EL&C Baillieu First | Ardent Leisure (ALG) | 24% sell down of Main Event Entertainment
|· Sell down of Main Event Entertainment (ME): ALG has announced that it has effectively sold down 24.2% of its equity in ME which it owns 100%. The sale is to US private equity firm Rainbird Capital Partners (Rainbird) by way of a US$80m perpetual preferred equity instrument with a coupon of 10% per annum on a cumulative basis as if Rainbird was to participate in ordinary dividends. ALG has also granted Rainbird 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 is scheduled for June 15, 2020.
· Valuation: Rainbird has acquired the initial stake at a cited multiple of 8.0 times FY19 adjusted EBITDA. The additional 26.8% stake can be acquired by Rainbird at 9 times the prevailing EBITDA at the time the option is exercised. The initial stake values 100% at an implied EV of US$424m based upon debt at May 31, 2020 and after transaction costs.
· Trading update: ALG stating that 28 of its 44 ME sites have re-opened subject to a limited offering. ALG citing progressively positive revenue trends with sites already approaching EBITDA break-even pre-rental costs.
· Our view: Whilst this may look like a transaction of necessity given current circumstances (ALG’s debt resides in ME and is currently the subject of covenant waivers) the implied EV of US$424m (A$615m) compares favourably to our current depressed valuation for ME of A$505m. 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. At face value the implied EV for ME looks attractive versus ALG’s current market capitalisation. Clearly risk has materially reduced which prompted our Speculative rating and carrying our price-target for ALG at a 50% discount to valuation whilst venues have been closed.