US gaming operator Bally’s Corporation has entered into an agreement to sell its interactive business in Asia and certain other international markets to a company owned by members of its management in a move analysts suggest is likely designed to reduce exposure to grey markets. The Asia interactive business derives a significant portion of its revenue and profit from Japan.
In a filing, Bally’s said the transaction was non-cash in nature, with the owners of the buyer – described as a “carved-out business” – instead issuing a seller’s note. Ownership of certain intellectual property has been placed in trust and will be licensed to the buyer for a term of five years, with Bally’s to have no role in the management, operations or governance of the carved-out business.
“The transaction is intended to allow Bally’s to focus its capital and resource allocation on North American and European business, and this carved-out business will benefit from focused management attention and aligned ownership,” the company said.
The financial impact of the transaction is not expected to be material to Adjusted EBITDA or free cash flow of the company, Bally’s added, with the expected “modest decline” in each to be mitigated by cost actions to simplify Bally’s organizational structure. However, it did not disclose the terms of the note issued by the buyer or of the licensing agreement.
CBRE Credit Research analysts Colin Mansfield and Connor Parks pointed out that the Bally’s Asian interactive business is predominantly in Japan, which operates as an unregulated grey market. The Asian business generated US$248 million in the 12-month period through 2Q24, comprising around 26% of total international interactive revenue and around 10% of total Bally’s revenue, while EBITDA from Japan was roughly 30% of 2023 International Interactive. Asia did, however see revenues fall by 35% year-on-year in Q2.
While CBRE questioned the benefit of a non-cash transaction, which also left many questions unanswered, it also noted that the “sale of the Asia interactive businesses reduces the regulatory overhang that was present in the grey Japanese market.
“This helps in the credit narrative as investors struggled to get comfortable in the long-term stability of operations in the unregulated market, especially given the volatility in 2024. Additionally, the proportion of cashflow derived from grey markets likely weighed on a valuation multiple of the entire international segment.
“We view the 5-year licensing agreement as an offset to the EBITDA loss as a positive, leading to a more modest decline in cashflow. The high-margin revenue stream combined with expected cost savings from organizational changes will lead to a more limited EBITDA impact than an outright sale of the business.”
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