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Yes, there was another bid but that was unsolicited as well.  No wonder the rest of the industry players were caught off guard.

The ASCA/PNK proxy agreement was an interesting read.  It certainly increased our optimism that there could be a competing bid and confirmed our belief that the rest of the industry was a bit caught off guard.  No other bids were solicited so potential buyers such as MGM, PENN, BYD and maybe PE firms were likely unaware.  But there was more including a surprise 2nd bidder (unsolicited), some questionable advice by bankers, a pretty big payout to ASCA management, and a more dismal outlook for 2013 fundamentals than maybe the Street was expecting.

Here are our takeaways:

  • CHDN was likely “Bidder 1”.  The Agreement mentioned that Bidder 1 made an unsolicited offer that included stock, had a stock that was near an all-time high, was licensed in fewer jurisdictions than ASCA, and that the acquisition would be transformational to that company.  The only other companies with stocks near all time highs are PENN and MPEL, but we can rule both of them out because ASCA would not be a transformational acquisition to either.
  • ASCA’s advisors convinced the ASCA Board that soliciting other bids would not have resulted in a price significantly higher than $26.50 and would’ve jeopardized the PNK offer due to the a longer timetable.  The advisors felt that no other bids would be forthcoming since ASCA conducted a process to sell the company in 2010 and were unsuccessful.  We would argue that it was a different time and operators are in a much better position financially today.  Moreover, given the reaction in PNK’s stock, ASCA left a lot on the table indicating that higher bids could’ve been successfully solicited. 
  • Other issues brought up by the advisors were that:
    • Bidder 1 refused to release non-public info requested by the Board to evaluate the value of their stock  - Probably due to competitive reasons related to CHDN’s on-line business
    • Pressure from some shareholders wanting to cash out could have put selling pressure on Bidder 1 stock – In retrospect, CHDN’s stock would’ve likely gone up materially. 
    • Bidder 1’s stock was close to all-time highs – We don’t find this relevant.

The advisors also made a claim that investors would not have been appreciative of the tax advantages of a partial stock deal.  This seems spurious.

  • The fact that MGM, PENN, BYD, nor any other operator was involved in the process increases our optimism that there could be a competing bid.  PENN could obviously pay the highest multiple given their future REIT structure and strong balance sheet but MGM could do a deleveraging and very accretive deal while adding additional value through the use of its NOLs.
  • ASCA can still negotiate unsolicited bids until the shareholder vote
  • It is possible that CHDN’s offer of $26 with 40% in stock could’ve actually been superior.  PNK’s stock appreciated 21% the day they announced the transaction and CHDN would’ve no doubt experienced a big increase in the share price as well which would’ve ultimately accrued to ASCA shareholders.  Moreover, the favorable tax treatment for investors receiving ASCA would have to be factored in as well.
  • There are a number of lawsuits arguing that ASCA is not acting in the best interest of shareholders.  We also believe that some institutional owners are not happy that additional bids were not solicited.  There seems to be a lot of pressure on the company to certainly entertain unsolicited bids.
  • ASCA management’s projection for 2013 EBITDA was approximately 3% below current consensus estimates.  We think the sell side continues to be a little aggressive on regional gaming projections for 2013.  Our thesis remains that US casinos face structural (fewer slot players) and economic (highly economically sensitive) headwinds.  Of course, this could argue against accepting stock from a bidder since any fundamental weakness would theoretically accrue to the buyer and potentially hurt its stock price.
  • ASCA spent $6 million on professional fees
  • A whopping $43 million of severance is owed to management