Should be very accretive and acquisition EBITDA looks stable to growing


"Acquiring Peninsula Gaming is a transformative transaction that fits perfectly into our growth strategy by expanding our Company's scale, diversifying our platform, strengthening our financial profile, and generating meaningful value for our shareholders. The Peninsula properties are a strong fit for us, as they are well-managed and operate in resilient markets in the Midwest and South. We anticipate this transaction will be immediately accretive to earnings and significantly increase our free cash flow." -  Keith Smith, President and Chief Executive Officer of Boyd Gaming 



  • Since the properties are fairly new, there is minimal maintenance capex
  • Opportunity to grow revenues by introducing the B-Connected to the portfolio
  • The Iowa properties control more than 45% of the northern part of that market
  • The 2 Louisiana properties:
    • Their properties are halfway between Delta Downs and Treasure Chest.  
    • Most of the patrons are locals - so there is no overlap.
  • Kansas Star: only property serving the greater Witchita area.  Despite limited amenities, they are already generating $27MM of EBITDA in the first quarter operating out of a temp facility.
  • Post acquisition, 54% of their EBITDA will come from the Midwest and South assets vs. 35% today
  • They will refinance $1.2BN of Peninsula's debt, which includes paying for pre-payment fees on the existing debt



  • Is there any room for margin improvement at the assets they are acquiring?
    • Expect a benefit from B-Connected 
    • Opportunities on the centralized services side like purchasing
    • This deal is more about growth than synergies
  • Are comfortable with the pro-forma exposure to Louisiana since each of their properties is in a difference sub market
  • The $1.25BN of debt financing is inclusive of the seller note.  They are not ready to disclose the financing terms.
  • They will only be on the hook for funding Phase 3 of the Kansas Star development.  The permanent facility will be funded by the time it opens. They will see a decline in margins at Kansas Star once all the amenities open but total EBITDA should grow as they add incremental revenue.
  • Management fee from Peninsula gaming? There will be some form of management fee but they don't know how much.  
  • They are non-committal on how they will fund the $200MM of cash.  They don't need to raise equity but have the option. 
  • The deal will not require any amendment on their existing revolver
  • PNK's Baton Rouge impact on Evangeline Downs: 
    • The property is very stable
    • has been there a long time and given the local customer base
    • they do not expect to see a material impact from BR
  • How long will B-Connected take to implement?
    • About 6 months after closing
  • They are pretty comfortable that the competitive landscape will remain stable around Kansas Star.  BYD thinks that Peninsula has done a great job master planning the property.  For PH2, they see a lot of upside from the equestrian facility and hotel addition.
  • This deal will not preclude them from acquiring the balance of Borgata if it becomes available at the right price
  • The $10MM of corporate will likely stay in place.  The assets are run very well.
  • Rebranding is not on their radar screen at the moment
  • They are tendering for the bonds at T+50 but that's included in the cost
  • Unclear how much goodwill will be and how much of incremental D&A they will have.  The run rate number they have now may not be a bad number to use for now.  $50-55MM is likely a good run rate.
  • There could be some accounting for the earn out
  • Just the management fee will accrue to benefit BYD's covenants 
  • Legislative action is needed for more Kansas casino licenses.  There is potential of a tribal facility but it's not likely. 
  • There is some talk about electronic bingo in Minnesota, but don't expect any impact on them if that happens



  • BYD has entered into a definitive agreement to acquire Peninsula Gaming for total consideration of $1.45B
  • "The purchase price represents an EBITDA multiple of 7.0 times based on the trailing 12-month EBITDA of $109 million for Peninsula's Iowa and Louisiana properties, an annualized run-rate for Kansas Star based on its first-quarter 2012 EBITDA of $26.8 million, and corporate expense of $10 million."
  • Transaction is expected to close by year end
  • BYD has committed financing for the acquisition, which should be deleveraging.  Funding will consist of $200MM of cash, $1.1BN of new debt, and a $144MM note provided by the seller
  • If Kansas Star's 2016 EBITDA exceeds $105MM in 2016, BYD will make additional payments to the seller in the amount of 7.5x EBITDA in excess of $105MM
  • The acquisition will add 5 properties to BYD's portfolio
    • Kansas Star Casino near Wichita, Kansas 
    • Diamond Jo Casino in Dubuque, Iowa
    • Diamond Jo Worth in Northwood, Iowa
    • Evangeline Downs Racetrack & Casino in Opelousas, Louisiana
    • Amelia Belle Casino in Amelia, Louisiana

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CONCLUSION: Chinese economic growth is slowing at a faster rate as of late while market-based indicators of monetary easing speculation are accelerating, leaving the Chinese economy at a perfectly confusing fundamental juncture. We do, however, continue to side with our research process – the net output of which points to a bottoming/inflection point in Chinese growth here in 2Q.


VIRTUAL PORTFOLIO: Long Chinese equities (CAF).



The month of APR certainly brought some fairly sour economic growth data out of China. The headline data was as follows: 

  • APR Industrial Production: +9.3% YoY vs. +11.9% prior
  • APR Retail Sales: +14.1% YoY vs. +15.2% prior
  • APR Fixed Assets Investments YTD: +20.2% YoY vs. +20.9% prior
  • APR M2 Money Supply: +12.8% YoY vs. +13.4% prior
  • APR New Loans: +CNY681.8B MoM vs. +CNY1010B prior
  • APR Exports: +4.9% YoY vs. +8.9% prior
    • To US: +10% YoY vs. +14% prior
    • To EU: -2.4% YoY vs. -3.1% prior
  • APR Imports: +0.3% YoY vs. +5.3% prior
  • APR Manufacturing PMI: 53.3 vs. 53.1 prior (improved at a slower rate, though)
  • APR Services PMI: 56.1 vs. 58 prior 

Behind the scenes, APR also saw a slowdown in Chinese energy demand and an incremental deterioration of conditions within the country’s property market: 

  • APR Electricity Production: +1.5% YoY vs. +7.3% prior
  • APR Processing of Crude Oil: -0.6% YoY vs. +1.9% prior
  • APR Real Estate Climate Index: -7.3% YoY vs. -5.9% prior 





As an aside, we flag these lesser-tracked data points because of their signaling power into the current Chinese growth model: 46.4% of GDP is Gross Fixed Capital Formation and Industrial Production accounts for 70% of all electricity use.


Moving along, it also appears that April’s Showers invited themselves into MAY, as the nation’s four largest banks are reported to have recorded only +CNY20B of Net New Lending MTD (per the Shanghai Securities News, citing unidentified sources). If this report is indeed accurate, it is an early (and extremely negative) read on the state of Chinese economic growth here in MAY, given the capital intensive nature of the Chinese economy.



Looking ahead, our models continue to point to a bottoming/inflection point in Chinese growth here in 2Q and the APR inflation data (CPI: +3.4% YoY vs. +3.6% prior; PPI: -0.7% YoY vs. -0.3% prior) lends credence to our long-held view that Deflating the Inflation alone would prompt the State Council, PBOC and the China Securities Regulatory Commission to continue “fine tuning” policy in support of growth. NOTE: we are not of the view that incremental easing is a function of slowing growth data; the latter has been purposefully engineered by Chinese policymakers starting as early as 1Q10 (recall our then-bearish Chinese Ox in a Box thesis).


China’s near world-beating currency strength has been supportive of domestic disinflation and that looks to continue despite what we see as TREND and potentially TAIL duration CNY weakness (commodities have higher beta on the downside) – a view that is increasingly being priced into forward-looking FX markets and in the yuan-sensitive Dim Sum bond market (yields breaking out as CNH deposit growth slows).








Most importantly, Chinese interest rate markets have dramatically accelerated their pricing in of easier domestic monetary policy over the past week (all spreads relative to the PBOC’s Benchmark 1yr Household Deposit Rate): 

  • 1yr Sovereign L/C Yield: -120bps vs. -70bps 1wk ago
  • 1yr OIS: -70bps vs. -24bps 1wk ago
  • 1yr PBOC Bill Yield: -78bps vs. -28bps 1wk ago 



In short, while we don’t view a material acceleration in Chinese economic growth in 2H as a probable event absent a removal of the property market curbs, we do think further RRR reductions and actual interest rate cuts will start to filter through the economy and provide an eventual boost to Chinese economic growth.



Given that Chinese interest rate markets have put on a marked move towards the expectation of further/more aggressive monetary easing of late, it strikes us as odd that the equity values of China’s most capital intensive industries (Financials and Industrials) are not outperforming on a S/T basis. We do expect them to outperform in the aforementioned scenario, so we’ll continue to monitor this for signs of eventual follow-through or further hold-out.




Even rumors that the China Securities Regulatory Commission may grant foreign pension funds access to China’s capital markets wasn’t enough to boost Chinese stocks at large this week. It is our view that improving TREND-duration fundamentals will spell outperformance of Chinese equities over that duration. TAIL-duration questions remain; a potential property price collapse and a dramatic deterioration in systemic bank credit quality are two key structural issues we need to see resolved before we’d argue that the Chinese economy is in the clear from a L/T perspective.



All told, Chinese economic growth is slowing at a faster rate of late while market-based indicators of monetary easing speculation are accelerating, leaving the Chinese economy at a perfectly confusing fundamental juncture. We do, however, continue side with our research process – the net output of which points to a bottoming/inflection point in Chinese growth here in 2Q.


Darius Dale

Senior Analyst


The Macau Metro Monitor, May 16, 2012




According to Business Daily, MPEL will receive government permission for a casino at MSC “very soon.”  The report quotes a source as saying that “the casino permission is just a formality and will happen very soon.”



Macau and Guangdong Province announced the construction of a new border crossing checkpoint connecting Zhuhai and Macau, to ease the burden of Gongbei border gate.  The new border checkpoint, pending the approval of the central government, will be located on a land plot currently hosting the South Guangdong Wholesale Market on the Macau side.


Daily traffic of the checkpoint is expected to be around 200,000 arrivals, and together with the expansion of the current border crossing checkpoint, the checkpoints will be able to cater up to 700,000 visitors.



A source familiar with the matter tells the Shanghai Securities News that two of the four largest banks posted ~CNY10BN and "several billions" in new yuan loans respectively, but the remaining two banks posted negative growth in new yuan loans, leading to almost zero new yuan loans for the four banks through May 13th. The source also adds that the four banks' deposits have declined by ~CNY200BN as of May 13.

Stinky Cheese

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“For every complex problem there is an answer that is clear, simple, and wrong.”

- H.L. Mencken


While they’re not the only ones in the business, the French are rightfully proud of their “stinky” cheeses.  Yet stinky is for the consumer to judge and when it comes to pungent cheese, aroma and taste can run the spectrum from intense pleasure to pain, or alternatively as a pleasure from the pain.


A similar broad spectrum on the handling of the Eurozone’s sovereign debt and banking “crisis” is enjoyed by investors, strategists, journalists, and European citizens alike: abolish it, rescue it, or structure some hybrid of the two.  So what’s the update on the region as we find ourselves in May with the stink currently in Spain?


We continue to throw the abolishment camp out the window on four main factors:

  1. Eurocrats will tote the line to save their job
  2. Fear of the contagion effect from the default of countries and banks on the rest of the continent
  3. Belief in the Union’s economic benefit (namely through open trade and travel)
  4. Belief in the formation of a European identity (including the continental strength to balance the closest geographic spheres of influence in the U.S. and Russia)

While we could argue until we’re blue in the face that Europe needs its own Lehman-like event, to let weaker countries default and/or exit the Union, and that one monetary policy for a collection of joined states growing at uneven rates will continue to compromise the Union because it handcuffs nations from manipulating currencies and interest rates to encourage competitiveness, we think the above factors will justify the maintenance of the existing Eurozone fabric over at least the next 12 months.


So the task is to play an incredibly-challenged environment ahead as Eurocrats try to find a balance between fiscal consolidation, while not obliterating future growth in the process. One key factor to monitor, which we’ll hit on later in the note, is the deterioration of Merkozy, or relations between Germany and France on Eurozone policy.


So what’s so wrong with Europe?

The existing rub in directing European policy to improve the fiscal health of countries is that European leadership is inherently compromised: on one hand they have to answer to their citizenry that is largely voting against fiscal consolidation (and rioting on the street to bout), yet on the other they must answer to the markets, and a larger Brussels “authority”. Given that the markets are pricing in slow growth across Europe in 2012 and such threats as the inability of governments to meets consolidation targets, sovereign yields should remain elevated, which in turn increases the cost to raise capital and sets the “non-virtuous” cycle of raising debt and deficits levels. 


With 10YR yields trading at 20.4% in Greece; 10.5% in Portugal; 5.8% in Spain; and 5.6% in Italy; vs 1.6% in Germany, it comes with no great surprise that Germany is not interested in issuing Eurobonds.


But now the stakes in reducing risk have elevated, as Spain has taken the sovereign spotlight after a lengthy focus on Greece!  (Note: Spain’s economy = 5x Greece’s.)


And while Eurocrats have set up a number of firewalls to ease investor concern that the Eurozone is going away—including funding programs such as the EFSF, ESM, and enhanced commitments to the IMF earmarked for Europe, to liquidity programs such as the two 36M- LTROs and the SMP—these programs do little to bind Europe under a growth strategy.  As of recent weeks, it’s growth that has been given more attention by Eurocrats.


More Conflicts Ahead

But how do you manufacture growth? Simply by setting up more funding through the European Investment Bank or earmarking more lending from the IMF?  But who’s paying for it? Importantly, Germany hasn’t put up her hand, and who’s left?


Again, the uneven and compromised nature of Europe (and the Eurozone specifically) cannot be overlooked.  Simply throwing money at “problems” won’t cure structural drags like high unemployment rates, low labor productivity, vulnerable banks, and further risks from declines in housing and property prices ahead.


To highlight a few imbalances: Spain’s unemployment rate is 24.4% vs Germany’s at 6.8%, or Spain has a monster deficit reduction target of 5.3% (of GDP) for 2012 versus 8.5% last year vs the German deficit forecast to fall to 0.6%.  Or consider Portugal’s average annual growth rate over the last 10 years of 0.03% vs 1.07% for Germany, or recall that we forecast house and property prices could fall another 30% from here in Spain! 


It’s such structural mismatches (to name a few) that suggest that even if Europe finds a united path, it won’t come next week, next month, or next year. Uncompetitive countries like a Portugal or a Greece are going to stay uncompetitive. Europe’s stronger nations will simply have to decide how long they want to subsidize them.  Is this a realistic long-term strategy? We think not, but we still must play the likelihood that Eurocrats fight to support the whole.


Of note is that in some cases expectation are just grossly misaligned. For example, the European Commission targeted all member nations to have deficits at or below 3% by 2013. That’s surely not realistic for Portugal, Ireland, Spain, or Greece! Further, the Fiscal Compact, which is really an amended version of the Stability and Growth Pact (aimed at deficit reduction to 3% and debt reduction to 60%), stands to fall short as Brussels wrongly assumes members will give up their fiscal sovereignty.


French Inflections

Returning to stinky cheese, the likely victory of the Socialist candidate Francois Hollande in this Sunday’s presidential elections spells the likely end of a strong working relationship between France’s Sarkozy and Germany’s Merkel. Hollande’s very socialist agenda (increase spending by €20 MM over five years, reduce the retirement age from 62 to 60, raise income tax on earners over €1 MM to 75%, capping gasoline prices for a number of months and a pledge to block corporate job cuts) along with such positions as pro Eurobonds (which Germany vehemently opposes) and opposition to the Fiscal Compact, portend great disunity at a time when the Eurozone needs its two largest economies to pull jointly on the loose strings and direct solutions to its sovereign and banking ills.


Returning to H.L. Mencken’s quote that started the note, it’s clear Europe has a very complex suite of problems. And if expectations are the root of all heartache, it’s the market’s expectation that Europe will be “fixed” tomorrow that needs amendment.   While there is no simple solution, without better coordination through both appropriate targets for fiscal consolidation alongside strategies for growth, we do not see any hope for material improvement across the region over the next 12 months.


The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1630-1656, $119.07-121.06, $78.55-79.32, and 1391-1415, respectively.


Matthew Hedrick

Senior Analyst


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