Standard General’s bid to buy Bally’s Corporation is “woefully undervalued” according to K&F Growth Capital. The rival shareholder advocates selling the online assets of Bally’s Corporation.
K&F suggests a strategic re-set as an alternative. This includes selling Bally Interactive assets, reducing investment in sports betting and increasing its focus. It argues that the land-based operations should also be refocused, and move away from costly developments in Chicago Las Vegas, New York.
Standard General had submitted an offer to purchase the rest of Bally’s in early March for 15 dollars per share. Standard General is led by Bally’s chairman Soo Kim and currently holds a 25 percent stake, which makes it the biggest shareholder. K&F Growth Capital owns various companies.
Bally’s formed a committee in order to assess the proposal from the hedge fund based in New York. K&F, however, has taken issue with the proposal and urged the committee to refuse it.
Bally chair accused of exploiting the “weaknesses”
K&F, in a statement expressing its disapproval, highlighted that Bally shares have fallen by around 45% over the last year and its bonds are currently trading at a discount of 28% to par. Soo Kim was accused by the hedge fund of taking advantage of this “weakness”, and buying Bally “for a fraction” of what it is worth.
K&F also says that this proposal goes against the interests of everyone. The company said that shareholders were denied the chance to double their value for each share.
K&F said that the bondholders would be left with an entity that is even more leveraged, and that the incremental leverage of the company will take away “precious capital” that could have gone into casino resorts in order to boost revenues at the cost of jobs and tax revenue.
Hedge fund continued to state that Bally’s is trading with a “clear inherent undervaluation”, compared to the potential of its business. The hedge fund also said that this undervaluation was due to the fact that the market had lost faith in Bally’s current financial and strategic stability.
The company cited unfunded projects in development, failed execution of online transactions in the US and underperforming properties at casino resorts as reasons for concern. It also cited the decision to purchase $69.0m of shares in Q4 as a threat to financial stability.
Hope for Bally’s
K&F did mention Bally’s “individually strong assets”. It argued that value can be unlocked by the correct strategy and supervision.
According to the hedge fund, regional expansion strategies between 2014 and 2020 have helped create a portfolio of “highly appealing” casinos. K&F has said that Bally’s “lost their way” since then due to its pursuit of a “deeply faulty” omnichannel approach.
K&F stated that the company could no longer focus on vanity projects, assets with negative returns and other items sought over the past three years. Standard General, as chairman and largest shareholder of Standard General Corporation, cannot afford to take the company for cheap after wasting equity value.
Bally’s has reached a crucial point. There is, we believe, a path that can be executed to generate material shareholder value. This would far exceed Standard General’s proposal. We offer, in the spirit of collaboration and a long-term relationship, our plan for strengthening Bally’s to maximise value.
What does K&F propose?
K&F’s own plan consists of six steps. This, it says, will potentially deliver twice as much value for shareholders than what was proposed by the Standard General Offer.
The first step is to reject Standard General’s acquisition offer. K&F stated that the offer was against the interests of everyone involved, and offered a fraction value.
Second, management must refocus on Bally’s operational core discipline. It is important to avoid distractions, such as the development of projects in Chicago and New York or Las Vegas.
K&F stated that “the board has the ability and opportunity to realign and refocus management if it is not distracted by development projects.”
Bally’s Should Consider Interactive Business Sale
K&F suggests that the third step is to monetise non-core interactive international operations, and then use those proceeds to reduce leverage. K&F said that there was “minimal overlap” between legacy Gamesys global business and the core US casino operation.
Bally’s was advised to sell the interactive division, in whole or part.
K&F stated that a sale at the current Bally’s price, which is based on a conservative premium of two times EBITDA would add $11 to each share. It would allow the company to deleverage or to use the money to continue growth.
Standard General did not acquire the company at a bargain price. This value belongs to public shareholders.
K&F advises cancelling Chicago, Las Vegas and New York Projects
K&F refers to the second step when discussing the fourth step. The hedge fund suggests reducing construction and operational risk in Chicago and Las Vegas, as well as New York. According to the hedge fund, the group shouldn’t take part in such “bet-the-company” projects.
K&F claims that the Chicago project is expected to yield a “well-below” Bally’s capital cost. It recommends that Bally’s immediately begin operating partnership discussions, even with parties who were also in the running for the license before Bally’s was awarded the contract.
K&F in Las Vegas said that this created a “cloud” of uncertainty for the foreseeable, saying Bally’s is unable to finance development as it builds Chicago and bids on a New York license. The group is advised to engage in exploratory conversations with possible operating partners and acquirers.
K&F says that it’s highly unlikely Bally’s would win any of the downstate New York licenses. The company added that the license is both a “significant management distraction” as well as a financial expense. It says Bally’s must withdraw the application in order to focus management back on its core business.
Can a new product online be an alternative?
K&F stated that re-evaluating online gaming, despite describing Bally’s recent strategy as “unmitigated catastrophe”, could be helpful. The article refers to the purchase of SportCaller and Bet.Works for an overall $300.0m as well as abandoned Sinclair deals.
K&F has also reported that cumulative losses have exceeded $125.0m, and they forecast further material losses through 2024. K&F suggests a different approach by reducing all sports activities online to an amenity.
K&F stated that “[Bally’s] should employ a comprehensive rethinking of the entire online casino in order to concentrate all activities around the core-physical-casino customers.” Why not think about an interactive product which offers a differentiated casino experience, rather than just a “me too” app?
K&F calls for a disciplined M&A Strategy
K&F’s sixth step outlines an M&A approach that is more focused on returns and less impulsive. Bally’s said that by implementing steps 1 to 5, it would put itself in the same position as before 2020, namely being able acquire land-based resorts with synergistic and strategically compelling assets.
K&F stated that “a strategy must include a commitment that is unwavering to evaluate every capital allocation option against a return on capital invested framework that targets returns that are well above Bally’s costs of capital.”
K&F concluded its recommendations by saying that it believed its plan was “straightforward”, and would serve all stakeholders. The proposal, it says, will create shareholder value by reducing debt and increasing profitability.
K&F stated that “we believe Bally’s, its shareholders, can benefit from the experience we bring, our ‘owner’s’ point of view, as well as sound advice about strategy and capital allocation which we’ve provided to many public companies before.”
K&F Growth Capital wouldn’t have invested if they didn’t believe that Ballys would be a successful public company, with a portfolio of assets of the highest quality, a balance sheet well capitalised, and a group of talented and dedicated leaders and employees.
We are certain that Bally will become stronger by working with us as partners.
iGB has contacted Bally’s Growth Capital and K&F Growth Capital to get more information.
