Bally’s Corporation: A Casino Portfolio Of Cast-Offs That Could Perform Well As A Low Cost Leader (NYSE:BALY)

With this article, we initiate coverage of newly renamed Bally’s Corporation (NYSE:BALY). The company has 9 properties in 5 states, with a 2019 annual revenue base of ~$529m under its former name, Twin River Worldwide Holdings Inc. (TRWH). It is a portfolio comprised of castaways from big operators who for one reason or another saw them as marginal and not a key part of their future. The transition pricing is a bit muddy at the moment price-wise, so we will focus on the business model here.

The regional gaming sector is led by three multi-billion operators: Caesars Entertainment (CZR), Boyd Gaming (BYD), and Penn National (PENN).Their properties are mostly located in the same markets in which BALY operates. So, growing its share of market will be a tough crust of bread to chew. Going head to head against both the big guys or even nimble, smaller cash machines like Monarch Casino & Resorts Inc. (NASDAQ:MCRI) (in Colorado, for example) to increase market share is problematical. But building its margins ever higher, it can become a cost leader, and that makes good sense.

To its credit, BALY acquired some properties at screaming bargain prices. But they still face what we consider to be daunting odds against future growth independently. What we do like is the covetous strategy of its dominant hedge fund owner to see the company as a deal vehicle that eventually can be either merged or sold off to a larger competitor as the sector continues to consolidate. At all events, this is a leap of faith stock until then.

Background

Back in the day, I worked with two of BALY’s top executives. CEO George Papanier was one of the financial types at the Trump casino organization in Atlantic City and Philip Juliano was a casino host at the Taj Mahal when I was Senior Vice President of Marketing there during the early nineties. Nominally, Juliano reported to me, but he operated more or less like a free agent, having worked at the property as a player development host under my predecessor.

Both men are solid gaming veterans who bring complementary experiences and skillsets to the ongoing operation. That’s a plus for the everyday grind of what it takes to operate these regional properties in a ferocious competitive environment. Gaming guys like Papanier and Juliano are usually much more effective managers in the space than standard belt and suspenders corporate types who often migrate into senior level jobs at casino operators. Marketing and finance are the two most crucial functions in any gaming operation. And BALY is in good hands on both scores.

(Above: Bally’s Park Place once a fortress money machine in AC, now badly in need of a major facelift inside and out: Source: Bally’s archives).

That limits downside risk here, in my view. We think it is best for interested investors to be on the sidelines here until we get clarification on a full year’s forward guidance.

The guy who really runs the show is Mr. Soo Kim, 45, company chairman and founder and operator of Standard General, a relatively small hedge fund specializing in distressed media and entertainment properties that has also pivoted into casinos. This means that, at the top, BALY will be guided by a transactional, rather than operating mentality. At this point, his fund controls ~38% of the common. Investors need to understand that the recovery cycle of US regional casinos will take place over the next 18 months. If BALY can compete on a low-cost basis, it becomes interesting. Otherwise, it lacks the firepower of the massive customer rewards databases in the same markets in which it operates as the big guys on the block.

The sports betting move

BALY recently announced it had made a deal with Sinclair Broadcast Group (OTCQB:SGBI) to rename 21 of its sports networks Bally Sports. It will pay $84m for the naming deal spread over ten years. Sinclair will also get a 15% stake in BALY with the possibility of adding another 15% based on performance goals upstream. The idea is to eventually to have customers use a Bally Bets app to place wagers during Sinclair network broadcast games. It’s an okay deal but no barn burner for investors.

Sinclair bought the former Fox Sports networks from Time Warner in 2019 for $9.6b when that unit was spun off from the AT&T (T) megadeal. Since then, Sinclair has taken a beating on the transaction, writing down the value of the sports package networks to $4.23b.

Its betting app Bally Bets can go live in Nevada, Mississippi, Missouri, Rhode Island, Colorado, NJ and newly legalized Louisiana. So, add yet another sports betting app to the already crowded party of companies that offer in-game betting. Like all naming rights deal, beauty is in the eye of the beholder. Whether the BALY name will incentivize sports bettors to use it is something of a stretch at this point. Like the entire sector, the jury will remain out as we are still leapfrogging legalizations across the nation before we reach saturation. BALY also announced a deal with Fan Duel to operate a sports book at Bally’s Park Place that stirred investor interest.

Mr. Market, true to his infatuation with sports betting stocks, moved BALY up on the news, 3.22%. Sports betting is not a reason to buy the stock as it slides into a terrifically competitive brick and mortar field as an also-ran from day one. But it does add to its service lines for its customers – always a plus.

An apples to apples bite of reality

Below, we list the main competitive matrix of the markets in which BALY will operate for context. Scale counts in the business.

Company #of casinos #states database 2019 rev. revenue

Caesars* 55 17 55m $11.9b

Penn Nat’l 41 19 20m 5.3b

Boyd Gaming** 29 10 N/A 3.3b

BALY 9 5 N/A 523m

(As Twin River Worldwide Holdings, Inc).

*Post-merger with Eldorado (NASDAQ:ERI), minus sell-downs of marginal properties including those sold to BALY.

**BYD revenues are dominated by Las Vegas locals market, and as such, its database size outside Nevada is not reasonably comparative.

All these operators have casinos in the same states. In addition, they compete with tribal properties in those states as well.

The valuations that are part of the stock prices shown here are based mostly on the same growth assumptions with some variables. For example, CZR has a fortress position on the Las Vegas strip the others do not. Therefore, it’s trade is probably treading a bit of water until the Vegas convention and meetings business recovers. That could be well over a year ahead.

Meanwhile, its regional businesses are recovering with the sector, and its most recent acquisition of the UK legacy betting giant William Hill PLC (OTCPK:WIMHY) (WMH) is giving it strong momentum.

PENN is likewise enjoying a huge spurt related to its perceived sports betting catalyst in its buy of the majority interest in the Barstool Sports site with its 62m “stoolies”. We believe the market has overvalued Penn’s potential in sports betting, given the competitive field it faces along with peers. But, on basics, we like its brick and mortar business because, next to CZR, it has a very good geographic footprint and good management.

BYD’s strength is in the Vegas locals market which, while doing better, is still waiting on line as is the entire sector, for the imminent arrival of the family of vaccines and subsequent revenue recovery once mass inoculation levels are underway.

The key questions investors need to consider

(Below: Twin River in Lincoln RI, a nice little property facing increasing incursion from Encore and Plainridge casinos in metro Bostin. Source: BALY

In its 3Q20 earnings release, we got the usual happy talk from BALY management that usually accompanies even tiny upside blips in revenue, EBITDA or earnings. What we don’t get for understandable reasons is a clear vision going forward of where the company is headed and how it expects to get there. The usual clichés apply to all operators in the sector: better customer service, quality renovations, aggressive marketing, yada, yada, yada. To clarify these issues, let’s consider these issues:

Most of the properties acquired in BALY’s recent buying spree were bought from other regional operators. Dominant among them was Eldorado properties placed in the bargain basement as part of the larger strategy to offload marginal properties. The $17.3b merger with Caesars Entertainment animated CEO Tom Reeg to edit the portfolio in order to raise cash so as to reduce as much as appeared prudent to reduce the massive debt undertaken by CZR.

So, the question is this: Why would a savvy operator like Reeg unload these properties at a distress price if he saw their potential for the new company? Case in point, the now flagship, Bally’s Park Place in Atlantic City-another property of which I am a c-suite alumni. I knew the place well during its halcyon days when it was a powerful presence in the slot business. Bally’s had a perfect storm going back then. It was located between two small properties that fed tons of free business into its spacious, wide-aisled casino floor.

Its 50c slot business and bottom line performance was the envy of competitors. Its table game hold percentage clustered around 18% vs. the industry average which ran around 14%-15%. The reason? Management eschewed chasing high end business and concentrated on higher hold grind, or recreational play avoiding much credit business. Its CEO, my then boss, Richard Gillman, was a margin crazy operator. “Pennies quickly turn into dollars,” he always said noting the urgency of cost containment in what was then and continues to be, an industry penchant for waste.

As to chasing high end business, he said, “We are in the gambling business, but we don’t gamble”. Our EBITDA was among the best in the town. That seems to be to be a viable matrix for BALY as an operational strategy going forward. If it can deliver better than average margins, it can produce EPS that would clearly attract investor conviction.

Post 2006, cannibalization and the financial crisis shrunken the AC gaming market to about half of its once lofty $5.2b.

Between the Bally’s Park Place and its extension, Wild West, the property deteriorated into what can politely be characterized now as non-competitive. Its competitive possibilities in gaining share against the current market leaders will take one key move: A substantial renovation of the property must be in management’s crosshairs.

Consider that the very savvy Hard Rock management that acquired the Trump Taj Mahal and converted it to a re-themed Hard Rock property at a $500m investment. It is still in the throes of a struggle to accelerate performance in a shrinking market. And Hard Rock truly has an iconic international brand recognition and a CEO, who is an AC veteran who knows the market and the buttons that need pushing as well as anyone.

Sports betting in New Jersey has been of some help, but it can never reach a level where it can replace anything near the lost revenue stream of all properties in town. In fact, best estimates now are that as much as 22.5% of NJ sports betting revenue is coming from New Yorkers travelling minutes over the Hudson River to lay down action in nearby Jersey.

If and when New York awakens from its usual tone-deaf legislative and gubernatorial slumber and legalizes sports betting in the metro area, NJ apps will take a big hit.

So, BALY’s buy of the AC flagship property is founded on the idea that at $25m, CZR essentially gave it away free. The place needs at least $150m to bring it up to a reasonable competitive product. If not more. Management has been slashing operating costs left and right with the idea that you take a) a basically free property and b) cut operational costs to the bone without impairing the customer experience and c) set your sights on a tight operation that can earn money from a revenue base that reflects a realistic assessment of the market’s revenue, not chamber of commerce happy talk.

It’s not a dumb strategy by any means, but it begs the question: If Hard Rock is still in the gallant fighter stage to build off its rebranding investment with a world famous brand, what could be best case in store for Bally’s? Our answer: Not much, but its central boardwalk location does remain a plus. And in casinos, geography always counts.

Yet CZR to date has opted to hold onto its other AC properties: Harrah’s at the Marina and Caesars (another alma mater of mine), a neighbor of Bally’s. BALY management has referred to “Bally’s” as an iconic gaming brand. That’s a bit of a semantic stretch. Caesars, Hard Rock and Harrah’s fill that bill, Bally’s to be realistic, does not. So the key here: If you can run the property on a low enough cost basis once it becomes a better product, it can qualify as a sensible buy at the $25m giveaway price it paid. Buying distressed properties for a song, running them right and exhibiting patience, isn’t the worst strategy in the world.

Other issues

Twin River: In Rhode Island, is its core property. Located a bit over an hour from metro Boston, the property found a nice niche prior to the expansion in Massachusetts which brought metro Boston into head to head competition with a $2.5b Encore integrated resort (WYNN) and a slot Parlor in Plainridge Park.

Up until recent quarters, both new properties were underperforming expectations exacerbated by the pandemic. Now, Encore has apparently moved smartly to shore up its sagging slot business and clearly will run for the roses once the pandemic leaves. Plainridge should improve as well but overall, this is not good news for the Twin River properties sitting an hour away with a real stake in metro Boston.

Can Twin River make it going forward? The same logic applies here. Keep cost in check, focus on nearest markets like Providence and fight to keep your metro Boston share from deteriorating too much and Twin River will do fine over time.

The same thesis applies to all the other bargain bin casinos BALY has acquired over the past three years. At some point, if run right and we think it will be, BALY will present an inviting target for one of the biggies in the regional space. And patient, long-term investors could cash out a nice premium.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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