FANTINI’S FINANCE: Unlock the Value

When a major investor took a position in Boyd Gaming, the stock jumped. Why did that happen and what are the implications for other companies should this investor truly find the buried treasure?

When activist investor Elliott Associates revealed it had taken a 4.99 percent stake in Boyd Gaming, it lit a fire under the stock, and that of fellow regional casino operator Pinnacle Entertainment.

Boyd’s stock popped 16.5 percent and followed that up the next day with a 1.9 percent advance to $14.01.

PNK jumped 6 percent then tacked on another 1.2 percent to $26.07. In addition, PNK got an extra boost by technical investors as it jumped past its resistance level.

Elliott’s plans for its stake in BYD are unknown, but its purchase immediately leads to speculation that the company could follow the path Penn National took last year when it spun off its properties into a real estate investment trust.

That, as investors like to say, unlocked value. Prior to announcing its split, PENN shares sold around $40 a share and below. Today, PENN and the new REIT, Gaming & Leisure Properties, sell for a combined $50-plus, and shareholders get a dividend from GLPI that equals a 5.4 percent yield.

The combined value of the two companies would be even greater except that PENN has had weak same-store gaming revenues even against the backdrop of weak performances by its peers.

The reason for the higher stock prices after the split is that stocks of regional casino operators tend to sell at seven to eight times EBITDA, while those of REITs sell at 10 to 12 times and even higher.

Thus, the value of the properties is locked in and splitting the company allows real estate-oriented investors to buy the REIT and let somebody else own the casino operations.

In that way, GLPI shareholders become landlords with steady and predictable income from rental payments.

In GLPI’s case, there also is a belief that it can grow beyond being PENN’s landlord by hunting for other casinos to buy whose owners find their values locked in.

Whether such a restructuring can happen with other casino operators has been the subject of great speculation since PENN announced its split, and speculation has been renewed by Elliott’s purchase of BYD stock.

Doubters include analysts such as Brian McGill of Janney Capital, who pointed out that BYD Chairman Bill Boyd would have to cut his ownership in the family business from 23 to under 10 percent.

Further, a restructuring isn’t feasible with debt levels more than six times EBITDA he said.

It will be a long time, if ever, before BYD is positioned for such a split, McGill said.

On the other hand, Thomas Allen of Morgan Stanley noted that PENN managed to figure out how to restructure, including handling the question of stock ownership by the founding Carlino family.

A stock sale could help address the debt issue by raising cash to lower debt and reduce the debt-to-EBITDA ratio.

Pinnacle presents the same debt issues as BYD as both companies had borrowed to expand, PNK in buying Ameristar and BYD purchasing Peninsula Gaming.

Bringing down the debt-to-EBITDA ratio is their priority now.

However, PNK doesn’t have the issue of a family owning a big chunk of the stock.

The third possible spin off candidate is Isle of Capri whose founding family owns 40 percent of the stock but has indicated an interest in selling.

So what would spin offs do for stock prices?

Allen thinks BYD could be worth $20 a share, maybe even $27.

Chad Beynon of Macquarie, noting a Penn National-like split might be difficult for any regional operator, nonetheless put pen to paper and came up with the following possible stock prices and their percentage changes from the day of his calculations:

Boyd                           $20         +41%

Isle of Capri               $21         +165%

Pinnacle                      $42         +62%

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.