"I'm addicted to the deal, to the next thing. It's irresistible."
- John Caudwell, UK mobile phone mogul
This is a gaming company with blood lines going back to its eponymous founder Sam Boyd, owner of a solid locals casino back in the 70s. He was a guy who understood the slot customer from the gut up and he, his sons and their smart top management of gaming veterans have since parlayed the original Sam's Town into a $2.1 billion regional gaming operation at the end of 2015.
Among its proudest achievements was its smart and sassy bucking of Atlantic City's conventional wisdom back in 2003. With its 50% partner, MGM (NYSE:MGM) it built the Borgata Casino Hotel & Spa. As managing partner, Boyd, with no East Coast gaming know-how to go on, changed the game. Against the almost religious faith that competitors had placed in big bus marketing programs in mass bussing, it passed on the strategy. It also had no second thoughts about locating the property in a critical mass boardwalk location to get the free business foot traffic. Borgata flourished from the get-go.
It also defied many competitors' long belief in the idea that no matter how much you courted younger patron demos, it was the older folks who were and who would remain the backbone of the business. But Boyd pressed ahead creating a vibe that did indeed appeal to, and form, a foundational customer segment of young customers. One by one, as the Borgata's monthly gaming and non-gaming revenues soared to become AC's number one revenue generator, the shibboleths fell. The property proved it could a) Prevail and grow without heavy bussing b) It could attract and maintain, a younger demo and c) that it would be the ultimate game-changer for the town. Furthermore, since the combination of cross-border competition from New York and Pennsylvania and recession crippled the AC market after 2006, Borgata not only maintained its leadership, but continued to thrive.
An attempt to adapt the Borgata business model on a large scale on a boardwalk site by the JPMorgan (NYSE:JPM) financed Revel (OTC:REVEQ) opened in the teeth of the AC downdraft in 2013. But that was only partly why the $2.4 billion dollar plus property tanked. The core reason was that its management failed to really understand that one of the quiet keys to Borgata's success was its outlier location at the marina. It was a place free of scruffy boardwalk vibes. Customers instead experienced open spaces, grassy acreage, a marina; a true resort setting rather than crowded, urban sprawl facing the ocean.
So after 13 years of compiling a solid earnings track record, Boyd management did what many industry observers had long suspected: when the time was right, it would sell to MGM. That's just what happened last June when Boyd (NYSE:BYD) sold its 50% share of the Borgata to MGM for $900 million, on which it netted $589 million after debt. (And will still be owed estimated $90 million real estate tax refund from AC if and when that issue settles). Following that in another move which surprised no one, MGM promptly sold the Borgata to its controlled REIT, MGM Growth Properties (NYSE:MGP) for $1.175 billion. Borgata is now committed to an annual $100 million triple net lease payment. Failing a deep recession and further erosion when pipeline properties in lower NY State and PA open, that number should be a layup for the property.
So Boyd got the much-needed cash, MGM got a great asset to add into its REIT and an expanded footprint in its growing East Coast presence. The company is due to imminently open its National Harbor property in Maryland, and sometime in early 2018, its Springfield Massachusetts operation. The transaction was a win-win all the way around.
So the next logical question for investors is this: What's next for Boyd? The sale of Borgata was the last of a series of transactions the company closed since 2012 when it bought the IP property in Biloxi for $278 million, adding Peninsula Gaming's six properties in Iowa and Kansas for $1.45 billion. And this year, it doubled down in the local Vegas market with acquisition of both the Aliante and Eastside Cannery Casino properties for a total of $610 million. These moves, which, by and large, have proven productive for Boyd, beg the question: Okay guys, so what's your next trick? Having proven itself an active acquirer as well as an eager seller when the timing is right, we've learned that this is a company that intends to stay on the move to unlock shareholder value by being simultaneously prudent and opportunistic.
A snapshot of Boyd right now
Price at writing: $19.69
Implied Price on metrics: $26.36-28.87
Market cap: $2.2 billion.
52-week trading range: $14.22-21.43
90-day average volume: 1.133m
Shares outstanding: 115m
Our call: $29 to $34 a share within the next year based on our theoretical assumption that in reading all the runes now there could well be a transaction coming for this very solid, nimble and opportunistic company. There are some downsides here and because of them, we believe more work needs to be done to among other things, clean up the balance sheet. Overall, we think Boyd's thirst for growth has not been slaked by deals already done. It's a transaction that will move this stock smartly. And this company knows how to spot opportunity.
Business base: Boyd operates 22 properties in seven states, including locations near markets like Chicago, New Orleans, Biloxi, Memphis, Shreveport and Wichita. While geographically diverse, we see this portfolio continuing to perform well in markets mostly holding its own off a nice recovery from the 2008/09 downdraft that hurt all regional operators. This geography is stable, can spike a few points here and there yoy. But the attraction we see here is stability in EBITDA contribution linked to a superior management with marketing smarts.
Overall, we believe that an upside in Boyd will more likely come from a transaction of some kind, rather than dramatically higher performance based on the company's presence in markets with great vitality going forward. Its markets are stable enough to support a nice free cash flow but not provide it the appellation of a growth stock. That will come from a transaction in our view.
Given its history of acquisitiveness and deft shuffling of its portfolio, against the growing and inevitable trend to consolidation in the regional gaming space, we see a strong upside for Boyd. It can become a merger partner, or a move to split into a REIT, either by with an existing entity or going at it alone. So our thesis is that the Boyd you see now is poised to grow bigger with more accretive EBITDA within the next year. And for that reason, we think it's worth a good, hard look to go long on the shares now. It's trading just beneath its 52-week high, now flush with the cash from the Borgata sale and a determined program to reduce debt.
Company CEO, Keith Smith, in a statement regarding the sale to MGM, said a good part of the cash infusion would be committed to reduce debt. As of this writing, the company has already paid down $120 million in debt YTD. Its longer-term target, according to Smith, is to aim at a leverage target at 4X to 5X coverage by the end of 2017. This is sound balance sheet housekeeping unto itself without doubt. But the numbers are telling:
Boyd's long-term debt and capital lease obligation at Q2 '16 was $4.8b putting its debt to total assets ratio at 0.75.
This suggests that management expects its growth to emerge far less dependent on debt than it has in the past. There is little doubt in my mind, looking at the company as a solid performing, well-managed gaming operator, that going forward the next logical move is a transaction.
1. A commitment to dramatically reduce leverage by the end of next year also suggests that a strong balance sheet showing an EV/EBITDA of 10.35 roughly better than 55% of industry peers.
And that in turn makes the company far better positioned for a transaction. It could turn up in the form of a merger with another regional operator with a geographic portfolio that complements Boyd's. Or as an acquisition with stock of a smaller company in markets where the company is not now operating. And lastly, a move to put all its 22 properties into a REIT itself to unlock shareholder value in another way. A logical move could be to sell its realty to its recent former partner MGM's parent controlled REIT MGM Growth Properties. Our industry sources tell us that the partnership was for the most part free of conflict. Both companies shared many management values. In such a deal, Boyd would get the cash and MGP would finance the debt taken on. It's a good match.
Finally, whatever direction Boyd goes, a sharp reduction in its debt and by extension its interest costs produces one of the best balance sheets and property portfolios in the regional space. Given its history of moving on transactions to grow, we see that as an actionable potential for investors. You have good performance going in, rapidly improving EV/EBITDA ratios, a share price, we believe, is largely undervalued and no appetite that is now apparent to go the debt route again to finance growth.
Boyd's percentage of 2015 revenue by geography:
Las Vegas locals properties: $610m or 28%
Downtown Las Vegas: $234m or 11%
Midwest properties: $852m or 38%
Peninsula (Iowa and Kansas): $502m or 23%
This shows the company's heaviest single presence is in the Clark County area (Las Vegas) 39% of all revenue in a total market estimated at $2.8 billion. Management points to what it believes to be north pointing signs for the larger southern Nevada economy as the justification for its continuing investment in the area. Gaming growth there has risen about 5.4% over the last five years, which averages around 1% per year. That's not very impressive for certain. The locals customer has certain distinct characteristics. He or she tends to be immensely value-conscious. Perception of slot machine hold percentages are very savvy. The price of such dining options as buffets, the valuation of comp policies, friendliness and personal attention of line employees weigh much more heavily on customer loyalty than they do at strip properties. Competition is fierce but Boyd knows this customer base well and should continue to hold its market share going forward. But we don't see strong performance at the locals or downtown Vegas properties as a reason to buy the stock.
Its presence in the south and Midwest is stable, its properties well-run, its margins, reasonably good. But we believe the skill set it acquired in building the Borgata into a top performer will not long go to waste on merely fattening a portfolio of more of the same in the regional space.
The propulsion to consolidate in the US regional gaming space is unstoppable. This summer Eldorado Resorts, Inc. (NASDAQ:ERI) announced its proposed acquisition of Isle of Capri Casinos (NASDAQ:ISLE). You have the Gaming and Leisure Properties, Inc. REIT (NASDAQ:GLPI) already owning the realty of its own spun off Penn National Gaming (NASDAQ:PENN) and later Pinnacle Entertainment's casino properties (NYSE:PNK). And the aforementioned MGP transaction this year. Further to that, the post-bankruptcy plan of Caesars Entertainment (NASDAQ:CZR) to split itself into a REIT may actually happen now that the long, tortured litigation with this junior lenders and creditors has been settled. We'll know more in January when the vote is taken. The company's new ownership base may approve the REIT plan for most of 35 of its US properties as originally proposed, or it could opt to sell off some of those properties to other regional operators. This again could open possibilities for Boyd acquisitions.
Boyd is a company with a strong management culture, a solid balance sheet in the making and a track record committed to growth. We believe it bears promise of a ramp up of its valuation and worth a hard look at by investors at its current trade.
About the author: Howard Jay Klein is a 25+ year c-level executive of the casino industry and now a consultant to that sector. He is the publisher of the SA marketplace site The House Edge. His own gaming portfolio is held in a blind trust for his family to avoid potential conflicts of interest with clients past, present and future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.