Stifel Analyst Says Churchill Downs’ Gaming Segment Has Selling Potential

According to Stifel analyst Jeffrey Stantial, Churchill Downs’ gaming segment has potential optionality. However, he cautions that Stifel is not aware of the company engaging in any merger or acquisition discussions at the moment.

Gaming Sector Could Bring In A Lot, But Churchill Downs’ Won’t Sell

Stantial observes that there is a compelling sum-of-the-parts (SOTP) case for selling or spinning off the company’s lower-growth, lower-margin gaming segment, supported by valuation analysis and prior comparable transactions. He maintains a “buy” rating on the stock with a $139 price target, implying significant upside from last Friday’s close at $85.12. 

However, Stantial reaffirms that there is nothing in the public discourse surrounding Churchill Downs suggesting that the company is considering a transaction involving its gaming unit. He also notes that there is some “pushback” to this view within the investment community.

This includes speculation that Churchill Downs’ gaming segment may offer limited cost efficiencies for prospective buyers, as well as the view that the pool of publicly listed potential acquirers is relatively small. However, the analyst at Stifel argues that this perspective overlooks a broader set of potential buyers, including financial and tribal entities.

The Company Has a Large Safety Net Thanks to Its Many Assets

Churchill Downs doesn’t need to act quickly, but divesting its slower-growing businesses could free up capital that could be reinvested into higher-margin assets. The operator also doesn’t need to fully divest its gaming business to unlock shareholder value from that segment. 

It should also be noted that, according to Churchill Downs’ Q1 financial report, the company has recorded a slight increase across the board, and its net revenue even hit a new record.

Stantial also notes that a frequent objection to the idea of Churchill Downs divesting its gaming segment is the view that Boyd Gaming is the only plausible buyer. However, there is no evidence that any such discussions are currently underway. If Churchill Downs were to consider divesting its gaming unit, it would more likely pursue an outright sale rather than a spin-off, as it would typically be more tax-efficient.

Not that Churchill Downs cannot sell some of its gaming properties, should it wish to, as it boasts quite a large portfolio. Currently, the operator’s gaming segment includes 13 venues across 11 states, comprising regional casinos. According to the company, this portfolio includes several key regional properties, such as Calder, Miami Valley, and Ocean Downs, among others. In addition, Churchill Downs has several partnership locations under the Hard Rock, Harlow’s, Rivers, and Riverwalk banners.

Stantial concludes that Churchill Downs does not need to sell the gaming division outright to unlock shareholder value from that segment, as it has several alternative options available. According to him, this includes one-time asset sales, monetization of real estate, a tax-free spin-off, or even a partial divestiture that still retains ongoing involvement through management fees.

In other news about Churchill Downs, the company is seeking to acquire the intellectual property and related rights associated with the Preakness Stakes and the Black Eyed Susan Stakes. The deal, which is supposedly going to be set to the tune of a single $85-million transaction, would further give Churchill Downs more assets to play with.