Tropicana: Buy It While You Can

| About: Tropicana Entertainment (TPCA)


Icahn currently owns 72.5% of Tropicana, a stake he publicly discloses to be worth ~50% more than the valuation currently ascribed by the market.

The company started taking itself private last November through a massive buyback spree, quickly going through its share repurchase authorization and approving another one for ~27% of the float.

We expect Tropicana to be taken private at a price ~50% above current market valuation.

Tropicana Entertainment (OTCQB:TPCA) is the owner and operator of eight regional casino and entertainment properties providing a gaming environment tailored for its local and regional clients complemented with lodging, dining, retail and entertainment amenities. The company had a yoy 4.4% revenue growth and enjoys a solid balance sheet - a rare sight in the industry - caused by the re-emergence from bankruptcy one year ago with total net debt of only 0.35x EBITDA vs. peers normally with net debts over 5x EBITDA.

We could go on about all the interesting stuff happening in its operations and have very meaningful discussions about the competitive landscape for each of the markets it is currently in, but all that comes second to what we consider to be its most interesting trait: being owned by Icahn Enterprises (NYSE:IEP), legendary investor Carl Icahn's investment vehicle, which runs his gaming operations through a majority 72.5% ownership stake in Tropicana.

Granted, there is a lot to like about Tropicana, like the very small free float of 27.5% of total shares outstanding, minimum trading volumes (average trading volume for the last 3 months is only 11,500 shares daily), trading on the pink sheets or the fact that it does not host conference calls nor issues press releases. Oh, and it came out of bankruptcy just last year. However, the IEP ownership tops it all.

You see, IEP being a public company discloses a fair value assessment for its holdings on the balance sheet. Since Tropicana is a publicly traded company and markets are efficient, IEP's stake on Tropicana is easy to determine: its total market cap is $776M so its stake is worth 72.5% of that, or $563M, right? Wrong.

On page 18 of its 4Q 2016 earnings presentation, IEP's stake in Tropicana is valued at $862M (or $48.27) rather than the $563M valuation implied by the public market - for a nice a ~53% markup - based on an 8.5x adjusted EBITDA multiple Icahn determines after assessing its market comps valuations vs. its current market EV/EBITDA multiple of 5.55x. The reason for the discrepancy is clear and stated by Icahn himself: restricted stock liquidity due to lack of material trading volumes. Although low volumes are a reality and a discount is warranted in such cases, we argue that a 35% discount is excessive and should narrow over time.

Additionally, there is another important aspect that should render irrelevant the liquidity discount being attributed to Tropicana shares: there is a high likelihood that Tropicana will not remain a public company for long.

Tropicana had a $50M buyback program implemented in 31 July 2015 of which almost $44.4M were still unused by 31 October 2016. This was natural given its stock's low liquidity and small float and one could reasonably expect the whole share repurchase allowance to be enough to cover the next couple of decades worth of buybacks, right? Very wrong.

The company not only went on a buyback spree over the last 2 months of 2016, buying back ~$37.2M worth of its own stock (and causing the price to increase by ~20%), it almost wiped out its existing allowance and already approved - on 22 February 2017 - a new additional $50M buyback plan which adds to the $7.2M still available from the July program.

This is meaningful not only because it clearly signals that Icahn thinks the company is deeply undervalued (which is consistent with his own assessment of fair value) but also that Tropicana is doing whatever it can to take itself private. In fact, the new buyback authorization basically allows the company to repurchase almost 27% of its free float at current prices (free float of 6.77M shares and stock price of $31.5 at time of writing).

So, where does this all takes us? We only see one possible outcome for Tropicana: to be taken private by Icahn. At current prices, it is still trading well below his estimate of intrinsic value for the company, so he could try to seize the opportunity to make a tender offer below that price, although the more obvious course of action would be for Icahn to take advantage of the depressed Tropicana stock price in order to buy as many shares as he can below intrinsic value before cashing out the remaining shareholders at a price closer to fair value.

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.

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