As readers of this space know, one of our recent themes has been that the merger and acquisition market in gaming should pick up if for no more reason than valuations have become too low.
A secondary theme is that the thawing in the market should involve private equity firms as they can buy for the long-term without the pressure of daily stock prices to react to.
Well, is that prospective trend starting to play out?
In just the past week, three M&A deals have been announced:
- Evolution will acquire table games supplier Galaxy Gaming for $3.20 a share, a 124 percent premium to its last pre-announcement stock price, and the only purchase of the three by a publicly listed gaming company.
- Apollo will acquire IGT for $4.05 billion and Everi for $14.25 a share.
- Standard General will buy the stock of Bally’s it doesn’t already own at $18.25 a share.
One thing all of these deals had in common is that the purchases are being made at lower prices than would have been the case a few years ago. Bally’s, for example, traded above $64 three years ago. Everi hit $26 around the same time. But that gets us back to the theme: prices have been too low for too long for someone not to come in and swoop up what amounts to solid companies with strong product lines.
Another thing all three deals had in common was the work of David Berman. The co-head of Americas investment banking for Macquarie was advisor to Galaxy, IGT and Bally’s in what amounted to a hat trick. Or as Berman says: “I told my boss I had a good year last week.”
And Berman, clearly much more knowledgeable in this field than I, agrees that more deals are likely on the way given the low prices and what he expects will be lower cost of capital for private equity firms as interest rates decline, assuming the Fed heads in that direction.
There are other reasons he sees – motivated sellers as the casino industry generally is past its growth stage, the owners of numerous private properties reaching an age where they may want to cash out, and an ample number of small supplier companies available for larger companies looking to capture their niches and/or products.
All of that should give equity investors reason to look beyond the immediate earnings outlooks as companies report their second quarter results.
QUOTE – AND MONEY – MACHINE
While we’re patting ourselves on the back for our prescience in seeing the M&A market pick up, here’s another pat on the rise to 52-week highs of one of our favorite stocks, Gaming & Leisure Properties.
We won’t go into the Gaming & Leisure story again right now, but the REIT is proving that it not only can acquire properties and become a profitable casino landlord, but that it does two things not expected by many analysts a few years ago:
- Gaming & Leisure generates its own future growth through various ways of financing the growth of its tenants, and
- It sticks to its knitting by focusing only on gaming.
The success can be traced to founding CEO Peter Carlino who might be the closest thing in gaming to Warren Buffet when it comes to putting common sense discipline into practice and expressing his approach in a folksy way, albeit with an East Coast edge.
My advice for anyone wanting to be both enlightened and entertained is to listen to the latest Gaming & Leisure conference call.
To whet your appetite, here are a few gems:
- Asked about possible multi-property purchases and their complexity in what sounded like a tacit reference to the company he long headed, PENN Entertainment: Carlino said he looks “with a jaundiced eye at anything that could upset the apple cart we have here…But in the end, it will be what’s good for our company here, period, period, period.”
- Asked about whether Gaming & Leisure now has a full plate of activity: “If need be…we’ll get a bigger plate.”
- After some lengthy discussion about the risks and complexities of financing Bally’s building a potentially transformative casino in Chicago: “Any moron can make a bad deal. It’s not hard. We don’t want to be in that group.”
