Stifel: Churchill Downs Has Ample M&A Optionality

• A top research firm clarifies it has no insider knowledge of Churchill Downs engaging in any formal M&A or consolidation discussions
• However, analysts point out “compelling” reasons for the operator to shed its slower-growth gaming segment to unlock shareholder value
• If a move is made, the strategic focus would likely be a clean, “outright sale” rather than a complex spin-off

Shares of Churchill Downs (NASDAQ: CHDN) are down 6% over the past month, confirming that a hoped-for post-Kentucky Derby bounce failed to materialize. However, the gaming giant still has several strategic levers left to pull to drive shareholder value.

In a new report to clients, Stifel analyst Jeffrey Stantial posits potential optionality around Churchill Downs’ gaming segment, though he cautions the firm doesn’t have knowledge of the company holding any talks related to mergers and acquisitions.

There is a compelling sum of the parts (SOTP) thesis for selling/spinning CHDN’s lower growth/margin Gaming segment supported by valuation work and prior comparables,” observes Stantial who rates the stock a “buy” with a $139 price target, implying significant upside from last Friday’s close at $85.12.

The operator’s gaming segment features 13 venues in 11 states, including regional casinos. According to the operator, the list spans major regional properties including Calder, del Lago, Fair Grounds, Miami Valley, Ocean Downs, Oxford, Presque Isle, and Terre Haute casinos, alongside partnership locations under the Hard Rock, Harlow’s, Rivers, and Riverwalk banners.

What Could Come of Churchill Downs’ Gaming Unit?

To reiterate, there’s nothing in the public discourse around Churchill Downs indicating the company is mulling a transaction involving its gaming unit. Stantial acknowledges there is some “pushback” to the idea in the investment community.

Stantial also points out that one of the common refrains of resistance to the idea of Churchill Downs parting with its gaming segment is that Boyd Gaming (NYSE: BYD) is the only logical buyer, but there’s no confirmation that any talks to that effect are in progress.

If Churchill Downs does mull a divesture of its gaming unit, it’d likely be in the form of an outright sale, not a spin-off. That’s noteworthy because a spin-off would be more tax-efficient.

Churchill Downs Has Options

Churchill Downs doesn’t need to rush into anything, but shedding slower-growth businesses would allow the operator to raise capital that could be allocated to higher-margin assets, including Exacta, the historical racing machine (HRM) business, TwinSpires and of course the Kentucky Derby.

The operator also doesn’t have to sell the gaming arm outright to create shareholder value around that segment. It has other options.

“While our investor dialogue has mostly focused on potential for an outright sale, we see broader optionality to unlock value via corporate actions involving Gaming including one-off asset sales, real estate or OpCo only monetization, tax-free spin-off, or divestiture with continuing involvement via management fees,” concludes Stantial.