K&F proposes a major strategic reset as an alternative, including selling off Bally’s interactive assets and reducing its investment and focus on sports betting. The land-based business should also refocus, moving away from expensive developments in Chicago, Las Vegas and New York, it argues.
Earlier in March, Standard General submitted a proposal to acquire the remainder of Bally’s for $15 a share. Standard General, led by Bally’s chair Soo Kim, currently has a 25% stake in the operator, the largest of all parties. K&F Growth Capital is a shareholder through various entities.
Bally’s has since formed a special committee to evaluate the offer from the New York-based hedge fund. However, K&F has now hit out at the offer, urging the committee to reject the proposal.
Bally’s chair accused of exploiting “weakness”
Outlining its opposition, K&F highlighted how Bally’s share price has fallen around 45% in the past year, while its bonds currently trade at a 28% discount to par. The hedge fund accused Soo Kim of exploiting this “weakness” and acquiring the group “at a fraction of its fair value”.
Furthermore, K&F says this proposal is counter to the best interests of all stakeholders. It said shareholders are being denied the opportunity to earn up to what may be double the offered value per share.
K&F added that bondholders will be left in an even more levered entity, while incremental leverage will divert “precious” capital that could have been invested into the casino resorts to increase revenues – at the expense of employment and tax generation.
The hedge fund went on to say Bally’s trades with “clear intrinsic undervaluation” compared to its potential. Equally, it said, this undervaluation is because the market has lost confidence in Bally’s current strategy and financial stability.
It referenced unfunded development projects, failed online execution in the US as well as underperforming casino resort properties as concerns. In addition, it flagged the decision to repurchase $69.0m in shares during Q4, saying this jeopardises financial stability.
Hope remains for Bally’s
However, K&F also spoke about Bally’s “individually strong assets”. Value can be unlocked with the right strategy and oversight, it argued.
The hedge fund said regional expansion strategy between 2014 to 2020 helped establish a “highly compelling” portfolio of casinos. Since then, K&F said Bally’s has “lost its way” due to chasing a “deeply flawed” omnichannel strategy.
“No longer can the company focus on the vanity, negative return projects and assets sought after over the last three years,” K&F said. “After squandering equity value as the chairman of the company and the largest shareholder, Standard General cannot be afforded the opportunity to pick off the company on the cheap.
“Bally’s is at a critical juncture. We firmly believe there is a ready-made, executable path to create material shareholder value, well in excess of Standard General’s offer. In the collaborative spirit of a long-term partnership, we offer our timely plan to strengthen Bally’s and maximise value for all.”
What is K&F proposing?
Mapping out its own proposal, K&F has put forward a six-step plan. It says this will deliver value to shareholders potentially double to what is proposed in the Standard General offer.
Step one simply states reject the Standard General acquisition offer. K&F said the proposal is counter to the best interests of all stakeholders, offering a fraction of value otherwise attainable.
The second step calls for a refocus of management on Bally’s core operational discipline. This includes diverting from distractions such as development projects in Chicago, New York and Las Vegas.
“The board, if not otherwise distracted by these development projects, has the opportunity and capability to refocus and realign management,” K&F said.
Bally’s should consider interactive business sale
Moving to step three, K&F calls for monetising non-core international interactive operations and use the proceeds to de-lever. K&F highlighted “minimal” overlap between the legacy global Gamesys business and core US casino operations.
As such, it said that Bally’s should consider selling the interactive business, either in full or in part.
“A sale of the division at a highly conservative two times EBITDA premium to where Bally’s currently trades is worth an incremental $11 per share,” K&F said. “It would enable the company to either materially de-lever or use the funds to support continued growth.
“Again, this value is owed to the public shareholders, not to Standard General post-having acquired the company for a low-ball offer.”
K&F recommends dropping Chicago, Las Vegas and New York projects
Looking to where Bally’s should focus, K&F refers back to step two when discussing step four. It suggests eliminating construction and operating risk in Chicago, Las Vegas and New York. The hedge fund said the group should not take part in “bet the company” projects such as these.
For Chicago, K&F says the project will yield a return on investment “well below” Bally’s cost of capital. As such, it recommends Bally’s should immediately pursue operating partnership conversations, including with those parties also considered for the licence before Bally’s won the bid.
In Las Vegas K&F said this creates a “cloud of uncertainty” for the foreseeable future, saying Bally’s has no ability to fund development while building Chicago and bidding on a New York licence. It recommends the group engage in exploratory discussions with potential operating partners and acquirors.
As for New York, K&F simply says it is highly unlikely Bally’s will win one of the three downstate New York licences. It added that the pursuit of the licence is an “enormous management distraction” and financial cost. As such, it says Bally’s should withdraw its application to refocus management on core operations.
Could a new online product be an option?
Moving to step five and K&F said revisiting online gaming could help Bally’s, despite billing recent strategy as an “unmitigated disaster”. It reference the purchases of SportCaller, Bet.Works and Monkey Knife Fight for an aggregate $300.0m, as well as the abandoned Sinclair deal, in particular.
K&F also spoke of cumulative operating losses to date exceeding $125.0m and forecast continued material losses in 2024. As such, K&F suggest a new approach, curtailing all online sports activity to an amenity offering.
“[Bally’s should] employ a holistic rethink of all online casino to focus all activities on the core physical-casino customer,” K&F said. “Why not consider an interactive casino product that provides a highly differentiated experience rather than a ‘me-too’ app?”
K&F urges disciplined M&A strategy
The sixth and final step proposed by K&F outlines a more disciplined, returns-focused M&A strategy. It said by following steps one to five, Bally’s would be in a position similar to where it was before 2020: being able to acquire strategically compelling and synergistic land-based casino resort assets.
“A strategy that must include an unwavering commitment to evaluating every capital allocation opportunity against a disciplined return on invested capital framework that targets returns well in excess of Bally’s cost of capital,” K&F said.
Concluding its recommendations, K&F said it believes its plan to be “straightforward” and will serve all stakeholders. It adds that the proposal will reduce debt, increase profitability and create significant shareholder value.
“We believe Bally’s and its stakeholders can benefit from our experience, an ‘owner’s’ perspective, and sound advice on strategy and capital allocation, which we have brought to numerous public companies in the past,” K&F said.
“K&F Growth Capital would not have made this investment if we did not believe in a bright future for Bally’s as a public company with an enviable portfolio of high quality assets, a well-capitalised balance sheet and a talented, dedicated group of leaders and employees.
“We are confident that by acting as partners, Bally’s will grow stronger.”
iGB has contacted Bally’s and K&F Growth Capital for further comment.
Original article: https://igamingbusiness.com/strategy/ma/ballys-shareholder-blasts-woeful-takeover-bid-calls-for-interactive-firesale/
