The story of US online gambling industry strategy is one of tortoises versus hares. Bally’s Corporation has always positioned itself firmly in the former camp.
Like almost every company in every industry, Bally’s is on a downswing. From January 1 to the beginning of this week, its stock ($BALY) had lost over half its value.
Rather than trying to spend its way out of the situation, it’s tightening its purse strings further and returning unused capital to investors. It first announced this plan in October 2021, saying it planned to repurchase $350 million worth of its own stock.
Today, it revealed its first step in executing that promise. Over the next month, it will conduct a “modified Dutch auction” to buy back up to $190 million worth of its own stock.
The press release explains the rationale:
Bally’s board of directors determined that Bally’s should pursue a $190 million tender offer in light of recent capital markets changes. Bally’s currently expects to return capital to shareholders in the future, including through its previously announced $350 million capital return program.
“Recent capital markets changes” is presumably a euphemism for what isn’t yet a recession, officially speaking, but is probably well on its way.
What is a Dutch Auction?
Like any auction, Bally’s plan aims to find the optimal price at which to conduct its transaction. A Dutch auction is a particular strategy for handling a deal with multiple parties on one side and a single party on the other.
In a typical Dutch auction, a company would be selling a particular volume of shares off to a number of bidders. Here, the situation is the other way around. Bally’s is looking to buy a volume of its shares from multiple sellers at a single price.
Starting now and running until the end of the day on July 22, interested shareholders can submit their offers. They’ll need to specify how many shares they’re ready to sell and the lowest price at which they’d be willing to do so. Bally’s has limited bids to the range of $19.25 to $22.00.
Once the bidding closes, Bally’s will determine the minimum price it would have to pay to spend all $190 million. All winning bidders will receive that price, even if their bid was lower.
BALY shares jumped about $2 on the news, or a bit more than 10%. As of the time of publication, they sit at $20.88, indicating a consensus belief on the part of the market that the final purchase price will be in that vicinity.
Modified Dutch Auction Example
This is perhaps easiest to understand by way of an example. Let’s say that:
- Shareholder A offers 2 million shares at $19.50
- Shareholder B offers 3 million shares at $20
- Shareholder C offers 5 million shares at $21.50
- Shareholder D offers 5 million shares at $22
Buying from only Shareholder A at $19.50 would not fill Bally’s quota. Neither would A & B together, at $20. Adding C’s shares and raising the price to $21.50 would do the trick, however.
In this scenario, Bally’s would end up buying 8.84 million shares at $21.50 to spend its entire $190 million budget. A and B would sell the full amounts they offered, having submitted the lower bids originally. C would only sell 3.35 million because Bally’s remaining budget wouldn’t be enough to buy all 5 million.
Why is Bally’s Buying Its Own Shares?
To those unfamiliar with the stock market, a publicly traded corporation buying its own shares may seem odd. Shareholders own the company and, by extension, everything it owns. So, repurchasing shares from some shareholders effectively just distributes those shares (or rather, the equity they represent) to those who don’t sell.
In practice, though, it’s just the reverse of issuing new shares. A company can, with proper approvals, issue new shares to raise capital. In doing so, it dilutes existing shares. As the number of shares increases, the percentage stake in the company represented by each share decreases.
When a company buys back its shares, it will typically cancel them. If not, it can hold them as treasury shares to simplify reissuing them later. Either way, though, the number of outstanding shares goes down, so the stake in the company each share represents goes up.
In effect, share repurchases are a way of distributing capital to investors, an alternative to the more common paying of dividends. At the end of the day, that’s what investors are looking for: a return on their investment.
There are many strategic reasons a company might choose to do this. Given the current climate and the wording of the press release, it seems likely that Bally’s simply feels its shares are worth less now than they should be.
In the short term, it gets itself a bump in stock value to offset the market downturn. In the longer term, it may be able to reissue a similar number of shares at a higher price once conditions improve.
Note: Nothing in this article should be taken as financial advice. The intent is just to provide a layperson’s explanation of what Bally’s is doing.