Shares of Churchill Downs (CHDN) rose a cumulative 4% in the first two trading sessions of the trading week. The diversified horse racing, casino and entertainment company, best known from the "Kentucky Derby", announced the acquisition of Oxford Casino on Friday after the market close.
Churchill Downs announced that it has reached a definitive purchase agreement to acquire Oxford Casino, in a $160 million all-cash deal.
Interestingly enough, Oxford Casino has only opened its operations in June of last year, so limited financial information has been available. The 25,000 square foot gaming floor holds 790 Class III slot machines and 22 table games, as well as a 140-seat restaurant, among others.
CEO and Chairman Robert L. Evans commented on the deal, "The acquisition of Oxford continues our focus on investing capital in gaming-friendly states, in newer properties, in what we believe are competitively defensible markets, and at valuations that we believe will result in significant future free cash flow generation at rates of return attractive to our shareholders. The Oxford team of over 400 employees has done an exceptional job and we look forward to welcoming them into the Churchill Downs family."
Based on current projections and the management budget, the deal values Oxford Casino at approximately 7.5 times trailing annual EBITDA. The deal is expected to be immediately accretive to earnings per share and boost annual free cash flows by some $12.5 million per annum.
The deal will be financed within the current credit facility of the firm and is contingent upon securing a gaming license from the Maine Gaming Control Board and other ordinary closing conditions. The deal is expected to close in the fourth quarter of this year and Churchill will be required to pay a $8 million termination fee if the deal falls through.
Churchill Downs ended its fiscal year of 2012 with $37.2 million in cash and equivalents. The company operates with $215.8 million in short and long term debt, for a net debt position of approximately $180 million.
For the full year of 2012, Churchill generated annual revenues of $732.4 million, up 5% on the year before. The company reported a 9% drop in earnings, coming in at $58.3 million, or $3.34 per diluted share.
The market currently values Churchill at $1.28 billion. This values the company at approximately 1.75 times annual earnings and 21-22 times annual earnings.
Churchill Downs pays an annual dividend of $0.72 per share, for an annual dividend yield of 1.0%.
Some Historical Perspective
Long term shareholders have seen decent returns on their investment in Churchill Downs as shares more than doubled over the past decade. Shares rose to highs of $55 in 2007, to lose half their value by 2009. A steady recovery send shares to all time highs, currently exchanging hands at $73 per share.
Between 2009 and 2012, the company grew its annual revenues by more than 55% to little over $732 million over the past year. Net income more than tripled to $58 million. Shareholder's interests in the company diluted as the shareholder base increased by a quarter over the time period.
Investors applaud the deal which Churchill has made. The deal is significant as Churchill is willing to spend an eighth of its market capitalization to acquire Oxford Casino. The $160 million deal values Oxford at 7.5 times annual EBITDA, a 12% discount compared to its own valuation at 8.5 times annual EBITDA. Furthermore the deal will be accretive to earnings per share and provide an almost 8% cash flow yield.
At the moment, Churchill generates roughly 40% of its revenues from racing, 30% from gaming and the remainder from its online operations. As a result of the deal the gaming operations will grow in importance, which is favorable given the superior profitability of Churchill's gaming operations compared to its other activities.
Investors are furthermore happy that the deal is contingent upon obtaining a gaming license and that the termination fee of $8 million is rather limited given the uncertainty of the decision of the gaming board. The company has a good track record in acquiring operations after buying already two other casino's in recent years.
The deal multiples for Oxford Casino appear to be reasonable and it is understandable that investors push up Churchill's shares following the deal. Yet I remain on the sidelines. The overall valuation is not appealing enough at roughly 22 times earnings, given the limited dividend yield.
Shares rose to all time highs, increasing some 30% on the past year alone, given the successful execution of the acquisition-based growth strategy. At these elevated levels there are few reasons for value investors to get involved.