Churchill Downs Joins M&A Party, Exploring Sale of Regional Casinos

Ending several months of related speculation, Churchill Downs (NASDAQ: CHDN) confirmed late Wednesday that it’s conducting a strategic review, including a potential sale, of its regional casinos.

The racetrack operator, which delivered second-quarter results yesterday, made the announcement in a Form 8-K filing with the Securities and Exchange Commission (SEC), telling investors it’s examining the divestment of brick-and-mortar casinos in multiple states.

Churchill Downs cautioned the strategic review doesn’t guarantee a transaction will be reached nor did the operator reveal a timeline for conclusion of the review. The company didn’t comment on potential buyers and it didn’t mention if the aforementioned venues would be sold as a group or in piecemeal fashion.

Churchill Could Gain Flexibility by Selling Regional Casinos

The confirmation by the racetrack operator ends several months of speculation that it was mulling parting ways with its regional casinos. A benefit to the potential seller is that, assuming a deal is reached, it gains flexibility to resume share repurchases and focus on higher-margin assets.

He notes that Churchill Downs hasn’t bought back any stock this year and the shares are now well below the $101 average price at which the company repurchased $425 million worth of equity last year. Now that Churchill Downs has confirmed it’s looking at shedding some assets, it may be able to resume buybacks.

“We view the portfolio review as an encouraging step that aligns with management’s strategy of focusing on higher-margin, higher-growth assets,” observes Citizens Equity Research analyst Jordan Bender. “While management did not provide a timeline for a transaction, the dissemination allows it to address debt maturities, while also allowing it to repurchase shares (none YTD). With the stock down 25% from its 52-week high and leverage at a comfortable level, we expect the company to become more aggressive with buybacks.”

How Churchill Downs Asset Sale Could Play Out

Churchill Downs is retaining its Fair Grounds assets because those have strategic tie-ins to the Kentucky Derby and on a related note, Stantial points out that some investors are speculating that Ocean Downs and Presque Isle Downs could be left out of the sale process because those venues are racinos.

For the seller, the timing for divestments may be ideal because regional casinos are displaying resiliency amid a challenging economic backdrop and the market could soon be awash in comparable venues due to increased consolidation activity in the gaming sector.

There’s been some chatter that beyond other commercial operators, potential buyers of Churchill Downs assets could include private equity firms and tribal casino entities. Churchill owns the real estate of the gaming venues it has on the market, which could be advantageous because it means buyers wouldn’t incur long-term obligations to landlords when acquiring the properties.