It’s called sticking to your knitting.
Companies that achieve success in their core businesses sometimes succumb to the allure of the next big thing.
That appears to be what happened to Churchill Downs (CHDN). After years of successfully transforming staid old Churchill Downs into a growth company under CEOs Bob Evans and Bill Carstanjen, CHDN dove into the sexy world of social gaming by buying Big Fish Games for $835 million three years ago.
Initially, there was heady, maybe even euphoric, success. But then the reality sank in—competing online is an expensive proposition as companies constantly spend to attract and retain players in a ferociously competitive environment.
Fortunately for CHDN, the company has recognized the value of sticking to its knitting of racing and casinos and was able to sell Big Fish to Aristocrat for $990 million, 18.6 percent over its purchase price. Wisely, CHDN will use the money to strengthen its balance sheet and buy back $500 million in stock.
Most important, CHDN will now be able to focus on what it does best.
The trends at Big Fish were clear. Through the first nine months of this year, Big Fish revenues fell 7.3 percent while racing grew 3.3 percent, casinos 3.7 percent and account wagering operation Twin Spires jumped 14.6 percent.
More important, EBITDA generated by Big Fish had fallen to $17 million from $27.2 million.
CHDN now has three growth divisions, all of which fit into its wheelhouse.
• Horse racing. Racing has been in decline in the United States for so long that it seems strange to talk about it as a growth industry. Yet two things have happened: 1) Pari-mutuel betting appears to have bottomed and is even growing at some tracks, and 2) special racing events continue to grow; and no event is as storied as the Kentucky Derby and the week-long surrounding events and sponsorships.
• Casinos. CHDN has clearly developed its expertise in casinos and continues to grow through acquisitions, as it demonstrated in buying Ocean Downs in Maryland and a stake in Saratoga Gaming.
• Twin Spires. Account wagering is clearly a growth business as bettors continue to wager more online.
But the potential grand slam for Twin Spires would be if legal sports betting becomes widespread. CHDN doesn’t have experience with sports betting, but it would be easy to visualize an alliance with a company that does.
Daniel Politzer of JP Morgan forecasts that casinos will be CHDN’s biggest financial contributor next year at $135 million in EBITDA. That compares to $96 million for racing and $76 million for Twin Spires. However, racing and Twin Spires added together would generate $172 million, meaning a majority of EBITDA would be racing related.
Now, that’s sticking to your knitting.
Of course, there is another side to the Big Fish deal—Aristocrat.
Aristocrat has made progress by sticking close to home as it has continually gained market share by focusing on the slot machine business and emphasizing penetration of the huge American market.
During this time, Aristocrat has almost quietly built a digital business. In fact, with Big Fish, digital will provide 38 percent of the company’s revenues, which is more than Class III sales at 35 percent and gaming operations at 27 percent. The purchase also lifts recurring revenue to 65 percent of Aristocrat’s total.
Aristocrat says Big Fish will add to earnings in its first full year.
Further, Big Fish, though operating in a different world than slot machines, plays into Aristocrat’s strength—games.
And that’s sticking to your knitting, too.
