> The market does not agree with this assessment. The entire market capitalization of Bally’s (NYSE: BALY) is, as of this writing, ~$1.5 billion. What’s the difference between the $50 million average imputed value of the other casinos and the $750 million imputed value of the Chicago casino? The $750 million is made up, that’s what.
> This is somewhat elementary and handwavy napkin analysis of a complicated business which, like most casinos and hotels, is heavily levered with a complex capital stack. But the investment case gets smothered by a napkin.
This analysis is not OK and Patrick should know better.
A quick Google [0] says Bally's has $5 billion in outstanding debt. That brings the market value of its assets to $6.5 billion and the question becomes "What's the difference between the $400m imputed value of the other casinos and the $750m value of this one?" And that's the kind of difference which gets explained by things like, it has 2x the average square footage, or it's more modern, or how about, it's in a city where it will have a monopoly on casino gambling, not in Las Vegas where there are dozens of competitors.
"A complex capital stack" isn't a good explanation for this analysis. It's a complex capital stack with one line item 3x the size of the only one considered.
I don't disagree with the conclusion that this is not a good deal. A fairer way to do this would be a parallel offering of class B shares to sophisticated investors, with the same economic rights and full transferability, then give the black churchgoers a 20% discount when they buy the class A. But the fundamental analysis is bad enough to make the article untrustworthy.
Yeah I personally think the valuation is the least egregious part. If they get sued, they’ll have a defense for how they arrived at that number. It’s not 10x off.
You don't have to take the loan, though. I think I'd prefer to buy the $250 shares at the terrible loan terms than to buy the unleveraged shares at $25,000, which suggests that the loan adds value.
The leveraged shares are essentially an option. If the casino way outperforms expectations, the shareholders will get a huge return on their money (100x return or more). If it meets expectations or loses money, they are out their $250. That fits the profile of what was asked for: if anyone gets very rich off this they want the community to share in the proceeds. Whether 11% "financing" cost is fair or not has very little to do with the cost of funds and everything to do with the volatility of the future returns. If there's any chance the casino doubles or triples or sextuples in value, those shares are very valuable - even though that chance would presumably be offset by a large chance of it becoming worthless.
My biggest problem with this is the transfer pricing issues. Bally's has every incentive to route profits to its other corporate entities and a lot of legitimate opportunities to do so.
> This is a constant risk of being the junior partner in a structure, particularly without an aligned senior partner who would be as adversely impacted by sharp operating as you would be.
This would also be solved by issuing the second class of stock with the same economic rights. Some hedge funds get to invest in it, someone who can assess the appropriate discount to apply for being the junior partner. And if Bally's ever do screw the shareholders, they have the perfect parties for a lawsuit: a sophisticated, well-coordinated operator in partnership with a sympathetic plaintiff.
You're right. I was bucketing the pricing/payout issues into the loan terms but they equally apply if you don't take out the loan.
Obviously there are many better ways to structure this if a sophisticated counterparty actually wanted a good investment opportunity for the community. Sadly that's not in anyone's interest.
> This is somewhat elementary and handwavy napkin analysis of a complicated business which, like most casinos and hotels, is heavily levered with a complex capital stack. But the investment case gets smothered by a napkin.
This analysis is not OK and Patrick should know better.
A quick Google [0] says Bally's has $5 billion in outstanding debt. That brings the market value of its assets to $6.5 billion and the question becomes "What's the difference between the $400m imputed value of the other casinos and the $750m value of this one?" And that's the kind of difference which gets explained by things like, it has 2x the average square footage, or it's more modern, or how about, it's in a city where it will have a monopoly on casino gambling, not in Las Vegas where there are dozens of competitors.
"A complex capital stack" isn't a good explanation for this analysis. It's a complex capital stack with one line item 3x the size of the only one considered.
I don't disagree with the conclusion that this is not a good deal. A fairer way to do this would be a parallel offering of class B shares to sophisticated investors, with the same economic rights and full transferability, then give the black churchgoers a 20% discount when they buy the class A. But the fundamental analysis is bad enough to make the article untrustworthy.
[0] https://companiesmarketcap.com/ballys-corp/total-debt/