Monday, April 16, 2018

Tropicana Entertainment: Deal with GLPI & ERI, Merger Arb

This won't be actionable for some readers, but Tropicana Entertainment (TPCA, 84% owned by IEP) announced a deal today where Gaming & Leisure Properties (GLPI) will purchase the real estate and Eldorado Resorts (ERI) the gaming operations for a combined total of ~$1.85B, subject to adjustments.  One of those adjustments relates to Tropicana's Aruba property which needs to be sold or spun-off prior to the closing.

So here you have a controlled company, with an illiquid stock, entering into a complicated deal with two parties and an uncertain final cash amount all leading to a potentially attractive merger arbitrage spread.  If the headline number is correct, using the current share count of 23.8 million shares, gets you to $77.61 per share versus under $70 today.  Unpacking that number is a little more complicated, from the 8-K today:

(a)                                 $640 million, which reflects the consideration paid by Parent in respect of the Merger;

(b)                                 plus $1.21 billion, which reflects the Real Estate Purchase Price received by the Company;

(c)                                  plus the amount of net proceeds received by the Company in connection with the distribution, transfer or disposition of its Aruba Operations;

(d)                                 minus the Real Estate Purchase Tax Amount (as defined in the Merger Agreement); 

(e)                                  minus 50% of the Estimated State Income Tax Amount (as defined in the Merger Agreement), which Estimated State Tax Amount is limited to a maximum of $38 million;

(f)                                   minus the excess, if any, of the Estimated State Income Tax Amount over $38 million;

(g)                                  divided by 23,834,512, which reflects the aggregate number of shares of Common Stock that are issued and outstanding.

Without taking into consideration any net proceeds associated with the distribution, transfer or disposition of the Aruba Operations which is reflected in clause (c) above, the Company has estimated that the aggregate merger consideration, as adjusted to take into account the amounts set forth in clauses (d)(e) and (f) above, will be approximately $1.77 billion.

Couple things here, ERI is paying $640 in (a) and GLPI is paying $1.21B in (b) totaling up to $1.85B and from there we adjust down for taxes (there are NOLs at TPCA) but those are almost entirely offset by the expected sales price of the Aruba resort.  The footnote at the bottom, even if Aruba is valued at $0 then the total consideration is estimated at $1.77B or $74.26 per share, still a decent spread from today's price.

Tropicana Aruba is a fairly small operation, its a short walk from the beach (read: not beachfront) on 14 acres with 360 hotel rooms they've been renovating and converting into timeshare units over the past several years, there's also a 4000 sq ft casino property that mirrors what you see at a many Caribbean resorts.  In the financials, Aruba gets lumped in with their Baton Rouge and Greenville casinos making it difficult to determine what the property is worth, but at the $1.85B headline number its being valued at $80MM.  That feels high, but maybe I'm anchoring to the original thinking that Aruba was simply an option to build a larger property.

The deal is expected to close by the end of 2018, if we call the range of potential (positive) outcomes $74.26 - $77.61 on today's close of $69.75 that's a 6.5% - 11.2% absolute return in less than 9 months.  Unfortunately I sold last year into the tender, but given my comfort with the company and the attractive deal spread, I repurchased a position today.

From the buyers perspective, both are out touting the benefits of the transaction, GLPI is receiving $110MM annually in rent for their $1.21B investment for a 9.1% cap rate or 11x EV/EBITDA, and Eldorado is quoting a 6.6x pre-synergies (BYD is paying 6.25x for certain PNK/PENN casinos) and 5.0x post-synergies multiple on the operations that includes some net cash and cash build until close.  At 9.75x 2017 EBITDA of $190MM, Tropicana received a great deal (TPCA was trading at 4-4.5x EBITDA in 2013) that really touts the benefits of utilizing the REIT structure and its lower cost of capital to consolidate the industry.  But as someone invested in the gaming sector, is Icahn marking the top here?  He timed the cycle well pre-financial crisis, let's hope his timing isn't quite as perfect this time around and he has other motivations as it appears he's piling up cash throughout IEP.

Disclosure: I own shares of TPCA


  1. This idea seems interesting: decent expected return, uncertainty of payout / otc listing / illiquidity as potential causes for mispricing. No special insights, just posting this to get notified in case somebody posts a genius follow-up!

    1. Ha, well at least it has passed your initial smell test, seems like your niche.

    2. Is there a chance the taxes come in higher than expected?

  2. Thanks MDC for originally helping get this on my radar, it's been a nice double for me! Like you, I'm comfortable still holding w/ the spread more than enough to justify.

  3. Dang! Look at what happened since the tender! Double dang that I also sold in the tender! Thanks for bringing this up - looks like a decent deal.


  4. Any new thoughts on STAR?

    I still continue to hold since last two years without much gains. Some recent developments sound good, but there's still question mark over how they'll simplify the structure:

    1. Hired Andy Richardson (formerly CFO of Howard Hughes) --> seems to be another move towards becoming a developer

    2. Current CFO stepping down (Don't know what to read here, except that the guy failed at the getting the market excited about the stock)

    3. Glendale's Westgate Entertainment District is up for sale for $142M. STAR took over property from Ellman Co when they failed to pay $97.5M loan. So looks like a good gain and time to sell.

    4. Sugarman says in the annual report that they need to grow assets to boost stock price. Cynical take - hope they don't make stupid investments at the height of CRE market (like 2006). Also, their annual report doesn't look like REIT, more like a promotional developer.

    1. I forget which post I responded to a similar comment, but yes, I'm disappointed in the results to date but still holding. Sugarman seems to acknowledge the need to simplify at times but then in his recently release letter talks about all the "innovation" iStar has done over the past couple decades, but who cares if results don't follow? The need to innovate again also doesn't seem to match up with the need to simplify.

      Adding Andy Richardson is potentially interesting, HHC (which I own) is actually a developer, they're also fairly promotional, but their disclosures are far better than STAR's, you can actually develop a fairly robust bottom's up NAV of HHC because of the property level financials they give. STAR is relatively opaque in that regard. But I do find it a little annoying that iStar keeps adding to their executive team, Richardson is pitched as just the interim CFO so presumably a new CFO is on the way too, they just added a CIO as well, and yet they've discussed needing to rationalize G&A? Their actions seem at odds with that, but if the real goal here is to line up separate executives for some kind of split, then maybe it makes sense? I'm waiting for the results of the strategic alternative initiative, seems like the status quo is built into the stock price, don't see much downside in waiting. Thanks for the comment.

  5. Its an interesting one but also some risk given that only "man-made disasters" are carved out from the contract - given that there are some properties on the water here, you are taking some tail risk with Hurricane season starting up in June and lasting till November.

    1. Good catch thanks, safe to say then I'll be carefully watching the hurricane season between TPCA and CPLG.

  6. Replies
    1. Nothing really new, still feels like a cheap stock but the company was completely unprepared for life as a standalone company. I do worry about how much of the "services" revenue is really print related. Reminds me of how VSTO used to split up their segments by shooting sports and outdoor, shooting would just have ammo and guns, but all the gun accessories would be in outdoor. Other than that, now they're in their target leverage range, we'll see if they can thread the needle in growing the services/software side of the business while controlling the costs while running off the print side. I still own it.

  7. Hi MDC,

    Really enjoy your ideas. Not sure if you are still following bio-tech special situations. Maybe you can take a look at Rafael Holdings, comprised of cash, commercial real estate and two biotech stakes. An interesting case.

    1. Thanks - I have taken a quick look at it, I do like "grab bag" type spinoffs where the assets don't lend themselves to be easy to value, so I am attracted to it, but haven't done enough work to say anything intelligent. Curious to hear your thoughts or others on it.

    2. Glad you are interested. My thought is that, subtracting hard assets, cash and CRE, you basically get a biotech for free. I am not an expert of biotech, but from my biotech friend, the pharma business is workable, worth more than 100M. And CEO is highly incentivized, having done some successful spin-offs. RFL is quite similar to his another past spin-off, Straight Path Communication.

      Look forward to your thoughts if you study more of RFL.

    3. I just took a look in Rafael Holdings. I'm a M.D. so I focused on their stakes in two biotech companies: Rafael Pharmaceuticals and Lipomedix. Rafael Pharma's pipeline CPI-613, which is a small molecule compound originally discovered at Stony Brook, that has completed multiple Phase I trails in lymphoma/leukemia, pancreatic, and lung cancer. It's currently undergoing multiple phase 2 trails (a lot of them are done in Case Western), that are showing promising results. One of their phase 2 trails was published in Lancet Oncology, a prestigious journal. ( Base on the existing data, FDA has already granted orphan drug designation to CPI-613 for the treatment of AML and pancreatic cancer. I think CPI-613 is a promising cancer therapeutic agent as it 1) showed a low toxicity profile in multiple Phase I and Phase II trails, 2) has a different mechanism of action that targets mitochondria metabolism (currently the only agent in this class) that can complement other chemotherapy agents in a cocktail, 3) is a small compound that can be produced cheaply and have favorable pharmacokinetics, and 4) that can be scaled up to treat multiple cancers - hematologic as well as solid tumors, if the current phase II trials come out promising. I think the other biotech Lipomedix's pipeline is interesting but very early in it's development (undegoing phase I trial) and can be discarded in the RFL valuation. It's worthwhile to note RFL's stake in Rafael Pharma is in the forms of warrants and options to buy 52% of the company. If RFL choose to exercise these rights fully, it will cost them ~ $110 million, which is their current market cap. On the balance sheet, they have about ~$50 million of cash and no debt. RFL's main real estate holding is a 20 story building, 520 broad street newark NJ, which has some problems that makes it difficult to estimate its valuation (the numbers I've seen are $20-$70 million). I definitely think RFL is worth a look, especially as CPI-613 does actually appear promising. My question is mainly - why did Howard Jonas, a savvy investor/speculator, did this spin-off, as he currently holds the same amount of stake for both the parent company IDT as well as RFL. I think the most likely reason is that he plans to take Raphael Pharma public? However, I'd be interested to know what you think.