Intralot - Flush
All,
Please find our unchanged analysis here.
Ahead of next week’s call, we are giving some thought to the impending share sale and how it wold be changing the company perhaps even more profoundly than even the last restructuring did. With the 24s among the few bonds on our screens that are actually up YTD, what’s the bet now?
Structure:
- Standard General are to make a significant investment into the group, diluting shareholders by up to 60%. The proceeds are to be used to buy back the shares in Inc. that it lost in last year’s restructuring.
- This result is far better for the group than a sale of the Inc itself, which would have been fraught with difficulties as the US business requires the continued service of the Greek cost centre.
- Moreover, without the US business the international operations would have struggled to support the 2024s at par. Upstreaming cash form Inc. would have been costly and the EM focus of the remaining business has a rather unstable track record.
- The result of the a deal with Standard General would be a unified Intralot, which would have its by far largest operation in the young and growing US market.
Prospects:
- The most significant change however would be the entry of a professional shareholder. Kokkalis seems to be accepting a significant dilution and looks to be giving up control in the process.
- The string of contract losses and devaluations through which the company has been going in the last years were in part due to its set up at the time, but a significant share of the blame must be borne by management, which already underwent significant changes last year.
- In case of any shortage of cash, we expect the new shareholder to seek to protect the new investment.
- We are convinced that a US listing would be desirable to maximise exit valuations. Alternatively a slow migration of the company to the US.
- As a distant third in this market, Intralot can be a valuable ingredient in the formation of a larger rival to SG and IGT and remains an attractive asset.
Flush:
- The company’s CF would be adequate for debt service and much of our arithmetic around what CF is trapped in the US vs. what is generated outside will likely become obsolete.
- Intralot has a healthy cash balance which allows it to invest in CapEx and R&D so as to win further contracts in developed markets.
- The company has won a number of contracts last year, which we were promised would contribute to earnings. Since then management have blamed Covid disruptions and slow starts for the lack of visible progress, but there is a chance that some of it does come through in the end.
Investment Considerations:
- The bet is that the transaction happens and that under a more stable leadership Intralot continue to win contracts to deploy the cash on BS.
- We sold our position earlier this year when we were not convinced that a deal of this kind would come reliably. Without this deal the 24s would have been slowly approaching a restructuring.
- We will be looking more closely at the 25s now to see if we like the documentation as much as the relative positioning vs. the 24s.
Happy to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003