Codere - So what have we achieved?

All,

Please find our unchanged analysis here.

The announcement this morning from Codere begs the question - what is it achieving? Put simply, Codere have engineered a primary IPO of Codere online, with the new entity having a minimum cash of $77m (pre expenses). Depending on whether existing SPAC investors redeem their current cash contribution, this pre expenses cash figure could increase to $192m. Codere can withdraw up to $30m of any proceeds in excess of $125m.

What is it all for?

Primarily, this transaction is to generate cash to fund CAPEX and marketing at Codere online and expand into new territories. Codere SA (parent) were unable to fund this CAPEX and probably had underinvested in the subsidiary as it grabbled with its own cashflow constrains. Post-transaction, Codere SA will own between 54-73% of the listed entity (on Nasdaq) and the existing Online management will continue to operate the business. They have diluted themselves in their main growth segment, but given they didn’t have the resources to fund the CAPEX, this enables them to participate in the upside.

Transaction:

DD3 Capital Partners have a listed SPAC (on NAsdaq) with up to $125m of cash within the vehicle. Codere will contribute the online business into this entity plus DD3 Capital and others will raise an additional $67m of capital via PIPE issuance. Existing shareholders within the SPAC have the ability to withdraw their funds ($10m of the funds have already committed to the deal). So with the PIPE and the committed $10m, there will be a minimum of $77m of cash in the entity. IF 100% of the existing SPAC investors roll over, this increases to $192m ($67m PIPE + $125 100% of the existing shareholders). Codere can withdraw up to $30m post transaction subject to minimum cash in the entity of $125m.

Downsides:

Transaction costs of $18m appear high given the value of the business plus the dilution from the 7% founder/private shares.

Valuation:

In recent presentations from the Codere SA, they outlined the potential to spin off Codere online. This transaction is in line with their goals of retaining majority control, raising up to $130m for online growth/CAPEX and potentially $30m dividend post-transaction, and valuing the segment in excess of $250m. Subject to existing SPAC investors rolling over, these will be achieved.

Post-transaction, (100% roll-over of SPAC investors) the SPAC will have $144m of cash and the Codere online division. Codere will own 54% of the entity plus will have received $30m dividend. Valuing the shares at $10/share (which is the price of the PIP funding), Codere’s overall stake, plus dividend is worth $300m.

Conclusion:

Mildly positive for Codere shareholders and bondholders as the funding gap for the online business will be secured. The projected growth assumptions are aggressive to justify the SPAC valuations but frankly given the relative size of the online to the overall group, it is marginal. The implied EV of Codere SA (including the online business) is €1.1bn, of which online valuation at the SPAC valuations, is $300m or €250m (23%). We remain cautious on Codere core business and although the Group has deleveraged we remain cautious on the cashflow metrics over the coming quarters.

Happy to discuss.

Tomás
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