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LEISURE LETTER (07/16/2014)

Tickers: IGT, RLJ, NCLH


  • July 16:  LVS 2Q call (430pm)
  • July 23:  TRIP 2Q call (430pm)
  • July 24:  
    • WYN 2Q call (830am)
    • PNK 2Q call (9am)
    • LHO 2Q call (930am)
    • PENN 2Q call (10am)
    • HOT 2Q call (1030am)
  • July 25:
    • PEB 2Q call (9am)


IGT – announced a definitive merger agreement with GTECH S.p.A. for the acquisition of IGT by GTECH for $6.4 billion, comprised of $4.7 billion in cash and stock and the assumption of $1.7 billion in net debt -- for approximately $18.25/share in cash and stock.  IGT and GTECH will combine under a newly formed holding company organized in the United Kingdom (NewCo).  IGT shareholders will receive an aggregate value of $18.25 per IGT share in a combination of $13.69 in cash plus 0.1819 ordinary shares of NewCo for each share of IGT common stock.  GTECH shareholders will exchange each of their existing GTECH shares for one (1) newly issued NewCo share.  The transaction may close in Q1 2015 or Q2 2015.

Takeaway: Despite a less than stellar history and career at IGT, CEO Patti Hart catches a golden parachute...the $18.25/share is slightly higher than the $18.13/share closing price on December 31, 2013 versus Hedgeye's $18-22/share fair value on a takeout basis. 


102:HK & 200.HK (GGR Asia) Investors in a casino project in Vladivostok, Primorye in the Russian Far East will invest an additional US$137.7 million to the development. The Russian casino resort complex, located near the port city of Vladivostok, is expected to have 119 hotel rooms, 800 slot machines, 25 VIP gaming tables, 15 mass market baccarat tables and 25 mass market tables providing other table games. The casino is targeted to open in the last quarter of this year.  Summit Ascent Russia Ltd, a British Virgin Islands firm wholly owned by Mr Ho’s firm Summit Ascent Holdings Ltd, will invest an additional US$82.6 million. Firich Investment Ltd, a Mauritius-incorporated firm, will pay a further US$27.5 million, while Elegant City Group Ltd, a BVI entity, will pay US$20.7 million, and New Crescent Investments Ltd, a BVI firm that is a wholly-owned subsidiary of Melco International Development Ltd, a Hong Kong-listed firm chaired by Mr Ho and a partner in his Macau casino investments, will pay US$6.9 million 

Takeaway: More competition coming in Q4 2014.


RLJ – acquired the 194-room Hyatt Atlanta Midtown located in Atlanta, GA for a purchase price of $49.5M or approximately $255,000/key and the purchase price represents a forward capitalization rate of abuot 8.0% on the Hotel’s projected 2015 net operating income. 


NCLH(Cruise Critic) Norwegian Cruise Line to announce smoking ban on ship balconies, effective November.


Macau table/slot count in 2Q 2014 – (DICJ) Tables increased to 5,710 in Q2 2014 from 5,700 in Q1 2014.  Slot count fell from 13,232 to 12,895 in Q2.

Takeaway:  Lowest slot count since Q1 2009 


Macau Slot Machine Issues (SCMP) Casinos have reportedly refused 133 gamblers their winnings, claiming that their wins are the result of "mechanical errors" - a practice critics say will deal a blow to Macau's tourism image. The Macau government has brushed off calls for tighter casino controls, amid accusations that operators in the world's gaming capital are unfairly withholding prize money from winners.  Legislator Au Kam-san argued that gamblers could not know if a machine was technically reliable before playing it. Au called for a rewriting of laws governing the circumstances in which casinos could refuse payment.

Takeaway: Based on our read, this story seems overblown, table play is what matters in Macau and total slot count in Macau is now below 13,000 units. 


Macau Grand Prix – Macau junket operator SunCity Group is the official sponsor of this year’s Macau Grand Prix.  The junket operator is also the title sponsor for the Formula 3 Macau Grand Prix, the Macau Motorcycle Grand Prix and the FIA World Touring Car Championship 2014 season finale. Suncity Group is committing MOP16.6 million (US$2.08 million) for the 61st Macau Grand Prix which runs runs between November 13 and 16.

Takeaway: Suncity Group shining brightly in all aspects and leading the way at the Grand Prix.  


Jeju Casino Dispute (follow-up from July 2) – Casino operators on the South Korean island of Jeju are concerned that their image may be tarnished by a case in which the management of one casino appears to have falsely accused four Chinese customers of cheating in order to refuse a payout of 1.1 billion won (US$1.1 million) in May.  On May 15, a Chinese national surnamed Lu and his three friends went to the local police, where they reported that the Seogwipo casino on May 11 had refused to cash out chips worth 1.1 billion won and had also threatened them. The four subsequently brought a civil suit against the casino, which filed a countersuit claiming the group had cheated at gambling with the help of one of its staff. The casino employee concerned, however, later admitted giving false testimony at his manager's instruction and the casino was unable to produce evidence to substantiate its case. 

Takeaway: A negative headline as the country begins to consider a locals gaming expansion.

Saipan Casino License Award – Best Sunshine International was awarded an exclusive 40-year casino license for Saipan and the Company is planning a $2 billion casino with the required 2,000 hotel rooms.  Best Sunshine is a subsidiary of Imperial Pacific, a Hang Sang listed firm. 

Takeaway: We remain very skeptical...With current annual visitation of approximately 450,000 (comprised of 40% from Japan and 20% from China), that's only a small percentage of the total 730,000 room nights at a 2,000 room hotel. We remain skeptical of the casino's profitability and viability given the isolated location.  Additional airlift is required to ensure casino visitation.


Australia Hotel Boom – More than 40 developers are competing to turn two 100-year-old government office buildings into hotel rooms as demand soars. Additionally, developers including China’s Greenland Holding Group Co. and Singapore-based M&L Hospitality Trust plan to add more than 5,300 rooms over the next five years. If they are completed, the city’s supply of rooms will rise by about 20% by the end of the decade, the most since Australia’s largest city hosted the Olympics in 2000, according to broker CBRE Group Inc.’s hotels division. Foreign visitors to Australia are growing at the fastest pace since the Sydney Olympics, sending occupancies in Sydney to a record and the highest in Asia after Hong Kong and Tokyo. Sydney’s average hotel occupancy is set to reach 88.8% by the end of 2016, the highest since at least 2000, according to economics advisory firm Deloitte Access Economics Pty.

Takeaway: Strong Aussie tourism could benefit Aussie casinos.


China GDP – Q2 GDP +7.5% year/year vs consensus +7.4% and +7.4% in Q1


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Retail Callouts (7/16): JCP, RH, M, H&M, SHOO



Wednesday (7/16)

EBAY - Earnings Call: 5:00pm


Friday (7/18)

VFC - Earnings Call: 8:30am





JCP - Report: HSN’s Mindy Grossman declined J.C. Penney CEO offer



"Mindy Grossman, the chief executive of HSN Inc., reportedly declined an offer to become CEO of J.C. Penney Company in May 2014. According to the Wall Street Journal, Grossman had been in advanced negotiations with Penney to take the reins as CEO but discussions ended for an unspecified reason."

"Grossman, a former Nike Inc. executive, took the reins of HSN in 2006."


Takeaway: Grossman is one of the most respected people to ever work at Nike, and although she does not often get appropriate credit, the fact is that she turned Nike into one of the biggest apparel brands in the world. HSN has been a good fit for her in many respects. But quite frankly, we're floored that she took the discussions with JCP to such an advanced level (unless she was testing her own market value -- something she has not done in eight years). JCP would have been so fortunate to have her. But truth be told, this deal was never going to happen.



RH - Buckhead Atlanta Nears Completion



"The tenant roster remains true to Carter’s upscale vision. So far, Hermès, Akris, Brunello Cucinelli, Etro, Christian Louboutin, Canali, Helmut Lang, Jimmy Choo, Tod’s and Moncler are on board. Oliver McMillan is also looking for emerging retail concepts."

"Stores will begin opening in September."

 Retail Callouts (7/16): JCP, RH, M, H&M, SHOO - chart1 7 16


Takeaway: Flattering roster of tenants in this new development in Atlanta, but the one that we are most excited about is not on the list. RH is set to open a new gallery in the space in 4Q of this year. The new space measuring 45,000 sq. ft. spread out over 6 floors will offer 6X-7X the assortment at RH's legacy store in the area.




M - Macy's Rethinking Brooklyn Unit's Future



"Macy’s has put the renovation of its Brooklyn flagship on hold and is considering a sale of the property to redevelop the site, according to sources."

"The site, at 422 Fulton Street, has emerged as prime real estate due to the influx of new retail and residential units to the area…"


H&M - H&M N.Y. Flagship to Sell All Offerings



"When the world’s biggest H&M opens Thursday, at Fifth Avenue and 48th Street in Manhattan, customers will see all the retailer’s product categories under one roof for the first time in the U.S."


AAN - Aaron’s to close 44 stores in Q3



Aaron’s Inc. on Tuesday said it plans to close 44 underperforming stores in the third quarter of fiscal 2014 and continue other cost-reduction initiatives in response to disappointing core business performance. The electronics, furniture and appliances rentals retailer also revised its earnings guidance downward for the second quarter.


SHOO - Steve Madden taps Certona for real-time omnichannel personalization



"Certona, a provider of real-time omnichannel personalization, was selected by Steve Madden to deliver integrated, hyper-personalized experiences to its customers as they browse, share and purchase their favorite footwear and accessories."

"Through Certona's patented technology, Steve Madden can identify new and specific customer segments, and then strategically target content by segment."


Our math suggests IGT should trade at a little over $17 given the high probability of closing and low probability of a competing bid



"CEO's Dream Strategic Transaction" and joining forces with "a tough competitor" - Patti Hart

IGT and it's management team catches a golden parachute while positioning the NewCo for a broader, deeper global platform






• Creates world leading end-to-end gaming company across all segments

‒ #1 global gaming equipment supplier
‒ #1 global lottery business
‒ Top tier in social gaming and interactive wagering

• Enhanced global scale with diversified product portfolio and geographic mix
• Greater resources allow further strengthening of industry-leading R&D effort
• Uniquely positioned to exploit key market trends
• Industry leader with more than $6B in revenues and $2B in EBITDA


Transaction Details:

• $13.69 in cash plus 0.1819x GTECH shares, equivalent to $18.25 per IGT common share (75% cash and 25% stock)

• NewCo will incorporate in the UK and UK tax resident 

• NewCo will be NYSE listed, 80% owned by GTECH & 20% IGT 

• Synergies: $280 million expected over 3 years


New Segments:

• Lottery Operations

• iGaming

• Video Lotteries

• Content

• Casinos

• Social


Pro Forma Revenue Mix (based on 2013):

• 51% Gaming Equipment'

• 35% Lotteries

• 8% Interactive

• 6% Other


Geographic Revenue Mix:

• 46% US and Canada

• 36% Italy

• 18% International




  • Process & Roadblocks:  goal was to create strategic value for shareholders, no other transaction more strategic!  No anti-trust issues. "CEO's Dream Strategic Transaction"
  • Cost savings of $280 million are incremental to previously announced cost savings transactions
  • Break-up fee: not disclosed today, but standard break up fee.
  • Discussion timeline: talks moved from partnering to tying the know, positive relationship....was a full process and evaluated all possibilities and outcomes, this is the highest value creation for IGT shareholders.
  • Participation business: no significant shift from historical, but opportunity to bring size, scale, and geographic diversity.
  • Industry needed consolidation to remove excess costs.
  • Believe industry can be stronger and IGT (NewCo) can be stronger with fewer suppliers.
  • EGM not expect unusual rescission elections.
  • Regulatory concerns: looking at 9-12 months, shooting for front-end, earlier - need to license in a few additional jurisdictions, go thru anti-trust, two Board and shareholder meetings.
  • UK domicile: GTECH had requirement to be in the EU, also believe UK is a "fantastic" market to facilitate US-listing, English speaking, slight tax advantages.
  • UK tax advantage: 100-300 bps advantage, but not the driving decision rather strategic advantages drove decision
  • Game Ops - industry needs to innovate; size and scale will afford this innovation advancement
  • GTECH licensing: a small number, no jurisdiction would appear to pose a risk to the transaction
  • Additional industry consolidation required?  No such thing as a pure gaming, slot machine supplier anymore.  More of a "distributed gaming" world.
  • Merger rationale: Reduce vulnerability and add strengths

Early Look

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Client Talking Points


Yellen’s comments to Congress on Tuesday were deemed as more Hawkish, she defended keeping interest rates low but opened the door to quicker rate hikes if the labor market strength continues. We remain on the other side of that as we see economic growth continuing to slow into Q3.


Has Portugal reached a bottom? The country is now leading Europe on the upside. Now Riforte Investments SA, a holding company in the Espiritu Santo family, missed a $1.2B payment of commercial paper yesterday. Central Bank Governor, Carlos Costa, made a statement saying shareholders of the parent company were standing ready to inject capital into the bank if need be. Without being on the ground, it seems surprising Banco Espiritu Santo’s bonds and stocks have recovered a portion of the losses today with the news of another missed payment unless a big buyer came in to support the market. The 7.125s of 2023 jumped 8.8 points to 79% of par (10.6% yield) and the shares rallied 18%. Portuguese ten-year sovereign yields are down -8 bps currently.


The VIX closed at 11.96 1 day percent change of 1.18%, our immediate term risk range is now 10.32-12.94. Volatility has been at generational lows across asset allocations and continues to tick lower, we see the risk increasing the more you push the ball under water.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


$INTC does the right thing, moves biz to net cash neutral reqmt. To repurchase $7B of stock in 2H14 & $10B more in 2015. Wow.



Hard work spotlights the character of people: some turn up their sleeves, some turn up their noses, and some don't turn up at all.

-Sam Ewing


Today in 1941, Joe DiMaggio had his 56th consecutive game with a hit - that's still a record.


At best, higher housing prices helped stabilize locals gaming revenue.  In the face of potentially lower prices going forward, gaming demand could dry up – not good for BYD and Station Casinos.




Las Vegas Locals gaming revenue have been stagnant for a while despite a pickup in home prices, but at least had stabilized.  It seemed attributable to a delayed wealth effect – housing prices proved to be the most statistically important driver of Locals gaming revenues during the boom.  However, falling sales volume – a demand indicator – since July may have been indicative of a weak overall housing environment despite higher prices.  Indeed, Q1 locals gaming revenues were disappointing after months of stability and the first 2 months of Q2 deteriorated further.


Our Hedgeye Financials Team sees downward pressure on home prices as they usually lag demand by 12-18 months.  The recent gaming revenue performance and declining prices would not be good for BYD and Station Casinos.  Historically, Vegas home prices have a 70% correlation with Locals gaming revenues.  At the very best, the upcoming housing environment should prevent any Locals casino recovery.  At worst, the already fragile Local customer will tighten her purse strings even more.





The Phoenix and Vegas housing markets have mirrored each other in the recent housing bubble and recovery.  While Phoenix home prices have remained relatively robust, home sales have declined since last July.  A number of comments from an ASU report on the Phoenix home market in May were quite disturbing:

  • Total single family homes sold fell 19% YoY with those under $150k plunging 37% YoY
  • The percentage of residential properties purchased by investors continued to decline from 16.3% in April to 16.1% in May.
  • Weak demand from 1st time home buyers
  • Outlook:
    • Some home sellers appear to be cancelling their listings and waiting for another time when buyers have a greater sense of urgency.
    • Many families are choosing to stay in their homes longer than they used to 10 to 15 years ago.
    • The mix of homes that are selling has changed a lot in the past 12 months. There are fewer distressed homes and far fewer homes priced under $150,000. This tends to push the averages and medians upward even if prices are stable.

Las Vegas home demand is not much better.   According to GLVAR, Southern Nevada total home sales (single family, condos, townhomes) declined double digits every month since January 2014.  Furthermore, in June, short sales – when lenders allow borrowers to sell a home for less than their mortgage obligation – spiked to 10.8% of all existing local home sales – up from 7.9% in May.  





Housing is a critical component of the health of the Las Vegas Locals gaming market. With sluggish top-line gaming revenues thus far in 2014, more weakness may lie ahead for the Locals market as any support from rapidly rising home prices is taken out.  Of the publicly traded gaming operators, BYD is most sensitive to the Locals environment.

CHART OF THE DAY: Risk Happens Quickly (Cue Portugal)

Takeaway: Is Portugal the proverbial canary in the global market coal mine?


CHART OF THE DAY: Risk Happens Quickly (Cue Portugal) - 77

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