Weekly Highlights - May 7, 2022
BALY update on Standard General bid, WBD insider purchases
I recently wrote about the Bally’s opportunity. At the time, shares of Bally’s were trading at a 28% discount to the $38 bid to acquire all of the outstanding shares that it did not already own from its largest shareholder, Standard General.
The company reported mixed first quarter earnings on Thursday, with revenues of $548.3 million missing analysts’ estimates of $572.5 million, and EPS of $0.03 significantly beating estimates of $(0.29). Softness in revenues were attributed to Gamesys' revenues, adversely impacted by tightened consumer spending in the UK.
Bally’s reaffirmed its 2022 guidance of revenues in the range of $2.4 billion to $2.5 billion and Adjusted EBITDA of $560 million to $580 million; although revenues are now expected to be at the lower range of guidance due to the uncertainty of foreign exchange movements.
Perhaps more importantly, the company provided an update on its review of the Standard General bid. The special committee decided to terminate consideration of Standard General’s proposal. While this was a disappointing development, Bally’s simultaneously announced that it would pursue a cash tender offer for its shares, involving $300 million to $500 million and structured in a Dutch auction format.
Bally’s CFO provided additional details on the call and provided the following reasons for rejecting the Standard General’s bid: (1) the fact that Standard General’s offer would be mainly financed via a sale-leaseback transaction, (2) prospects including synergies and other opportunities, and (3) historical trading prices:
As I argued in my initial article, the price offered seemed relatively fair, albeit on the low side - especially given Bally’s growth opportunities in sports betting and iGaming. But at $38, anyone who bought shares after November 2020 and before the bid announcement would have sold at a loss, which combined with a relatively undemanding valuation and opportunities ahead was likely considered a bad outcome for shareholders:
The Board is fortunately also offering a way out to shareholders willing to exit with the tender offer announcement. The amount is significant: the company had 52.5 million shares outstanding as of April 25, with Standard General owning 11.4 million. This leaves a 41.1 million float excluding Standard General’s ownership. At the current share price of $28.9, a $300 million to $500 million buyback would represent 20% to 33% of total shares outstanding and 25% to 42% of the float not owned by Standard General.
Obviously, the buyback would be material at even a large premium to the current share price. Running a sensitivity between $34 and $42 per share shows that Bally’s could repurchase between ~20% and ~35% of the float not owned by Standard General:
What could be the clearing price for this offer? Given the substantial amount of the tender, comments made regarding the Standard General bid, and the weighted average price of shares between the bid announcement and its rejection (which I calculate at $32.7, excluding the day when the bid was announced as volumes spiked to more than 10x normal trading volumes), I would hope that the lower range would be a significant premium to the current share price of $28.9, perhaps as high as $34. This outcome is less than ideal, as there are now more uncertainties on both the timing and the price of an exit event. But the risk-reward still seems compelling.
Warner Bros. Discovery (WBD)
In my initial Warner Bros. Discovery write-up, I flagged cluster buy activity from management following Q1 2022 earnings.
Additional SEC Form 4 were filed by insiders in the following days, bringing total purchases since earnings to 185,266 shares for a total value of $3.5 million.
While the amount is obviously not significant compared to total compensation for someone like Zaslav, it is still a positive signal - especially with some insiders materially increasing their ownership.