).  There will also be increasing competition from legal online gaming as that comes online in states other than NJ, although the gaming companies will have you believe it is additive and not cannibalistic.  That remains yet to be seen.
     
    Anyway, given the secular decline, there is the question of what FCF multiple these assets should trade on.  I can name other companies that have seen less erosion in their EBITDA which trade at <10x free cash flow.  Maybe the right multiple is only 8x on free cash flow?  When it comes to an EBITDA multiple, I would be buying these assets at no more than 6.5 and selling them at 7.5.
     
    So who is in the comp base that trades at 9x?  You clearly should not have any of the LV players in ther because they are a different animal, GLPI shouldn't be in there because it's a REIT that returns all its cash - so it's a different animal, and I would argue BYD should be at a big discount to PENN because while some of their assets are similar, their management has proven themselves to be massively astute (by trying to sell out at the top) whereas BYD management have been the opposite of the astute (leveraging up the company to try and enter the LV market at the very top, right before it collapsed).  So who is in the comp base?  PNK?  PENN?  Who else?

    SubjectRE: Who is in your comp base?
    Entry02/17/2014 08:03 AM
    MemberFletch
    PENN ISLE MCRI CHDN CNTY & PNK
     
    Regarding your statement about "secular decline" I believe that is highly debatable and is true in some areas (like Atlantic City) but absolutely not true in others (like BYD's Kansas City Star).  Most juristictions that have gambling are not seeing increases locally and therefore their revenues are more of a function of local economies than anything else.  The only places that really are getting hurt now by the increased number of casinos are "destination locations" since there is no reason to go there anymore once gaming has been legalized locally.  Atlantic City will still suffer because it is not serving locals, but  rather mostly people from NYC and Philly.  As soon as NYC legalizes gambling they will suffer.  The majority of Boyd's casinos are insulated from new competition.  Building a new casino in Las Vegas HELPs boyd as it brings new jobs to the area and helps the economy and their locals casino.  If they allow gaming in Texas (Houston), it will probably hurt their Delta Downs casino.  As a result, most of the "street" are looking for slight increases of revenues over the next few years for Boyd.  

    SubjectRE: Who is in your comp base?
    Entry02/28/2014 02:52 PM
    MemberCries
    As a gaming analyst in my professional life - I'd enocurage prospective investors to look at the monthly revenue trends put out by the regulators, broken down by property. 
     
    Its pretty ugly across the entire regional gaming space.  Baileyb hit on a few important secular trends that makes most regional gaming asset portfolios a bad bet at this point, IMO. 

    SubjectRE: RE: Who is in your comp base?
    Entry02/28/2014 05:15 PM
    Memberbaileyb906
    Sorry missed your reply to my question until now.  That comp base is reasonable, I guess I would just suggest that they may all be overvalued because I maintain my former opinion that the industry is in secular decline.  As Cries said, just look at the monthlys put out state by state.  Not pretty.  And it's been like this for years now.
     
    And when I referred to Boyd building a new casino, I was referring to their ill-timed strip ambitions with Echenlon which was 100% about entering an overbuilt high end Strip market at the top of the market as opposed to creating jobs that would lead to more business for their locals properties.  Even as late as mid 08 when you met with them, these guys had no idea that the Strip wasn't going to be a quick bounceback.
     
    As for destination locations being the only ones hit...look what happened to the Indiana casinos when Ohio opened up.  Check out PENN and PNK results for details.  This is just one example.  And the promotional environment has been pretty rational so far.  It's been number of visits and/or spend per visit hitting results.  Imagine if the discounts really picked up what net revenue could look like in some of these markets.  
     
    This is a very consensus opinion I admit, but that doesn't mean it is wrong.

    SubjectRE: RE: RE: Who is in your comp base?
    Entry03/05/2014 04:24 PM
    MemberCries
    To the author's credit, BYD just put up good 4q numbers overall.  However, midwest/regional stuff continues to suck wind.
     
    Performance was driven by LV

    SubjectRE: Elliot takes a 5% stake
    Entry03/11/2014 11:10 AM
    MemberJSTC
    What are your thoughts on why they are getting involved?
     
    Opportunity to lower cost of debt over time is apparent, but leverage inhibits major transactions (e.g., REIT).  What can they do hear as an activist to enhance value, other than perhaps babysitting mgmt in its capital allocation decisions?

    SubjectRE: RE: RE: Elliot takes a 5% stake
    Entry03/11/2014 11:33 AM
    Membertyler939
    FYI, Morgan Stanley is out saying an Opco/Proco split similar to PENN/GLPI is the most likely scenario that Elliot has in mind.  They assume such a transaction is accompanied by an equity raise.

    SubjectRE: RE: RE: RE: Elliot takes a 5% stake
    Entry03/11/2014 12:54 PM
    Memberelehunter
    If BYD does go down the REIT conversion path, do you think it would be a net positive or negative for GLPI?
     
    It does seem somewhat unlikely that BYD would go through with the REIT conversion process considering it would imply the BYD family selling down their considerable stake at 30% down to ~10%, forfeit the value of the NOL's, and dilute equity through a major raise. 
     
    What if BYD delevered their balance sheet by selling assets to GLPI or entering into sale/leasebacks with them? Could be an interesting alternative to going through the costly REIT conversion process. 

    SubjectRE: RE: RE: RE: RE: Elliot takes a 5% stake
    Entry03/11/2014 06:29 PM
    Memberbaileyb906
    Didn't GLPI specifically say on the call that they weren't talking to private companies?  That they were talking to family-owned, private, trust-owned, etc.?  That was perhaps to deflect or shut down speculation over ISLE...but wouldn't BYD count as a public company?  Or you think they were fibbing and/or they haven't started talking yet and this is Elliot's endgame?

    SubjectRE: RE: RE: RE: RE: RE: Elliot takes a 5% stake
    Entry03/12/2014 11:12 AM
    Memberelehunter
    They did say that they havent talked to any public companies at that time, but I dont think that they said they havent or wouldnt.
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