Bigger may be better. Highly accretive - similar to most acquisitions these days - the deal looks like a big positive for NCLH. The $25m synergy target seems conservative.

  • Prestige:  49% market share of upscale market
  • Broad portfolio of products and experiences:  Oceania- country club environment, Regent - luxury-focused, NCL- family-based 
  • Multiple:  11x adjusted EBITDA (estimated 2014 earnings before synergies)
  • $50m bonus may be paid to Prestige shareholders based on reaching 2015 financial targets
  • Prestige:  formed in 2008.  Shielded from recession and economic downturn. 
  • Prestige: have invested $125m in refurbishments
  • Pro-forma Combination: (TTMJune 30 2014):  +43% revenue, +18% in net yield, +33% in adjusted EBITDA (includes $25m synergies) 
  • Pro-forma leverage at end of 3Q:  5.3x
    • Soon after, they expect leverage to go back to 4x


Q & A

  • Prestige net yield guidance:  business continues to be strong; long forward bookings curve
  • Prestige 2015 deployment:  similar to 2014
    • Mid- April to mid-Nov:  2 ships in Europe, 2 ships in Alaska
    • Mid Nov- Mid-April:  2 ships in Miami, 1 ship in South America, 1 ship in Australia, 2 ships in Asia, 1 ship (180 day- around the world cruise)
  • $25m cost synergies:  getting into luxury/upper end agent community; merging customer databases; fuel/marketing cost synergies
    • Conservative target?  It's early to say.  Feel very comfortable with '1st $25 million' for 2015.
    • NCL:  Can do much better job on front-loading the business.  Prestige will finish 2014 50% booked more than NCL
    • Will affect interest expense (more efficient on margin basis), D&A will be better as well
  • Prestige's highest yielding ship is their oldest ship.
    • Focus on customer service and fine dining
  • Genting's thoughts on deal:  complicated situation but sees enormous value from deal.
    • Believe lock up in shares until end of 2015
  • Will not be surprised if private equity guys continue to sell.
  • Prestige:  on the cost side, could do better given their small scale.
  • For every $ of synergy on cost, double/triple that on the revenue side
  • 7,000 people on combined basis
  • Prestige:  CEO Frank committed to stay until end of 2015
  • Will set up a investor meeting in NYC in November

LEISURE LETTER (09/02/2014)



  • Sept 2:  Revel closed
  • Sept 4:  MGM at Mizuho Investment Conference
  • Sept 9:  EXPE at DB Technology Conference


ALL:AU – announced it entered into an agreement with Playtech for the sale of the Aristocrat Lotteries business for total consideration of EURO10.5 million in cash, subject to certain adjustments and closing conditions. The sale will result in a non-cash write off of AUD45 million in the current financial year, subject to adjustments. Completion of the sale is expected in the current financial year.

Takeaway: Aristocrat focusing on its core business.


CZR – A federal judge on Friday imposed a preliminary injunction on Helena Wong, a casino hostess who used to work at Maryland Live Casino in Hanover and is now employed at the new Horseshoe Casino in Baltimore. Wong sent an email earlier this month to roughly 20 Maryland Live customers offering free access and services at Horseshoe Casino. Maryland Live filed a lawsuit against Wong, alleging that the contact information for those clients is proprietary information.

Takeaway: Clearly an attempt to pull out all stops and recruit regional VIPs to newly opened properties.


LVS – completed an amendment and restatement of its Marina Bay Sands Credit Facility where by the Company extended the maturity of such term loans to August 28, 2020 for the Facility A Loans and extended until February 28, 2020 the Facility B Loans. Additionally, the the amortization schedule for the Facility A Loans was amended to provide for 0% due at the end of the third quarter of 2014, 0.5% due at the end of each quarter beginning with the fourth quarter of 2014 until (and including) the third quarter of 2018, 5% due at the end of each quarter beginning with the fourth quarter of 2018 until (and including) the third quarter of 2019, and 18% due at the end of each quarter beginning with the fourth quarter of 2019 until the second quarter of 2020 and on the maturity date of the Facility A Loans; and the leverage covenant was amended to provide that leverage shall not exceed 3.50 to 1.0 on the last day of each fiscal quarter from the end of the fourth quarter of 2013 until (and including) the end of the third quarter of 2019, and 3.00 to 1.0 on the last day of subsequent fiscal quarters.

Takeaway: A favorable credit facility extension for LVS that should result in even more capital return to shareholders - especially with the stock down.


LVS & 1928:HK – opened the Phase III, $50 million addition, of its Cotai Central shopping mall, adding 36 stores and boosting square footage by 70% to 400,000.

Takeaway: The maturation of the SCL's retail properties continue and thus a sale is not likely in the near-term.


MPEL (Macau Business) Hollywood will make a short film to accompany the opening of casino operator Melco Crown Entertainment Ltd’s Studio City development in Cotai. RatPac Entertainment will produce the film, Martin Scorsese will direct it and Robert DeNiro, Leonardo DiCaprio and Brad Pitt are due to appear in it. The film will have its premiere at the opening of Studio City in the middle of next year.

Takeaway: Continuing the focus on non-gaming entertainment and a clever new property promotion which does not highlight "gaming".


VAC – is in negotiations to sell its Kauai Lagoons project, located near Lihue Airport and one of the largest Hawaii construction projects to be stalled by the Great Recession, to Hawaii developer Ed Bushor for $60 million.

Takeaway: Cleaning up an idle, non-income generating asset.


CCL (Cayman Compass) The captain of the Carnival Magic anchored in an unauthorized zone in George Town. As a result the anchor damaged part of a  coral reef. The vessel dropped anchor 200 meters out of the authorized zone due to strong winds. Under Marine Conservation Law no boats can damage any type of coral within Cayman waters when using anchors. The Carnival Magic was moved back into the anchor drop zone by noon.

 Takeaway: Expect CCL to pay a fine for this unfortunate event.


STCO:SP – Straco Corporation has agreed to buy the troubled Singapore Flyer for $140 million in cash. The Flyer, which cost $240 million to build, came under the spotlight in May last year when the company behind the now six-year-old attraction was placed in receivership. Straco is behind several well-known tourist attractions in China such as the Shanghai Ocean Aquarium and Underwater World Xiamen. Straco is led by founder and executive chairman Wu Hsioh Kwang, a prominent local businessman who is chairman of the culture, education and community affairs committee at the Singapore Chinese Chamber of Commerce and vice-chairman of tourism and leisure for the Chinese business group at the Singapore Business Federation. 

Takeaway: LVS took a pass on this entertainment asset.


Macau Smoking Ban – The Health Bureau says it had received by yesterday plans for smoking rooms in 39 casinos. The casino operators submitted the plans anticipation of the government restricting smoking in casinos to smoking rooms and VIP gaming rooms from October 6. The smoking rooms will have no gaming tables or slot machines.

Takeaway: The early plans to accommodate gamblers who smoke are making their way through the approval process despite a mere five weeks until the smoking ban implementation.


Philippines Gaming – legislation was introduced to impose a PHP3,500 (peso) (US$80) entrance fee on any Filipino entering a casino.  The author of the legislation, Representative Peter Unabia, suggests the fee is to prevent financially challenges residents from accessing gaming.

Takeaway: Another source of tax revenue for the Philippines government.


Mexico Gaming Expansion – Legislation to legalize casinos in Mexico, and possibly leading to integrated resorts in Cancun and Los Cabos, will be unveiled within 10 days, Octavo Dia has quoted Fernando Zarate Salgado. Mexico's House of Deputies that will consider the bill, which would allow for a 10-year license and one 10-year renewal.

Takeaway: Some increased competition potentially for Las Vegas Strip gamblers who live in Mexico and the Southwest and West Coast of the US.

Atlantic City – Fitch Rating Agency estimated that of the $457 million in gaming revenues from Atlantic Club, Showboat, Trump Plaza and Revel over the 12 months that ended in July, $280 million of gaming revenues will remain in Atlantic City, with more than $140 million in gaming revenues going to Caesars’ properties.

Takeaway: Time will tell how gaming revenue resets across the surviving Atlantic City properties.


Chinese Banks and Non-Performing Loans(WSJ) According the the WSJ, the big-five Chinese state-owned lenders (ICBC, China Construction Bank, Ag Bank, Bank of China, and Bank of Communications) and found that the banks reported a combined CNY423.49B in NPLs in H1, up 21% y/y. The banks cited steel, manufacturing, and small-business sectors as the main sources of the bad loans. The banks also wrote off a total of CNY46.91B of bad loans in H1, vs the CNY22.07B written off a year earlier


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.

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Takeaway: Disappointing Mass continues to be the story in Aug. Our Mass Decelerating theme remains intact and could continue to pressure the stocks.

The GGR decline of 6% wasn’t the only story



August’s GGR decline of 6% is worse than what we anticipated when the month started. Most disappointing, YoY Mass revenue growth decelerated to 14% in August. Our Mass Decelerating thesis for 2H 2014 has played out faster than we expected. We also remain concerned with the potential for continued margin pressure as labor costs continue to escalate and player reinvestment rates rise.  The stock valuations look more attractive but we don’t see any positive catalyst on the near term horizon. We remain cautious on the Macau stocks with the exception of Galaxy.  


Macau Market:

  • As already known, GGR fell 6%
  • What was not known was that Mass YoY growth was very disappointing at only +14%, below July’s increase of +17% and 1H 2014 growth of +36%
  • Our Mass Decelerating theme (first espoused in June) of 2H 2014 is occurring at a faster (slower growth) rate than even we thought. We had only heard in the last 2 weeks that August could be as slow as July for Mass – and now we know it was worse.
  • VIP hold was close to normal for the market and slightly higher than last year
  • Rolling Chip volume declined 19% YoY – the worst performance since early 2009
  • Constant hold in both periods would’ve produced a YoY decline of 9% in GGR




  • Market share increased to 24.7%, 180bps above the 6 month average driven by very high hold
  • Despite a nearly 1% YoY increase in hold percentage, GGR only increased 2%.  LVS has been quite lucky in 2014; YTD, hold has been 3.3%.
  • Disappointing GGR growth was driven by Rolling Chip volume that fell 32% YoY, worst in the market
  • Mass revenue grew 18%, better than the market



  • Market share fell 60bps below the 6 month average due to low VIP hold
  • Wynn’s VIP hold percentage fell about 30bps below normal
  • GGR fell 17% YoY but Mass revenue grew a market leading 43% off of an easy comp
  • Rolling Chip volume grew in line with the market



  • Galaxy’s estimated VIP hold was below normal but higher than last year
  • Despite the low hold, Galaxy’s GGR share of 20.9% was 40bps above the 6 month average
  • YoY GGR growth of 15% led the market, despite Mass growth of only 12%
  • Galaxy remains our favorite stock in the group given its ability to drive VIP revenue growth amid a difficult environment and the likely earlier than expected opening of Phase II on Cotai.  We think Phase II could operate for 6-9 months as the only new property on Cotai



  • While below last year, MPEL’s August VIP hold was a little above normal
  • Yet, GGR fell 15% owing to a 29% decline in Rolling Chip volume
  • Mass grew in line with market



  • MGM held 55bps below its normal %
  • Low hold contributed to a market worst 20% decline in GGR
  • However, Mass revenue growth was strong at +29%
  • Rolling Chip volume declined 22%
  • Market share of 8.8% was the property’s worst performance in 3 years, driven by the low hold
  • Mass share was in line with the 6 month average



Post-Labor Day Mashup

Investment Ideas

The table below lists our Investment Ideas as well as our Bench -- a list of potential ideas we are watching closely.  We intend to update this table regularly and will provide detail on any material changes.


Post-Labor Day Mashup - 1

Recent Notes

08/25/14 Monday Mashup: BKW, BWLD and More

08/26/14 Expert Call: Coffee Outlook in 2015 and Beyond

08/26/14 BKW: Flame-Broiled Crawlers

08/27/14 Expert Call | Analyzing the BKW/THI Merger

08/28/14 BKW/THI Call Replay & Summary

08/28/14 BOBE: Leaving Much to be Desired

08/29/14 Restaurant Sector Valuation

Events This Week

Wednesday, September 4th

  • LOCO earnings call 5pm EST
  • KONA Liolios Group Gateway Conference

Chart of the Day

Milk prices are up 17.1% YTD and 24.3% YoY.


Post-Labor Day Mashup - 2

Recent News Flow

Monday, August 25th

  • TXRH upgraded to overweight at Stephens with a $32 PT.
  • BWLD took a minor stake in Rusty Taco which has nine locations in three markets.
  • JMBA entered into an agreement with Capgemini in order to accelerate franchise recruiting and development.

Tuesday, August 26h

  • BKW announced the acquisition of THI for C$94.05/share in cash and stock.
  • THI downgraded to sector perform at Scotiabank with a C$90 PT.
  • THI downgraded to hold at Miller Tabak with an $81 PT.
  • PLKI announced its title sponsorship for NCAA Football's Bahamas Bowl.
  • BOBE announced that four of Sandell's nominees were elected to the company's 12-member board.

Wednesday, August 27th

  • THI upgraded to neutral at Credit Suisse with a C$89 PT.
  • THI downgraded to market perform at BMO Capital with a C$92.75 PT.
  • THI downgraded to market perform at Raymond James with a C$92.50 PT.

Thursday, August 28th

  • BOBE downgraded to underweight at Stephens with a $40 PT.
  • DRI reschedules 2014 annual meeting for Friday, October 10th.

Sector Performance

The SPX (+0.8%) outperformed the XLY (+0.3%) last week.  In aggregate, casual dining stocks performed in-line with the XLY as quick-service stocks outperformed the index.


Post-Labor Day Mashup - 3

Post-Labor Day Mashup - 4

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.


Post-Labor Day Mashup - 5

Casual Dining Restaurants

Post-Labor Day Mashup - 6

Post-Labor Day Mashup - 7

Quick Service Restaurants

Post-Labor Day Mashup - 8

Post-Labor Day Mashup - 9


Howard Penney

Managing Director


Fred Masotta


Panic! Market Up

This note was originally published at 8am on August 19, 2014 for Hedgeye subscribers.

“Panic! Dow Plunges Through Floor”



The 1980s were awesome. From big hair bands to Boesky getting bagged, there was a lot going on. A straight up stock market went straight down. The Dow dropped -22.61% in a day (October 19th, 1987)… but, if you ask the perma bulls, “the market was flat that year.”


It’s already August and the Russell 2000 is still trying to get back to flat for the year. With the 10yr Bond Yield having crashed alongside fanciful 1980s like +3-4% US GDP growth expectations, in Greenwich meetings yesterday I was told that GDP “doesn’t matter anymore anyway.”


Yep. This time is different. Roger that.


Panic! Market Up - Black Monday the Stock Market Crash of 1987 NYT


Back to the Global Macro Grind


The rate of change in US economic growth may not matter to long-short stock pickers, but it matters, big time, to both the bond market and the sector asset allocations that are driving performance in the US stock market. As growth slows, big-cap-slow-growth #YieldChasing stocks & sectors outperform.


They didn’t yesterday though. My Connecticut investor meetings were great, but my recommended positioning sucked:


  1. Housing (ITB) led gainers at +2% on the day
  2. Regional Banks (KRE) were right behind the builders at +1.7%


The only thing that has sucked more than having that short position yesterday, has been having it as a long position all year.


BREAKING:Wall St Rallies on M&A Blitz and Home Builder Data” –Yahoo


Yahoooo! Everyone is going to buy everyone as US growth slows. Why not? And I’m not being sarcastic about that either. That said, there’s also a greater chance of Big Alberta Cows jumping over the moon than the US economy accelerating as US Housing and consumption slows.


Another US equity only manager told me yesterday that if I was right on #Q3Slowing (and that Janet Yellen gets more dovish, in kind), that “oh, the stock market is going to go higher on that.”


In other words:


  1. If growth accelerates, as Consensus Macro has been calling for since January, stocks are going to rip
  2. If growth slows, stocks are going to rip too




It’s a good thing everyone is going to be a winner under any scenario with Global Macro volatility (across Equities, Currencies,  Commodities, and Fixed income – ping for our Q3 Macro Theme of #VolatilityAsymmetry) at all-time lows.


That hasn’t happened before, but neither did 1987.


Q: How many US equity only PMs live in fear of missing the last 3% of a 5 year rally in the US stock market? A: lots


Or at least a lot more than there are PMs, strategists, and (god forbid) economists, who are in print like this Canadian mutt writing about the US economic cycle similarities between Q3 of 2007 and 2014.


Enough of the ranting – here are some #timestamped short ideas for this morning’s “futures are up” to sell into:


  1. Russell 20000 (IWM)
  2. Housing (ITB)
  3. Toll Brothers (TOL)
  4. Target (TGT)
  5. Brinker (EAT)


Yep. On the no-volume bounce (Total US Equity Market Volume was -15% and -39% vs. its 3 month and YTD averages yesterday), I’m going right back to the wood (i.e. the SELL calls that worked for me in both 2007 and 2014). They are early-cycle slowdown housing and consumption shorts.


And no, I don’t think that what’s going on in Ferguson, Missouri right now is a bullish catalyst for the 80% of this country being smoked by the all-time highs in Fed-inflated cost of living. Neither would I be surprised if the US stock market had a 3-6% down day in the next 3 months. Then you’ll see panic.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.42

SPX 1950-1977

RUT 1115-1161

MIB Index 18994-20246

VIX 11.14-17.29

USD 81.31-81.72

Gold 1293-1321


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Panic! Market Up - Chart of the Day

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