|Shares Out. (in M):||66||P/E||0||0|
|Market Cap (in $M):||91||P/FCF||0||0|
|Net Debt (in $M):||1,173||EBIT||0||0|
Negative momentum and high leverage have been self-reinforcing for Everi, ultimately creating the opportunity to buy into what is now a very cheap, 13:1x levered option in a fundamentally sound business with substantial asset value.
While there are numerous explanations for a floundering Everi share price – an abrupt management change, clumsy communication, and an uneasy business integration– stock performance has unhinged from substantive value as the Company has been incorrectly cast with bankruptcy pall. In the midst of a reflexive cycle of selling pressure Everi needs the faintest sign of stability for the share price to significantly re-rate. I believe this will happen in the very near term as performance is beginning to inflect upward.
Everi is comprised of two businesses: 1) Formerly called Global Cash Access: the dominant player in the niche financial services segment of cash access to casino floors 2) Formerly called Multimedia Games: a successful manufacturer of slot machines for the secondary gaming market, focusing primarily on the class II Native American market. In the fourth quarter of 2014 Global Cash Access purchased Multimedia Games for $1.2bn, financing the acquisition with debt. In August of 2015, the Company changed its name to Everi Holdings. For more background on both businesses, refer to the investor presentation at the time of the Multimedia Games acquisition:
Why is stock down (chronologically)?
$7/shareà $5: Guidance. $7 stock when deal closed in late December of 2014 with expectation of ~$220m in EBITDA for 2015. In July 2015, 2Q15 guidance reduced by ~$20m and share price falls to $5
$5/share à $4: 3Q15 announced and 2015 guidance is reiterated. After netting out a gain on the sale of a small business, operating guidance is effectively lowered by $4m. YoY EBITDA is flat in both business segments.
$4/share à $3: Market Beta in January 2016
$3/share à $2: CEO is unceremoniously fired in a public statement with no immediate permanent replacement. On 4Q15 announcement, 2015 full-year guidance of $200m is met. Interim CEO, Mike Rumbolz, announces 2016E EBITDA will be flat and first quarter will be soft. Adjusted for the $4m gain on sale, YoY full-year EBITDA improves by 5.5% or $10m from 2014.
$2/share à $1.40: 15% shareholder sells down to just below 10% in single transaction. 1Q16 is announced and is weak as telegraphed by management. Management explicitly states that this will be low point for the year and has decent visibility into 2Q16.
“Loss of CEO”: Mike Rumbolz now the permanent CEO has deep industry relationships and a long history in gaming and payments, serving as the Chairman of the Nevada Gaming Control Board in the late 1980s. Industry checks are very positive. Prior CEO was new to the clubby gaming world.
“Biggest shareholder selling”: The market interprets this as a loss of confidence but a better interpretation is it that it frees up the holder to assume an activist stance. Gaming regulations restrict such action for owners above 10%.
“Profitable revenue stream in decline”: Everi has almost 13,000 slots on revenue share, collecting ~$29/day on each, a high flow through earnings stream. Almost 2,000 (‘third-party participation’) of these games are at risk of being removed because of a legacy agreement between Multimedia Games and the Chickasaw Tribe which effectively subsidized Multimedia by allowing it to rent third party manufactured slots to the Tribe. The Company has proven its ability to replace this stream of revenue with its own machines. For example, between 1Q15 and 1Q16, the total machines on rent declined by 215, while the third-party participation machines, a subset of the total number, declined by 1,231. So Everi grew its own base by 1,016 slots, while this extant third-party revenue stream was declining. Management’s affirmation that they will keep net machine count steady on YoY basis by 4Q16 is believable in light of past performance. In 1Q16 the Company added 188 of its own machines.
“Multimedia Games in shambles”: Everi is in the middle of a new product cycle, having come out with their first new slot box in many years, HDX. A temporary air pocket of orders is explainable given this dynamic. A record number of games were on trial as of 1Q16, with 85% of trials ending in 2Q16, which should result in a sale or another retrial. Management has recently stated that game sales in 2Q16 should match 2Q15, which would imply a 300+ unit improvement in game sales from 1Q16. R&D investment in 2H15 and 1H16 should begin to payoff and early signs of this are evident. Note recent open market share purchases by CEO.
“Covenant break coming”: 2016 EBITDA would need to fall below $182m to violate leverage covenant, assuming an additional $15m is drawn on the revolver. Annualizing the 1Q16, which the Company views as the low point for the year, yields $187m of EBITDA. And of course, covenant breach does not equate to bankruptcy, merely an additional fee for a waiver. Important to note that 41% of the secured tranche is owned by the Canadian Pension Fund which is historically a very permissive/supportive lender.
“Merger thesis is broken”: While Multimedia games has underperformed expectations under Everi, FY15 vs. FY14 EBITDA was up $10m. Integration has been less efficient than expected and revenue synergies have thus far been sparse. However, green-shoots are starting to show on this front. Consider the foray into Alberta as announced on the 1Q16 call. Consolidation in the slot industry has created an opportunity for second-tier players, as casino floor managers look to diversify suppliers (evidenced by market share losses by IFT and WMS in last few years).
Global Cash business had an average EV/EBITDA of 7.3x (since 2010) before the transaction and is very stable business, now that the majority of large customers have been locked up in multi-year contracts. Since this was a standalone business, it has been strengthened (e.g., shift to service vs. product sale strategy and additional offerings through bolt-ons) and should arguably trade at a better multiple.
The Multimedia games business is a desired property. See the proxy disclosure for descriptive list of other bidders. Global Cash Access paid $36/share and the next highest bidder, a PE firm, was at $37, with $6 as earn-out. Transaction multiples in the space have ranged from 8x -12x since 2014 with the most recent being the acquisition of Cadillac Jack for 8.2x by American Gaming Systems (Apollo owned and run by the former CEO of Global Cash Access – perhaps a future acquirer?). Note that Cadillac Jack has ~60% of installed base in Mexico.
|Total Debt + $15 revolver||1,173||1,173||1,173||1,173||1,173||1,173|
|Upside from $1.40||24%||118%||110%||210%||197%||302%|
Levered 13:1x Everi is compelling risk/reward. While priced as if serious risk of bankruptcy (i.e., at 40% volatility, pricing implies option expiration in 3 months) I believe that the risk of Bankruptcy here is minimal. If the gaming business does not inflect, management will sell the business in a deleveraging transaction (synergies could be substantial for a strategic acquirer). Additionally fixed expenses are manageable: $100 for interest and taxes and $70-85 for CapEx (a substantial portion of that being variable for growth capital). At $200 of EBITDA, there is $15-30 of free cash flow. If we allow that the option will endure to bond maturity (1/15/2022), current pricing implies less than 5% volatility.