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Chicago’s first and only casino is now approaching its ninth month of operation in its temporary venue. At this time, what seemed an inevitable shift to the permanent Bally’s Chicago facility feels less certain.
That’s mainly because Bally’s as a whole isn’t in the most enviable position currently. Other market forces are creating a scenario that puts the company’s future into question and along with it, when Chicagoans will enjoy everything that Bally’s promised and perhaps even if that will ever become reality.
Bally’s shares the unsightly details
In March, Mitchell Armentrout of the Chicago Sun-Times reported1 that Bally’s Chief Financial Officer Marcus Glover shared an update on the company with the Nevada Gaming Control Board. Glover disclosed that the company is still working to secure $800 million in funding toward renovating the Chicago Tribune printing plant for its permanent casino facility in Chicago.
In winning the bid to apply for the Chicago license, Bally’s (NYSE: BALY) committed to spending no less than $1.34 billion on that facility and surrounding area. It still has $1.1 billion of that commitment left to contribute, according to Glover.
Glover was adamant that Bally’s feels “pretty good” about securing financing for the $800 million it still needs. Glover added that he expected to receive the funds from an unnamed lender by summer 2024.
At the same time, one Bally’s insider seems to be taking advantage of the situation.
Standard General strikes at opportune moment
About the same time that Glover shared this information with Nevada regulators, another organization connected to Bally’s chairman Soo Kim made an interesting offer. Standard General, a hedge fund of which Kim is the managing partner, made a takeover bid for Bally’s.
Standard General currently controls 23% of Bally’s stock and offered $15 per share for the outstanding balance that it doesn’t control. The Bally’s board of directors has appointed a special committee to consider the offer but no other announcements have been made.
These situations may not be intrinsically connected. A takeover by Standard General does not guarantee that Bally’s would not still borrow money to fulfill its Chicago casino obligations, for example.
Furthermore, the fact that Bally’s may have to finance $800 million for its Chicago casino project is not in and of itself a surefire sign that the company is on feeble financial footing. At the same time, market forces could make Standard General’s offer more attractive.
Economic conditions not ideal for debt
On April 16, Christopher Rugaber of the Associated Press reported2 that United States Federal Reserve Chair Jerome Powell confirmed what financial analysts already suspected. Persistent inflation, driven mainly by higher-than-expected producer costs, will delay the fed cutting interest rates.
Given Bally’s current need for funding to finish the casino in Chicago, that’s unwelcome news. Venture Smarter CEO Jon Morgan explains how that could affect the current situation for Bally’s.
“When interest rates remain high, it becomes more expensive for companies like Bally’s to borrow money,” Morgan said. “This is because the cost of borrowing, or the interest that Bally’s would have to pay back in addition to the principal loan amount, would be higher. This could potentially widen the funding gap that Bally’s is currently facing for its Chicago casino development. It’s like trying to fill a bucket with a hole at the bottom; the higher the interest rates, the bigger the hole.”
The cost of financing the gap could make Standard General’s offer more attractive to Bally’s shareholders. However, Standard General might not be the hero in this situation. There are other considerations for Bally’s besides the funding gap for Chicago.
Could privatization affect Bally’s standing in Chicago?
Among the considerations for Bally’s in evaluating Standard General’s offer is the legal ramifications in Chicago and elsewhere. Wright Law Firm CEO Jamie E. Wright discussed what Bally’s going private could mean in this context.
“In situations where a public-private partnership is involved, such as Bally’s contract with the City of Chicago to operate a casino, any change in company ownership, like the potential acquisition by Standard General, necessitates careful consideration of the original contractual obligations,” Wright stated. “Typically, these contracts contain clauses that address changes in control, ensuring the new owner can fulfill the existing commitments. If Bally’s is acquired, Standard General would generally assume all contractual responsibilities, although the city might have rights to review and approve the change beforehand to ensure the project’s continuity and financial stability.”
Even if a takeover by Standard General would not significantly alter Bally’s standing with Chicago, another shareholder is far from keen on the idea.
Opposition arises to Standard General’s bid
On April 2, K&F Growth Capital sent an open letter3 to the Bally’s Board of Directors regarding the takeover bid from Standard General. K&F also holds Bally’s shares.
The letter states that “the market has lost confidence in the Company’s (Bally’s) current strategy and financial stability.” It further accuses Kim of proposing “to exploit this weakness and acquire Bally’s at a fraction of its fair value.”
Regarding the Chicago casino, K&F’s plan does not endorse securing loans or using Standard General funds. It presents an alternative.
The letter shares a “belief that the project will yield a return on investment well below Bally’s cost of capital.” To address that, K&F suggests that “Bally’s should immediately pursue operating partnership conversations” regarding the Chicago casino.
To K&F’s point, the temporary Bally’s Chicago casino has failed to meet revenue projections, as Sophie Rodgers of Crain’s Chicago shared4 earlier this month. With a timetable for the opening of the permanent casino somewhat in flux and Bally’s dealing with this internal turmoil, bringing on an operational partner could help to shore up confidence in the project in Chicago.
At the same time, an influx of funding from Standard General might make splitting future revenues from the Chicago casino with a partner unnecessary. The company also needs to make that decision with broader and longer-term circumstances in mind.
Chicago is just one piece of the puzzle
Morgan believes that while an offer for outstanding shares could produce an influx of cash, Bally’s needs to take a broader look at the situation.
“If Bally’s is struggling to secure funding due to high interest rates, an acquisition offer could become more appealing,” Morgan elaborated. “Standard General’s bid to acquire all remaining shares of the company could provide Bally’s with the necessary capital to move forward with its development plans without having to worry about the cost of borrowing.
However, it’s important to note that an acquisition is not without its own set of challenges and considerations. Bally’s would need to carefully evaluate the terms of the Standard General offer and consider its long-term strategic plans. As with any business decision, it’s all about weighing the pros and cons and making the choice that best aligns with the company’s goals and vision.”
As the slots blur by and the cards are dealt at the temporary Bally’s Chicago, Bally’s has higher stakes to consider in its boardroom. The hand that shareholders deal may put Chicago into a situation in which it needs to take a seat at the table.
Sources
- Bally’s chairman tries to take company private as it searchers for $800M in Chicago casino funding ↩︎
- Fed’s Powell: Elevated inflation will likely delay rate cuts this year ↩︎
- K&F Growth Captial Issues Letter to the Board of Directors of Bally’s Corporation ↩︎
- Bally’s Chicago local tax revenue grew in March ↩︎
