Florida Gaming - Liquidation With Upside

| About: Florida Gaming (FGMGQ)
This article is now exclusive for PRO subscribers.

Summary

Florida Gaming is in liquidation phase. Its assets have been auctioned two days ago at prices that should leave $10.5m for equity holders.

With today's closing market cap of $3.5m, this represents a significant 200% upside.

Like with other micro-cap companies, it takes time for the market to absorb new information, creating a gap of a few days for agile investors to profit.

Florida Gaming Corporation (OTCPK:FGMGQ) assets were auctioned for $155m. After repayment of $144.5m of net debt and liabilities, $10.5m is likely to be left for equity holders. These funds are due to be distributed to shareholders in company's liquidation.

With today's closing market cap of $3.5m, this represents a significant 200% upside for the equity holders.

Share price has been very volatile over the last couple of days, so limit orders are advised.

Background for the case

Florida Gaming Corporation owns jai-alai frontons (popular sport within Latin America and other countries with Hispanic heritage) with simulcasting operations in Miami and Ft. Pierce, Florida.

The Company's operations at these frontons include casino gaming, poker games, card rooms, live jai-alai performances, inter-track wagering on jai-alai, horse racing and dog racing, and the sale of food and alcoholic beverages. Jai-alai games are played live and simulcast from the Miami facility via satellite to pari-mutuel wagering locations globally. The company prides itself as the largest jai-alai operator in the world, although its main revenue currently is derived from casino operations.

In 2011 after Florida legalized gambling, the company took out an $87m loan (with annual interest rate of 16%) from ABC Funding for huge expansion of Miami Jai-Alai, adding a 40,000 square foot casino with 1,000 slot machines, an expanded poker room, electronic blackjack and more, as well as live shows (concerts and boxing) and restaurant / bar facilities. Opened in January 2012, the casino provided 10 times more revenues than Florida Gaming original Jai-Alai business. However, this expansion and debt load caused significant liquidity issues for the company.

In July 2012, the company missed a principal payment of $2.3 after which a legal battle followed with ABC Funding. Finally in August Florida Gaming filed for Chapter 11.

Fast forward to today, Florida Gaming assets were auctioned on March 25, with ABC Funding (the main lender) beating other bidders and agreeing to pay $155m for substantially all of company's assets.

Valuation of equity after the auction

The latest available financials are as of Sep 2013, but company provides some further details on its financial obligations in the latest 8K filling (here), which was agreed in court before the auction. The expected obligations after asset sale are listed in the table below (amounts in $m).

Available cash (as of Sep 2013)

5.50*

Sale proceeds

155.00

Total available for distributions

160.50

Loan Claim

99.91

Administrative Claim Reserves

0.55

Guggenheim Fee

0.65

Silvermark Break-Up

4.00

Center claims reserve for Estates

3.50

ABC repurchase claims

37.00

Payments for non-subordinated claims

4.24*

Total claims

149.84

Remaining for equity holders

10.66

Current market cap

3.43

Potential upside

211%

Amounts marked with * can still change and might either increase the upside further or decrease it a bit. My thoughts on these are as follows:

- Cash - as of Sep 2013 cash stood at $5.5m. During 2013 Florida Gaming has posted positive operating income and operating cashflow and after filing for bankruptcy there have not been any cash outflows for financing activities. It is likely that cash accumulation continued during Q4 2013 and Q1 2014. This quote also supports that: "Financial statements filed in court showed the fronton's slot machines deliver $1.1 million in cash to the operation every week, while a top executive testified that running jai-alai matches brings a net loss of about $1 million a year." (taken from here). Thus it is very likely that actual cash available for distributions is higher than $5.5m as of Sep 2013.

- Payments for non-subordinated claims - the amount of $4.2m is likely to overstate the actual claims. The initial reserve for non-subordinated claims is significantly lower at $1.5m and the rest of the amount is allocated on percentage basis of any further available distributions. As of Sep 2013 company had a total of $4m in current liabilities (and I would not expect this to have changed materially), most of which will already be covered by 'Center Claims Reserve' of $3.5m, thus the liabilities for other non-subordinated claims are likely to be materially below the $4.2m.

- Any other claims that are not covered in the table above (subordinated claims) - no details about these are stated in the 8K filling, thus would assume these claims to be immaterial, especially keeping in mind that insiders (Collett family) were not allowed to extract money after the bankruptcy at the expense of remaining shareholders: "For the avoidance of doubt, the Centers Claims shall not include the Collett Claims and the Holdings Intercompany Claim, which shall be waived pursuant to the terms of this Agreement" (from the 8K filling). These waived fees amounted to $5m.

Overall I believe there might be an even larger upside as cash position is likely to have increased since Sep 2013 and maximum claim amounts are likely to overstate the liabilities of the company.

With 4.04m shares outstanding, the distributions to equity holders are equal to $2.64 per share. And all of this equity value is in pure cash.

Funds to be distributed to shareholders after company liquidation

And the best thing is that as part of auction settlement, Florida Gaming is due to file complete liquidation plan at least 15 days before closing of the sale of company's assets. Thus these funds will not be wasted on management salaries while looking for further 'growth opportunities', but rather distributed to existing shareholders shortly. The timing of the sale is not yet specified - Florida Gaming will need to prepare liquidation plan which should include all the details, however would not expect this to take longer than a few months.

Thus investors have c. 200% upside from the current share prices (volatility over the last few days was very high so it depends at the price level one manages to purchase these shares).

As usually happens with micro cap names available information does not get reflected in the share price right away (markets are much less efficient than for larger names). With auction results released only last week, it might take another couple of days for share price to reach fair value, wide price swings and high volume lately are indicative of that. Also would expect share price to stabilize somewhere around $2 before full liquidation plan is released by the company.

Why the opportunity exists

Companies rarely emerge from bankruptcy with anything left for common shareholders and thus investor remain very skeptical about potential upside. However, this case is a bit different as Florida Gaming assets have been sold down in an auction where 3 bidders were competing. This has pushed the selling price to a level, where sufficient funds remain after paying the main creditor in full (including any accrued interest, professional fees and etc).

Also due to its size, the case is likely to attract only the smallest investors who might not possess the necessary knowledge to analyze bankruptcy court fillings and obligation waterfalls. For larger investors this opportunity is not attractive due to low upside in absolute terms. (only $3m market cap and low daily volume would allow buildup of significant positions).

Risks

The main risk here is that asset sale does not proceed as per auction results. However, it seems that all parties are interested in ending lengthy legal battles. Also the settlement has been approved by the federal judge and thus ABC is legally obliged to proceed with the purchase. Thus I view this risk as minimal.

Also, Florida Gaming operations over the last six months (since the latest financials as of Sep 2013) might have been significantly different. Thus my estimations of where cash resources and other non-subordinated and subordinated claims might stand could be wrong. However the margin of safety for this case is large enough to cover for these risks.

Disclosure: I am long FGMGQ. 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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.