Trump Entertainment Resorts (TRMP) is one that now even the Amazonian tribes know is on the block, but what we wanted to do was look under the hood to see what the valuation for this one could be. Before walking away thinking the values are substantially more or substantially less, there are some large discrepancies and making an apples to apples comparison is like comparing Quebec to Toronto: same country, same citizenship, geographically close, yet as different as night and day. Here is part of the problem: the most recent data is as of 12/31/06 from the February 7, 2007 filing date and we are close enough to the 10-K filing that it is probably safe to assume that saying “beauty is in the eye of the beholder” is an understatement.
Nonetheless, we were able to come up with some derived price ranges. This one is actually going to be a two-part piece and the details will change after there is more recent financial and reporting data to work with. The ranges that could come in here are actually just under $16.00 on the conservative end and up to $22.00 on the rosy end. Shares are at $18.00 as it stands today. This is also a much smaller fish in the casino-resort segment, and its geographic concentration is another wildcard. We rounded all of these numbers to the closest dime because there is such a large variance and this is merely a starting point.
There is more than one way to skin a cat (sorry kitties). The “under $16.00” valuation we derived was on a pure break-up value if it was being liquidated to return the money to shareholders and bondholders in a relatively quick timeframe. Because we haven’t been in a “survival mode” market for a long time, this is admittedly not the likely exit for the company. That implies an auction process and rapid deployment of capital back to bondholders and then to shareholders. The largest holders would not be very agreeable on this either: Donald Trump (4% holder), Morgan Stanley (almost 18% holder), Franklin (16.5% holder), and the next 5 largest holders (with more than 25%). So if this is the strategy that end up as the recommendation, it is assumable that the holders will try the status quo and roll the dice that they can turn it around.
The “up to $22.00” valuation is basing this on current public deals that have occurred and comparing it to valuations of the other existing publicly traded casino-resorts out there now. If a casino operator wanted to step into Atlantic City it could be worth up to $22.00 in a 100% buyout bid. If they were going to make a partial play and spin-out some of the newer licenses outside of Atlantic City then it appears closer to the $19.50 to $20.00 mark, but this avenue could also get back up there depending on who wants what. Maybe they would bring in private equity or even the “Native American route” partnership aspects. You could also see a Wynn, Penn, MGM or others that could want to get involved in bids for individual properties as has been speculated previously. If it was a "sum of the parts" bid contingent upon an outcome that is "all or none," this could even conceptually get just north of the $22.00 figure.
The third avenue is that Trump’s engagement of Merrill Lynch (“to assist the Company in the identification and evaluation of strategic corporate options including, but not limited to, capital structure, financing and value-creation alternatives. There can be no assurance with respect to the results of this engagement. The Company does not intend to comment further publicly with respect to this matter unless required by law…”) brings about a recapitalization as they have implied. The company may still decide to sell off one property to streamline debt and pay for the needed capital spending on the properties, and the WSJ noted previously that the Trump Marina may be sold (Marina has had the rooms renovated but the floor is still what needs to be renovated). So if the company was able to recapitalize and streamline its operating structure to a less leveraged position, then you could sit at perhaps a 10% higher value than today’s $18.00 handle if you believe in the efficient market theories. If you believe the hype of a potential buyout rumor that was going around before the news came out is the only reason this is higher than the sub-$17.00 levels from last week, then you may determine that today’s prices are already fully reflective of the best-case scenario.
Analysts are all expecting another loss for the quarter about to end, so all of these cash values and implied numbers may look very different in four to six weeks from today. Once again, this is admittedly a very subjective situation that does not have only one answer. It also doesn’t have only one price because for the small size of the company it could quite easily be snapped up by one of the larger operators at almost whatever price without it materially hurting their balance sheets and operating structures. The good news is that there does at least seem like a $16.00 or slightly less “implied” floor, even with the caveat that there is no such thing. A chicken-bull strategy also allows investors today to buy protection via the JULY $17.50 PUT options as a hedge for $1.40 based on today’s $18.00 strike; but keep in mind that longer-dated options may come out next week after this Friday’s expiration that could provide a longer-term hedge.
There is a discrepancy in any valuation comparison from person to person, and that is why there are some implied ranges rather than a single set target.
Written by Jon C. Ogg & Ryan Barnes
March 13, 2007
JOn Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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