Intralot - Margin Loan
All,
Please refer to our unchanged analysis of Intralot here.
The gold rush out west has made many a fortune, but for many it turned into a matter of all or nothing. Once again, Intralot have lost their biggest contract outside the US, but the sell-off we had anticipated did not materialise. Instead, holders of the 24s are now onto their final bet with all eggs in one basket - the US.
Malta:
- Intralot ended up not even bidding for the renewal of the contract. Malta had been asking for an up-front show of the money that would have to be invested under a new contract and, as we recently flagged, Intralot did not have that. So Intralot decided to JV with another party, who fell foul however of the country’s media. In the end there was no bid.
- This means that the ROW business is now yet another €12m Euro lighter.
- The company correctly points out that the payback on the CapEx would have been well after the maturity of the 24s and so from a bondholder perspective perhaps the non-renewal of such CapEx heavy contracts is a good thing. But it tells us also about how management is managing for cash - to secure 2 years of interest in ROW, after which all bets are off.
US Sale:
- Indications for the US business lie around 10x EBITDA, with management pushing expectations of E100m next year.
- A simplified model of the pay-down shows that with a 10x multiple of €100m EBITDA the 24s are only just covered.
- Shame then that without the US, the ROW operations carrying the remaining weight of the central office (R&D / CapEx and IT) are running at negative EBITDA. So even at this price the 24s could not hope to recover full value.
- As an upside, management claim they could be seeing multiples of 10.5 and 11x.
- One the downside, however, the deal may involve equity in the acquirer or a new, then minority owned JV business, so the 24s become a mere 100% margin loan.
- News as to which kind of deal it’ll be and with whom the company will be striking it should reach us in January. But the set of transactions that would allow for a material cash pay-down and guarantee recovery of the 24s at maturity is narrow. So the short term upside is probably still well below par.
Positioning:
- To be sure we are not fans of the above economics, but our short was really predicated on the market showing some kind of reaction to the narrowing of options following Malta - which we have been missing.
- The optionality on the US deal could go either way, but the market seems to be clearly positively disposed. So without a concrete view, a 5% of NAV short on the bonds is not prudent.
- We will therefore be discussing closing out our 5% of NAV short in the 24s over the coming days.
Please reach out to discuss,
Wolfgang
T: +44 203 744 7003