To sell or not to sell? The answer has to be no. By Andrew Tottenham, Managing Director, Tottenham & Co August 4, 2020 at 11:48 am In the last few weeks, I have been approached by owners to find buyers for a casino group and a supplier to the industry. The owners of these businesses, whilst not forced to sell, decided that they no longer want to be in a land-based, public-facing leisure business or one that supplies this type of business. Their motivation to sell was due to the uncertainty that the future holds for these businesses in the short to medium term, due to the spread of COVID-19 and whether they will be able to trade through the losses they are currently experiencing. This uncertainty is now felt by most land-based leisure operations and supply businesses; they really don’t know what the future has in store. My advice was, unless you’re prepared to accept a low valuation, if at all possible, don’t sell now, but hold out for more predictable times. Any sale today won’t realise the value that might be achieved next year or the year after, provided of course that the business will be profitable when it comes time to sell. Uncertainty means risk. If you cannot reliably predict the near- and medium-term future, a buyer is going to price in a risk factor — in other words, a price reduction. This uncertainty is due to a number of factors, not just whether the number of customers or spending will ever return to pre COVID-19 levels and when that might happen. It also depends on how governments will react when dealing with spikes in infection rates in the future. As we have already seen, governments will act spontaneously. For example, casinos in Cataluña reopened in June, albeit with restrictions on capacity and other requirements, but due to a spike in new cases in the region, they were ordered to close at the end of July. The edict seemed to suggest that those businesses that close late were at higher risk of being super-spreading venues. The High Court of Spain disagreed and thought the government could use other measure to slow the spread of the virus, striking down the order. In the same vein, in an effort to restrict the spread of the virus, a mayor in Andalucia ordered that all nightclubs in his town should close at 2 a.m. as opposed to 4:30 a.m. It seems the virus only comes out very late at night! The UK government agreed to allow all the casinos in England, along with bowling alleys and skating rinks, to open on August 1. Then 12 hours before the opening time, it rescinded the relaxation and ordered them to remain closed until August 15 at the earliest, much to the chagrin of Britain’s casinos operators. An increase in new cases in and around Manchester was thought to be the reason behind the decision. The UK government professes to have a “whack-a-mole” policy in dealing with the disease: local lockdowns until new case numbers reduce sufficiently to reopen again. It therefore does appear ludicrous that to bring new infections down in the Greater Manchester area, which is in the north of the country, casinos should be forced to close over 200 miles away in the south. In the UK, health matters are devolved to national governments and the Scottish government, which have generally handled the pandemic better than the UK government has done for England. At the very least, their approaches and messaging have been more consistent; the date that Scottish casinos can reopen is August 24. What these examples show is that the new normal is likely to be stop-start-stop-start for businesses until this pandemic is brought under control. Casinos, whether it is true or not, are perceived to be businesses where their customers are at a high risk of catching the infection. Those businesses that have the highest risk of infecting their customers will be the last to reopen and the first to be forced to close again. In the main, there are two groups of potential buyers: trade buyers (existing casino operators) and financial firms (private equity, hedge funds and the like). Existing casino operators are probably in the same boat as the sellers, with revenues and future profitability extremely unpredictable. Likely, they are trying to preserve cash and weather the storm, so it is doubtful that these companies will be in buying mode right now. Only those with strong balance sheets that see the opportunity for a real bargain are going to be buyers. It is not a seller´s market. Private-equity and hedge funds have rules by which they make investment decisions; it is how they run their funds. If a business can get over the hurdles (i.e., meet the rules of the fund) it can be a candidate for acquisition. Again, the risk attached to revenue flows is only likely to make the transaction work at a low valuation. Because of one of the ways these firms calculate value, unpredictability in the immediate to medium term will have a larger negative impact on long-term value than the same risk being applied a few years from now. I might have talked myself out of a fee, but given all of the above, my advice to the potential sellers was, if at all possible, continue to trade, get the business in a lean shape to survive the volatility of next year or so and be in a position to capitalise on the opportunity when stability and growth return. That way, the owners might succeed in maximising their return. So, stay the course, right-size the business and get through the next year or two. You will thank me if you do.