Favorable adjustment to our private equity analysis


In our IGT note and presentation ealier today we communicated IGT could be worth $18-22 to a private equity firm and would yield an IRR of 21%-33%. However, we found a data flow through error (related to D&A) from our forecasting model to our LBO calculation.  After updating our model, the IRR on a go private transaction at $18 or $22/share would be 36% and 24%, respectively - about 300 bps higher than our initial analysis. Our leverage and coverage ratios also improve as a result of the higher calculated EBITDA. 

We apologize for the error and inconvenience.  Please see our revised data table for additional details.




Please call us, if you'd like to discuss further.

EHTH: Keeps Getting Worse

Takeaway: Management comments at a competitor's conference introduce new risk to the story. A much bigger risk is yet to emerge. We remain short.


  1. WHAT'S NEW:  Management suggested at a competitor's Healthcare conference that it hasn't seen much improvement in fixing its technical issues interfacing with the government exchanges, and this issue may not be resolved before the next Open Enrollment period.  If true, this will only exasperate its retention/attrition issues, which is the central part of our thesis.
  2. WHAT'S NOT SO NEW:  Management also said 2Q14/3Q14 applications will be a “fraction” of what they were a year ago.  Management already alluded to this during its last earnings call, suggesting applications will be down y/y.  We previously highlighted this as risk to consensus estimates, but this isn’t central to our thesis since applications were accelerated into the 4Q13/1Q14 period because of Open Enrollment.
  3. WHAT'S COMING: What no one on the sell-side is talking about is Individual & Family Plan (IFP) commission rates next year.  The private exchanges (e.g. EHTH) are becoming more obsolete now the government exchanges are operational, which wasn’t the case heading into the 2014 Open Enrollment period.  The mix of new lives on the exchanges in 2014 are older (costlier) than historical experience, meaning Managed Care Companies (MCOs) need to find ways to recoup profitability next year.  Of all options available to MCOs, cutting IFP commission rates will be the path of least resistance.


See notes below for more detail on our thesis.  Let us know if you would like to see additional notes, have any questions, or would like to discuss further.


Hesham Shaaban, CFA





EHTH: Déjà vu

03/04/14 02:15 PM EST


EHTH: Initiating Short

01/29/14 10:38 AM EST


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Retail Callouts (6/10): ICSC, NKE, TGT, UNIQLO, JCP, WMT, GPS

Takeaway: ICSC #'s starting to stabilize in 2Q. NKE goes to the Space Jam vault for WC. TGT announces more 'changes'. Uniqlo raising prices in Japan.



TUESDAY (6/10)

  • ULTA - Earnings Call: 5:00pm



  • RH - Earnings Call: 5:00pm



  • LULU - Earnings Call: 9:00am




ICSC - Chain Store Sales Index


Takeaway: +3% compared to 2.2% in 2013. YTD growth rate is equal 1.96% YY compared to 2.4% in 2013. But, numbers in 2Q-to-date are down just 6 bps compared to the 2.4% growth rate in '13. Nothing spectacular, but a little stability after a tough start to the year.


Retail Callouts (6/10): ICSC, NKE, TGT, UNIQLO, JCP, WMT, GPS - chart2 6 10







  • "Today Nike Football released part three of its #riskeverything campaign. The film – 'The Last Game' – is a five-minute animated feature starring some of the world's greatest footballers on a mission to save football from the hands of a villainous mastermind, The Scientist."


Retail Callouts (6/10): ICSC, NKE, TGT, UNIQLO, JCP, WMT, GPS - chart1 6 10


Takeaway: NKE taking a page out of the Space Jam playbook in the last part of its #riskeverything campaign for the World Cup. We're surprised we haven't seen more product and marketing from brands leading up to the World Cup in Rio.


TGT - Target CEO Memo: Less Committee, More Leadership



  • "The retailer is relocating all of its top executives to same floor in its Minneapolis headquarters, part of a several changes announced Monday by Target interim Chief Executive John Mulligan as the company tries to move on from the era of former CEO Gregg Steinhafel."
  • "Target’s renaming its executive committee the 'leadership team.' It is modernizing or eliminating four its longstanding groups — the supply chain council, the prototype committee, design committee and capital expenditure committee — removing a layer of approval."
  • “'All across Target, we need more ‘leadership’ and less ‘committee,’ Mr. Mulligan said in the letter reviewed by the Wall Street Journal."
  • "The top executives like Chief Marketing Officer Jeffrey Jones and Chief Information Officer Robert DeRodes will be relocating to the 26th floor in Target Plaza South, where Mr. Mulligan and Executive Vice President Kathryn Tesija currently have their offices. The floor will be getting a more open plan than its current layout of office and hallways, aimed at fostering greater collaboration."


Takeaway: The reality is that the narrative on this name will change dramatically over the next 12 months after a real CEO is hired and major strategic decisions. We’ll be talking about a new CEO’s vision to both transform the company, and fix all the mistakes made over the past 5 years. That might sound like great news, but it will be expensive news. 


9983 - Uniqlo Raises Japan Prices by 5%



  • "Uniqlo is raising its pre-tax retail prices in Japan by an average of about 5 percent this fall to combat rising material costs and the depreciation of the yen."
  • "A spokesman for Fast Retailing specified that the price hikes are only applicable to Japan. Uniqlo's prices in international markets will not be affected as they are set on a market by market basis, he said."


Takeaway: Damned if you do, damned if you don't scenario for Uniqlo in Japan. With 60% of its store base in Japan, the company had to do something to offset the margin squeeze from FX. But, the 5% price increase coupled with the country's 3% tax hike means that consumers have to pay an extra 8% at the register. The fact is that everyone is likely feeling the squeeze in Japan from both FX and the uncertainty surrounding the tax hike, but its much more pronounced for a brand like Uniqlo who is much more dependent on the Japanese economy.


JCP - Stephen Sadove Joins Traub Associates



  • "Stephen I. Sadove, the former chairman and chief executive officer of Saks Inc., has joined Marvin Traub Associates as cofounder and head of Traub Accelerator, a new division focused on technology and innovation."


Takeaway: Scratch another name off the potential CEO list at JCP. Sadove is on the board, and if he were interested in the full-time gig it would have happened by now. Based on the 1Q14 conference call, it does not sound like Ullman plans on going anywhere anytime soon. While we think that's negative at face value, let's give the guy credit…he's getting it done. If he could keep this momentum going, then maybe he should stay.




Toms - Shoemaker Toms put up for sale



  • "Toms...has hired bankers and is working on a sale, according to several people familiar with the matter."
  • "The exact value of unclear. However, people who have viewed the prospectus said it could fetch as much as $600m."
  • Toms had estimated revenue of $250m in 2013, with 30 per cent of sales coming from its website
  • "In November [Tom's founder and CEO] Mr Myckoskie launched Marketplace, an online department store showcasing 200 products from 30 fashion brands with a charitable component to the business model."


GPS - Gap Inc. to Produce Apparel in Myanmar



  • "Gap Inc. plans to produce apparel at two factories in Myanmar, making it the first American retailer of note to enter the market since the U.S. lifted a nine-year ban on imports from the country last year."
  • "...U.S. retailers and brands have been exploring the new opening in the country, which could be a potential fresh apparel-sourcing destination for companies that have been grappling with rising labor costs in China and turmoil in other Asian countries. However, many industry officials have said investment and sourcing will be a slow-moving process because serious concerns remain about workers’ rights and safety. Apparel imports to the U.S. from Myanmar were $5.6 million for the year ending April 30."


WMT - CEO Joel Anderson to Step Down



  • "Joel Anderson, chief executive of in the U.S., is leaving the world's largest retailer later this month for a job at a new company, according to a memo sent to Wal-Mart Stores Inc. employees on Monday."
  • "Fernando Madeira, who is currently president and CEO of Latin America at Walmart eCommerce,will replace Mr. Anderson and take on a broader role to lead in the U.S., Latin America and other growth areas, according to the memo, which was written by Neil Ashe, who runs Wal-Mart's e-commerce business, and reviewed by The Wall Street Journal."
  • "Mr. Anderson's last day at Wal-Mart is June 20. The memo didn't say which company Mr. Anderson was joining."


FIVE - Former President and CEO of, Joel Anderson, Named President



  • "Joel Anderson has been named President, bringing more than 20 years of experience in the retail sector, most recently as President and CEO of, the multi-billion dollar U.S. dotcom business unit of Wal-Mart. In his new role, he will lead all aspects of merchandising, stores and marketing."


URBN - 2Q15 sales updated (10-Q)


  • "Thus far during the second quarter of fiscal 2015, comparable Retail segment net sales are approximately flat."


CHS - Chico’s explores sale to private equity



  • "Chico’s, the US womenswear chain, is exploring a sale to private equity and has discussed a deal with potential suitors that could lead to one of the largest take-private transactions so far this year.
  • The final asking price could not be ascertained but one industry source said Chico’s would likely command a premium of about 30 per cent to its $2.36bn market capitalization."



A takeout price much higher can still make PE (and current shareholders) a lot of money. Stay tuned for Hedgeye's 1pm EDT conference call.


IGT could be worth $18-22 to a private equity firm which would yield an IRR of 21%-33% by our estimation. The stock closed at $14.31, up 14% but considerable upside remains to our target valuation.  Of course, no deal has been announced, nor has IGT made any announcement – only a Reuters article citing a source that IGT has hired an investment banking firm to sell the company. 


Moreover, tragically low replacement demand could put near-term earnings slightly at risk with little relief in overall slot demand until 2016.  Finally, regulatory impediments would likely result in a year-long closing process.  Nevertheless, there is real cash flow and real value in the name, in our opinion, and private equity could make this a profitable deal for itself and current shareholders.





A Reuters article yesterday suggested IGT had hired Morgan Stanley to pursue the sale of the company.  There were enough details in the article to conclude that where there is smoke, there is fire.  It makes sense to us - Hedgeye had already planned a BlackBook report and conference call for later this week analyzing a potential LBO scenario. 


We’ve revisited the private equity option many times over the years.  IGT’s cash flow and low capital intensive business model always seemed to be a candidate for the private marketplace, especially at low points in the cycle similar to now.  The main hurdle has always been regulatory in nature.  As someone who has been through the licensing process in 200 jurisdictions through my Board affiliation with Shuffle Master, I can speak to the uphill battle private equity would face.


However, we have seen private equity more involved in the gaming space in the last 8 years:  HET and STN went private and Fortress pulled the plug, expensively, on a deal to bring PENN public in 2008.  More recently and more directly, at least 4 private equity firms bid on WMS with 1 making it to the final round.  


Other private equity/gaming relationships include Blackstone buying Cosmopolitan and the firm was involved in The Cromwell as well as Caesars; Fortress is the sponsor of GLPI; Icahn Enterprises sponsorship of Tropicana Entertainment; and, MacAndrew & Forbes has an ongoing interest in Scientific Games. 


So what’s the play for PE?  Buying a high cash flow generative company, despite secular and cyclical issues, at the low end of the slot cycle for a relatively cheap multiple.  Bring IGT public again in 4-5 years when international demand should be humming and more domestic jurisdictions should be open or in the process of opening.  Oh and there is a social gaming asset that may not be core and carries a multiple higher than the core business.  A coincident sale of Interactive could pay for much of the equity contribution for the LBO.


PE would likely affect a management change, improve employee morale, and stem the brain drain of the last few years.  We do not believe PE would value current CEO Patti Hart’s skill set.  However, John Vandemere, CFO, could be a candidate for the role to keep some continuity.  We have grown an appreciation for Mr. Vandemere’s cash flow focus and ability to cut costs – 2 skills necessary for an LBO CEO.


What’s the play for another manufacturer?  Well, it would almost have to be an international slot manufacturer such as Aristocrat or Lottomatica.  However, we believe this outcome is less likely than a private equity bid. 


I will be hosting a 1:00 pm EDT conference call today to discuss Hedgeye’s thoughts and analysis on IGT as a private equity play.  We will also discuss the near and long term issues facing IGT and look at potential catalysts should a sale not reach fruition. 


If you are interested in joining us, please contact your Hedgeye salesperson or email for more information.

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