After months of speculation, Churchill Downs (NASDAQ: CHDN) officially announced late Wednesday that it is undergoing a strategic assessment, which could include a sale of its regional casinos.
The operator of the racetrack, which released its second-quarter financial results yesterday, made the announcement through a Form 8-K submission to the Securities and Exchange Commission (SEC). In this filing, the company revealed its exploration of potential divestment of physical casino properties across various states.
“The Company is assessing opportunities to sell its wholly owned regional gaming properties, which include Calder Casino in Florida, Terre Haute Casino Resort in Indiana, Hard Rock Hotel & Casino in Iowa, Oxford Casino Hotel in Maine, Ocean Downs Casino and Racetrack in Maryland, Harlow’s Casino Resort and Spa and Riverwalk Casino Hotel in Mississippi, del Lago Resort and Casino in New York, and Presque Isle Downs and Casino in Pennsylvania,” the regulatory document states.
Churchill Downs cautioned that this strategic review does not ensure a finalized deal, nor did the operator provide a timeline for the assessment’s completion. Additionally, the company did not specify potential buyers or whether the properties would be sold as a collective or individually.
Benefits of Selling Regional Casinos for Churchill
The confirmation from the racetrack operator concludes months of speculation regarding its plans for its regional casino properties. A notable advantage for Churchill Downs is that, if an agreement is established, it would acquire the flexibility to restart share buybacks and refocus on high-margin assets.
“Our understanding is that the potential sale has been extensively discussed, and this disclosure grants CHDN the flexibility to pursue further capital structure transactions,” remarks Stifel analyst Jeffrey Stantial.
He points out that Churchill Downs has not repurchased any stock this year, with shares currently trading below the $101 average price where the company had previously purchased $425 million worth of equity in the prior year. With its recent announcement to consider divesting assets, Churchill Downs could potentially resume stock buybacks.
“We see the portfolio review as a positive move in line with management’s strategy to prioritize higher-margin, higher-growth assets,” notes Citizens Equity Research analyst Jordan Bender. “Although management has not indicated a timeline for the transaction, this announcement allows them to manage debt maturities while also paving the way for share repurchases (none so far this year). With the stock losing 25% from its 52-week peak and leverage at an acceptable level, we anticipate that the company will become more assertive with buybacks.”
Potential Outcomes of the Churchill Downs Asset Sale
Churchill Downs is retaining its Fair Grounds properties due to their strategic links with the Kentucky Derby. Stantial also highlights that some investors speculate that Ocean Downs and Presque Isle Downs might not be included in the sale because they function as racinos.
For Churchill, the timing for asset divestiture could be optimal as regional casinos have shown resilience despite a tough economic climate, and the market might soon be saturated with similar establishments due to increasing consolidation in the gaming sector.
There are discussions suggesting that potential buyers for Churchill Downs’ assets could extend beyond commercial operators to include private equity firms and tribal casino organizations. Churchill owns the real estate of the gaming properties it is considering selling, a factor that could be advantageous as it would eliminate long-term leasing obligations for buyers when acquiring these establishments.