Ardent Leisure Group (ALG) | Minority report
Sell down of Main Event Entertainment (ME): ALG has sold down 24.2% of its equity in ME – it previously owned 100%. The sale is to US private equity firm RedBird Capital Partners (RedBird) by way of a US$80m preferred equity instrument with a coupon of 10% p.a. on a cumulative basis. ALG has also granted RedBird an option to acquire a further 26.8% stake in ME between July 2022 and July 2024, which would take its stake to 51%. The transaction is unconditional and not subject to ALG shareholder approval – settlement has been completed.
Valuation: RedBird has acquired the initial stake at a multiple of 8.0 times FY19 adjusted EBITDA. The additional 26.8% stake can be acquired by Redbird at 9 times the prevailing EBITDA at the time the option is exercised subject to a minimum value of US$250m, which would equate to c.4 times our FY22 EBITDA forecast for ME. The initial stake values 100% at an implied EV of US$424m based upon debt at 31 May 2020 and after transaction costs. Excluding net debt and transaction costs, the US$80m for the 24.2% stake values ME at US$331m (A$487m) compared to our pre-transaction valuation of A$505m.
Trading update: ALG stated that 28 of its 44 ME sites have re-opened subject to a limited offering. ALG cited progressively positive revenue trends, with some sites already approaching EBITDA break-even pre-rental costs. We have appended commentary (page 4) from US peer Dave & Buster’s as to its response to COVID-19.
Changes to forecasts: Modest (<3%) changes to FY20/FY21 EPS forecasts after considering: 1) sale of 24.2% stake in ME with introduction of minority interest; 2) reduction of debt from US$80m sale proceeds; and 3) earlier re-opening assumptions for ME and Theme Parks, albeit offset by social distancing measures.
Investment view: Upgrade to BUY with revised DCF valuation of A$0.74 (prev. A$0.78) and price target of A$0.75 (prev. A$0.40). We have reduced our risk rating from Speculative to High due to materially reduced financing risks post the RedBird transaction – we have therefore removed the discount in setting our price target relative to valuation. High risk rating retained due to uncertain duration of the impact of COVID-19. Whilst this may look like a transaction of necessity given current circumstances, it must be remembered that COVID-19 appears to be less in control in the US, where ME operates, and the resumption of new ME site roll-outs will retard margins in the short-term and require funding. The issue for ALG investors is ultimately whether they want to own Theme Park assets in Australia and a minority stake in a US restaurant chain. Our upgraded call is valuation-based. Click here to read full report