- Bally’s is shelling out nearly $150 million to save the Aussie casino operator
- Analysts say the transaction is fraught with risks for the buyer
News emerged late Sunday that Bally’s (NYSE: BALY.T) is partnering with Australian businessman Bruce Mathieson to essentially save Star Entertainment Group in a deal valuing the battered casino operator at about $180 million — $149 million of which will be paid by Bally’s. At least one research firm believes the acquisition carries risks for the buyer.
Under the terms of the acquisition agreement, Bally’s is infusing capital into Star via a convertible bond sale that will result in the Rhode Island-based regional casino operator controlling 56.7% of the Australian company. While the deal keeps with Bally’s acquisitive history, CBRE analysts Colin Mansfield and Connor Parks point out the buyer’s capital obligations to Star could just be getting started.
We believe the initial Bally’s investment may be the first of multiple cash injections needed at Star and we are cautious around the ability to turn operations around,” observed the analysts in a new report.
Star is cash flow negative and its cash burn rate indicates the company was on death’s doorstep before Bally’s and Mathieson — Star’s biggest shareholder — came to its rescue. Citing those weak financial conditions, the CBRE analysts said Bally’s could be required to pony up more cash for Star in the future.
Star Could Be Distraction for Bally’s
The CBRE analysts also argued that Bally’s is using restricted cash to finance its deal for Star — a move that could raise eyebrows for some market observers who believe it would be preferable for Bally’s to focus its expenditures on its Chicago casino hotel plans and other US efforts.
There’s some merit in that line of thinking. Bally’s credit rating was recently downgraded deeper into junk territory by Fitch Ratings, with that research firm citing Chicago-related risks. The operator’s $1.7 billion Chicago integrated resort is its most expensive project to date.
Given Star’s spate of regulatory woes in Australia, as well as the possibility of Bally’s needing to inject more cash into the Aussie operator, it’s possible that an opportunistic-looking deal turns into a burden, and one that may not escape the scrutiny of Bally’s creditors.
“We believe the investment could also be a distraction as Bally balances a list of near-term variables, diverting management attention away from domestic priorities,” adds the CBRE duo. “An accumulation of assets outside the restricted group is also concerning when considering Bally’s’ high restricted group leverage and distressed trading prices of its term loan B and unsecured notes (the latter of which have already organized via cooperation agreement). We think the possibility that term loan lenders formally organize will increase as a result of this transaction.”
Star Buy Jibes with Bally’s History
Risks aside, the pending acquisition of Star meshes with Bally’s track record of buying what it perceives as undervalued or unloved casino assets — a playbook the operator has deployed from Atlantic City to Las Vegas.
Bally’s experience working with various state regulators in the US could pay dividends as it works through Star’s Australian regulatory woes.
“We think Bally’s views the Star assets as an opportunity to come in at a modest capital investment but participate in the upside should things improve,” noted the CBRE analysts. “Their background in operating gaming in heavily regulated jurisdictions in the US should help in solving ongoing regulatory issues at Star.”
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