Saturday, February 25, 2017

Tropicana Entertainment: Buyback Plan Ramping, Tender Coming?

Tropicana Entertainment (TPCA) is the Icahn Enterprises (IEP) controlled regional gaming operator with 8 casinos and related hotels, bars, restaurants, and entertainment venues.  I've covered it a few times on the blog and have owned the stock since early 2013, to summarize the story:
  • Carl Icahn (through IEP) owns 72.5% of the shares and has a solid track record of investing in gaming throughout the cycle.
  • Given Icahn's ownership, Tropicana's free float available to the public is small and the shares trade rather infrequently on the pink sheets which limits the number and size of potential investors despite TPCA being an $810MM market cap company.
  • Tropicana's balance sheet is unlevered with minimal net debt, fairly unique in the regional casino industry where most peers are heavily levered and its not uncommon to see leverage over 5-6x (especially when including operating leases).
  • Tropicana's flagship casino is located in Atlantic City, a market that has seen a precipitous decline since the recession (which pushed Tropicana into bankruptcy) as competition has destroyed Atlantic City's once gambling monopoly on the east coast.  Since 2014, the number of casinos in Atlantic City has dropped from 12 to 7 with the latest casualty being Icahn (but not TPCA) owned Trump Taj Mahal which closed in October.  Tropicana has been able to capture increased market share in Atlantic City as a result of the closures and Caesars underinvesting there due to their prolonged bankruptcy.
  • The shares trade at a significant discount to peers.
The 10-K was posted today, Tropicana doesn't host conference calls or issue press releases targeted at investors, so the SEC filings are really the only place to gain insight on the company.  Business results continue to steadily move along -- Tropicana primarily targets drive-in markets and focuses on slots as they have more consistent results and require less staffing, with the goal being more predictable results -- nothing in there was too worthy of an update until I got to the share repurchase section.

Share Repurchase Plan
Tropicana initiated a $50MM buyback program in July 2015, but given the limited free float and low trading volume it was a bit head scratcher to determine how the company would execute on that plan without significantly impacting the share price.  Over the following 15 months the company only purchased ~$6MM of shares, but then something happened during November and December of 2016, Tropicana bought over $37MM worth of shares at an average price of $27.62.  What changed?  The election?  Hard to tell, but given the undervaluation and how long the shares had been languishing around $15-18/share, it appears the company decided it should be its own catalyst.
Additionally, if you look at the fine print, on 2/22/17, the board authorized an additional $50MM buyback authorization for a total of $100MM, with about $57MM left remaining.

As of 12/31/16, there were 24,634,512 shares outstanding, of which Icahn Enterprises owns 17,862,706, so while the market cap is about $810MM, the free float is only $222MM, the remaining share repurchase authorization is then over 25% of the non-Icahn shares outstanding.  The company has $240MM in cash, more than the free float, the company could continue to buyback shares and effectively take itself private while bringing their capital structure more inline with peers as they go.

Icahn Enterprises each quarter puts out an indicative NAV, questionably they don't use the market value of their TPCA holding, but instead put a private market value on it given its low trading volume.
IEP marks their ownership in Tropicana at $877MM or $49/share which is 8.5x EBITDA as of 9/30, shares closed today at $32.90.  If Icahn believes in this valuation, continued share repurchases make a lot of sense and would be accretive to IEP's NAV.

While the stock price has about doubled over the past 12 months (now we know why) without a significant change in the business, given the company's appetite for their own shares, Tropicana Entertainment continues to be a very compelling opportunity.  At some point, I wouldn't be surprised to see Icahn Enterprises conduct a tender offer for the remaining shares like it recently did with Federal-Mogul.

Disclosure: I own shares of TPCA


  1. Great ideas as always.

    If Icahn Enterprises believed that the shares were significantly undervalued, wouldn't it benefit them more to have tendered an offer already?

    What's to stop IEP from selling their shares once the share price begins to appreciate?

    1. It depends what price you think they could tender at? They probably couldn't have done a tender offer at $27 when they mark it at $49 without causing a stink, but they could do open market purchases without a problem. I think they pursue the share repurchase program until liquidity really dries up and then attempt to squeeze out the stubborn remaining shareholders.

      It's illiquid and a control situation, if they're going to sell shares they might well just sell the company, they wouldn't get the same price in open market sales as they would in a sale.

      Thanks for the comment.

  2. As always, enjoy following your blog and most specifically your thoughts on GRBK. Was curious if you have had a chance to read the conference call transcript and if you have general impressions. Thank you.

    1. Thanks. I haven't had a chance to go through the 10-K, maybe I find something in there worth posting a full update. But mostly just business as usual, still growing into their balance sheet (maybe they raised too much equity in 2015?), seems to be the only NOL shell of that era to work well, Dallas/Atlanta still hot, I've read they're looking at Nashville - so maybe that's where all this acquisition talk ends up?

  3. Thanks for the additional perspective. Part of the reason I am fascinated by this stock is because of the chairman of the board, the big Third Point investment and the fact that it still seems to be completely under the radar. Look forward to any updated posts you may make on this and other stocks. I have learned so much from your blog. Continued success.

  4. Thanks for the updates. Quick question - what level of work have you done on minority shareholder protection? One specific example is the NOL (which could be source of value here) - if IEP doesn't sell into repurchase and gets over 80% can he consolidate for tax purposes and potentially use the NOLs for his other businesses?

    1. Interesting thought -- have you seen that done before? I believe TPCA would need to be the surviving entity? Don't believe the NOLs can be transferred to another business unless TPCA is the acquirer, but it's not something I've spent time thinking about, curious to hear yours or others thoughts on the topic.

  5. I draw a parallel to Sirius and Liberty, where SIRI management made the point to me that they would not buy back to get Liberty over 80% as they could then consolidate SIRI for tax purposes and use NOLs at that entity for other businesses without SIRI shareholders getting compensated. However, Liberty has other media assets whereas not sure IEP could apply to other industries. IEP is also set up as a partnership so not sure the NOLs matter (not a tax expert but maybe they could be downstreamed to partners?). Just used NOLs as an example, could be other ways minority shareholders could be treated unfairly and so asking more broadly about protections. Thanks.

  6. 10-Q came out, no share repurchases during the quarter which is disappointing. But we did get a $15MM gift from the Trump Taj Mahal closing and the management agreement being terminated, almost the opposite of abusing minority shareholders.

  7. Thanks. I haven't had a chance to go through the 10-K, maybe I find something in there worth posting a full update.