Nevada Gold & Casinos merger arbitrage

Last month Nevada Gold & Casinos (AMEX:UWN) announced that it had struck a deal to be acquired at $2.50/share, subject to certain minor adjustments. The company operates 9 mini-casino’s in Washington, approximately 604 slot machines in 15 locations in Deadwood, South Dakota and one casino in Henderson, Nevada. This last location is under contract to be sold, and is the cause of the possible adjustments in the $2.50/share merger consideration. Based on working capital of the Nevada business at the time of the sale there is a possible adjustment to the merger consideration. Because this adjustment is expected to be minor to begin with, and can both be positive and negative, I think we can safely ignore it since I think it should have a more or less neutral expected value.

With the stock currently trading at $2.39 there is a potential upside of 4.6% which would translate to a 19.8% internal rate of return if the deal closes, as scheduled, before the end of the year. And with the stock trading at $2.15 before Nevada Gold & Casinos announced that they were in discussions to be acquired the likely downside in case the deal breaks is probably limited. Add that there is no financing condition, and stockholder approval and regulatory approval shouldn’t be an issue either, I think it’s an attractive deal. As a small sweetener, the merger consideration will be increased by $0.01/month if the merger is completed after February 1, 2019. I don’t think that will happen, but if things get delayed for some reason it’s nice to get paid while waiting for the deal to be consummated.

Disclosure

Long Nevada Gold & Casinos

27 thoughts on “Nevada Gold & Casinos merger arbitrage

  1. pogonific

    Agreed on all fronts, so I’ve joined you with a position! This is despite me not doing well following you (Stalexport, Black Earth Farming) in the past, but I love the inspiration from the blog and do all my own research so this is not at all a criticism. Cheers!

    Reply
  2. Greg

    Any idea when the shareholders vote meeting will be held ? Stock went down to $2.30 last Friday in size volume (relative to normal) and then rebounded to $2.40. Any color? Thanks

    Reply
          1. Greg

            Will keep my fingers crossed that if delay, will push beyond Feb 1st, 2019. Likely wishful thinking on my part. Cheers.

  3. Brian

    Here’s my guess on last Friday’s volume: large holder selling, possibly because he/she got a glimpse of the prelim proxy and noted there was no competetive bid in the works. That being said, I’d expect to see the prelim soon. This is just speculaton take it fwiw.

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  4. Dave Smith

    Just a few questions… Although the deal is not conditional on financing, Maverick is still boring the money from a bank. Also, the deal is conditional on the closing of theClub Fortune sale. Don’t you consider these as major risks?

    Reply
    1. Greg

      The Club Fortune sale transaction was announced back in June. My two cents is that is a slam dunk perhaps slight variation on the final price tag. However, cash offer will be adjusted based on any variation (details are in the merger agreement).

      Reply
      1. Greg

        Could it be that there are some dissenting shareholders on the registry that management is concern on the vote ? Last I checked there are over 32% institutional ownership?

        Reply
    1. pietje

      What makes you think this was done to facilitate a shareholder vote? According to the filings it was done (literal quote): ” in order to facilitate and avoid delays associated with obtaining the approvals of the Washington State Gambling Commission required in order to consummate the Merger”.

      Reply
      1. Greg

        You are right on that! I misread. Just curious why would placing out shares to Maverick be able to facilitate and speed up the approval from the gambling commission ? Thanks.

        Reply
  5. Alex

    I have been a long-term shareholder of UWN and quite unhappy with the proposed transaction. The company offers high cash flows at very decent valuations and I think the proposed $2.50 per share are way below the intrinsic value of the company.

    Adjusted stand-alone EBITDA of the company should be around $6m implying a valuation of roughly 5x EV/EBITDA ( calculations are from October and rely on some assumptions (including reasonable buffers) regarding the Club Fortune sale and possible overhead reductions (which were announced by Mgmt)).

    The sale of Club Fortune implies a valuation of >8x. Peers trade (again numbers from October) at EV/EBITDAs of 10x (CNTY), 14x (MCRI), 11x (FLL), 10x (DDE).

    The proceeds from the Club Fortune sale could be used to pay down all of the companies debt plus a special distribution.

    The remaining Free Cash Flow should be in a range of $4.0-4.5m p.a. implying a FCF/EV-yield of >10% (which could again be used to buy back shares or distributions).

    Overall, I do not think a transaction at $2.50 per share is attractive to shareholders.

    Reply
    1. Austin

      Alex, none of the comps you mention are true peers. Making a direct comparison between WA state card rooms and full service casino hotels is a mistake. Ditto for comparing the Club Fortune sale price to the remaining stand alone UWN. The only publicly-traded comp to UWN that I am aware of is Evergreen Gaming, which trades at maybe a 1 turn EV/operating profit discount to UWN’s buyout price. I don’t think UWN management is leaving money on the table here, and I (accordingly) voted FOR the transaction.

      Reply
    2. Jensen

      Cash offer $2.515 (as of today), since deal completion has pushed beyond 2/1/2019. In fact as per last mgmt. announcement post EGM, if WA gaming approval received at end of March, cash offer px be $2.52. A sweet $0.02 for an extra 60 days.

      Reply
        1. Jensen

          Hmm….if u annualized it (using $2.49 px today) is over 30%, to get pay end of March. Am all ears if any treasury could yield as much.

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          1. Alpha Vulture Post author

            I’m not sure how you get to 30%. You get one cent a month on a merger price of $2.50. That’s 0.12/year while locking up $2.50 in capital. That’s a return of 4.8%. Sure, it’s better than a treasury, but far from spectacular.

          2. Jensen

            Hi there, I was referring to the entire investment, assume $2.49 entry. Cash payout $2.52. Profit of $0.03 ($2.52-$2.49) for 0.5 months. Annualized it 33.3%. Without the extra 2cents, annualized return will only be 10.1% (Profit of $ $0.01, $2.50-$2.49 for 0.5months)

  6. Alex

    Austin, thanks for your response! You are correct that I did not went into too much detail with my peer analysis.

    Nevertheless, at the current valuation I fear that the offer price does not reflect the underlying profitability / cash generation of the business accordingly (as it is obscured by M&A). If overhead cost could be reduced after the Club Fortune sale as indicated by management, EV/EBITDA should lie way below 10x.

    Reply

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