Golden Entertainment has continued to grow its business incrementally over the last two years, through expansion to its existing distributed gaming business.
With its acquisition of American Casino & Entertainment, Golden is making a larger shift to focus on its casino business.
The market continues to discount Golden, despite its growth and operational success since it came public in 2015.
It has been an eventful two years for Golden Entertainment (GDEN) since Golden Gaming merged with Lakes Entertainment in 2015. The company has been able to deliver results as it had advertised at the time on its two primary businesses, distributed gaming and casinos.
Distributed gaming involves the operation and servicing of gaming and amusement devices in many third party locations, as well as in company-owned locations. Golden services over 10,000 devices in the Nevada and Montana markets. Company-branded taverns are also included in this market segment with plans to reach 60 locations in the Nevada area by the end of 2017. Distributed gaming made up 76% of revenues and 65% of segmented Adjusted EBITDA in 2016, making it the biggest component of Golden’s business.
Golden had recently extended out this business with several acquisitions in the Montana market and has been investigating whether Pennsylvania was beginning to open up as a potential market as well. These revenues are typically recurring in nature, with contracts with third parties running at between 5 and 7 years, with Golden experiencing greater than 85% renewal rates on outstanding contracts in the most recent year.
The casino business consists of 3 casinos around Pahrump, Nevada, which brought in roughly $34.6m in revenue in the last 12 months, as well as a larger operation in Rocky Gap, Maryland that did just over $64m. Since inheriting the Rocky Gap casino from the merger with Lakes, Golden has been able to boost EBITDA margins to 25% from 16.2%. This is very encouraging as Rocky Gap is a much larger operation than the Pahrump casino group. As it turns out, this may have served as the impetus for Golden’s latest corporate development.
Golden made a big step forward in changing its product mix with its June 12, 2017 announcement that it was acquiring American Casino & Entertainment Properties for $850m. This transaction drastically alters the composition of Golden’s business, with its pro-forma revenues from casinos now rising from 24% of Golden’s total revenues to 61% with its Adjusted EBITDA from 35% to 76%. The ACEP business includes four casinos, most notably the Stratosphere on the Las Vegas Strip:
Golden has put up an investor presentation detailing some of the key aspects to this deal. ACEP has had a checkered operational history, at one point being owned by Carl Icahn before being sold to Whitehall Street Real Estate Funds, an affiliate of Goldman Sachs, in 2008. The company had some difficult struggles during the financial crisis and had to do a large restructuring of its $1.1Bin debt, which involved Goldman eventually acquiring 22% of Whitehall directly.
The fortunes of the company have clearly turned around since that time, based on its performance over the last year. Golden feels it can add some value to this business almost immediately, as it is projecting $18m in synergies in the next year. It does have a track record with the improvement at Rocky Gap and I can see a few avenues for them to reach this.
Vertical Integration. The 4 new casinos bring 3,879 gaming devices under the Golden umbrella. Based on Golden’s portfolio, I don’t believe any of these would have been existing Golden distributed gaming clients. Being able to insource this business should be able to add some to the bottom line.
Past Performance. Golden was able to improve EBITDA margins by 9% in the last year at Rocky Gap; this was not simply through cost cutting as revenues also increased by over 12%. With over $400m in revenues, Golden would only need to improve margins by about 4% to meet their target, which should be feasible. Golden is no stranger to acquisitions, completing 13 in the last 15 years of operations.
That said, this acquisition is at a substantially larger scale than anything Golden has done previously. The Aquarius and 2 Arizona Charlie locations are in-line with the type of businesses that Golden currently operates but they have not had a Las Vegas Strip property like the Stratosphere before.
Headcount. The presentation does not include any personnel cuts in the deal summary sheet for the two operations, but there must be some back office attrition that will occur on the SG&A side that contributes to these savings.
From a corporate ownership side, I found this transaction interesting. Blake Sartini, CEO and the largest shareholder of Golden, owned 32.6% of the shares prior to this deal. As part of the acquisition, Golden is issuing approximately 4m shares to Whitehall, which will own just over 15% of the company and will have a seat on Golden’s board. It was clearly worth it to Sartini to bring on a partner like Whitehall & Goldman Sachs to support the business going forward, even though his stake dilutes down to 27.6%. Taking the view that a slightly smaller share of a much larger pie is a good thing for Golden shareholders.
This deal is not without risks, though. As noted in ACEP’s history, they have been through a tough time before when the Nevada economy struggled during the Financial Crisis of 2008/9. The underlying metrics do seem good for the Nevada economy, which should benefit the new properties
Golden has leveraged up to make this happen. Although no debt came with the purchase, the cash consideration of $781m was funded via an $800m 1st lien loan, a $200m 2nd lien loan and a $100m revolver as part of a restructuring of Golden’s existing debt. Its net leverage will increase to 5.5x after closing, which is more in-line with its region peers like Boyd Gaming (BYD), Eldorado Resorts (ERI) and Red Rock Resorts (RRR). The distributed gaming business does provide recurring business as some buffer to the downside but the company is now more like the other regional operators.
The company has included a comparison to other local operators with a multiple of 9.2x EV/EBITDA in its investor presentation. Working our way through the revised capital structure:
|Shares Outstanding (pre-ACEP deal)||22.25m|
|Shares Issued for Acquisition||4.00m|
|Total Shares Outstanding||26.25m|
|Current Share Price||$20.27|
|Market Cap, post-deal||$532.12m|
|Add: GDEN Debt||$178.78m|
|Add: ACEP Acquisition Debt||$781.00m|
|Less: Cash GDEN||($45.20m)|
|Less: Cash ACEP||($28.00m)|
|Pro-Forma EBITDA (including synergies) 2018||$192.0m|
If we exclude the synergies, the multiple jumps to 8.1x. Both these are still less than the peer multiple mean of 9.2x, which doesn’t reflect the rapid growth Golden has produced over the last 2 years. I do believe there is room to re-rate here. The $1.1B re-financing will be leaving the company with about $180m in its coffers, which would allow it to continue with some tuck-in acquisitions to the distributed gaming business or if any capex refresh is required on the new properties.
The market’s response to this deal was very positive, as it was trading at around $17 before the announcement. If the market starts to reward Golden with a regional multiple in-line with the others, shares should re-rate to somewhere between $27 and $33/share, depending on how well Golden can deliver on its proposed synergies. It has a strong track record so I am still willing to bet on Golden, even after the sharp move up.