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K&F Growth Capital Issues Letter to the Board of Directors of Bally's CorporationToday K&F Growth Capital released the following letter to the Board of Directors of Bally's Corporation: Subject: Recommendation the Special Committee Rejects Standard General's Woefully Undervalued Proposal to Acquire Bally's Corporation Dear Directors, K&F Growth Capital, through entities it manages, is a shareholder of Bally's Corporation ("Bally's", NYSE: "BALY", or "the Company"). We hope the recommendations shared here will be seriously considered and adopted by the Special Committee of the Board of Directors as a thoughtful, thoroughly-vetted approach to strengthening Bally's for the long term. Bally's trades with clear intrinsic undervaluation compared to its potential and, equally, this undervaluation is for an obvious reason: the market has lost confidence in the Company's current strategy and financial stability. The Company's share price has declined ~45% over the past year, and its bonds currently trade at a ~28% discount to par. Soo Kim, Chairman of the Company and also Managing Partner of Standard General (Bally's largest shareholder) proposes to exploit this weakness and acquire Bally's at a fraction of its fair value, using as a source of funds Bally's own already overstretched balance sheet. Furthermore, his proposal is counter to the best interests of all stakeholders. Shareholders will be denied the opportunity to earn into what may be double the offered value per share; bondholders will be left in an even more levered entity (alongside potentially having valuable assets sold from their collateral); and the incremental leverage will divert precious capital that otherwise could have been invested into the casino resorts to increase revenues, at the expense of employment and tax generation. Moon shot bets on huge, unfunded development projects, failed U.S. online execution, casino resort properties underperforming its regional peers, an overlevered balance sheet with little near-term prospects for de-levering and irresponsible capital allocation decisions have driven the stock and bonds to a point of disinterest from the investing community. It is inconceivable that despite having major, unfunded development projects, the Company repurchased $69 million of its shares in the fourth quarter of 2023 alone, jeopardizing the Company's financial stability and access to capital, and being executed mere months before the Chairman's offer to take Bally's private. Notwithstanding, Bally's possess individually strong assets, and value ready to be unlocked with the right strategy and the right oversight. There is no denying that the regional expansion strategy employed from 2014 to 2020 resulted in the compilation of a scaled, highly compelling portfolio of casino resorts. The company lost its way thereafter - chasing a deeply flawed omni-channel strategy that was executed by overpaying and subsequently writing down (or writing off) a series of interactive assets, issuing massive amounts of equity in large part to acquire a sports betting customer who never arrived, and blindly pursuing massive new development opportunities without the requisite large-scale casino construction expertise. No longer can the Company focus on the vanity, negative return projects and assets sought after over the last three years. After squandering equity value as the Chairman of the Company and the largest shareholder, Standard General cannot be afforded the opportunity to pick off the Company on the cheap. Bally's is at a critical juncture. We firmly believe there is a ready-made, executable path to create material shareholder value, well in-excess of Standard General's current offer. In the collaborative spirit of a long-term partnership, we offer our timely plan to strengthen Bally's and maximize value for all. Our Proposed Plan As intended long term supportive shareholders in Bally's, we believe, with the resolute focus of the Board and management, there is a credible path to deliver value to shareholders potentially double what is proposed in Standard General's offer, refocus operations on its core strengths, and de-lever the balance sheet to provide capital investment flexibility. Step 1: Reject Standard General's Acquisition Proposal We recommend the Special Committee of the Board of Bally's reject Standard General's self-serving and undervalued acquisition proposal. It is counter to the best interests of all stakeholders, offering a fraction of the value otherwise attainable. Furthermore, it is reprehensible to use the already overstretched balance sheet of the Company as a source of funds: this jeopardizes the completion of the Chicago project, putting at further risk gainful employment and tax generation in Illinois; impairs existing bondholders to the Company; and diminishes the Company's capacity to invest across its casino portfolio. Step 2: Refocus management on core operational discipline Bally's core casino operating margin performance materially lags peers, generating 400bps+ lower EBITDA margins than several regional competitors. Each 100bps of margin is roughly equivalent to $15 million of EBITDA. We can only surmise the distraction of Chicago, New York and Las Vegas has prevented senior management from optimizing core performance as Bally's is the only major regional operator not to have increased margins relative to pre-Covid levels. The Board, if not otherwise distracted by these development projects, has the opportunity and capability to refocus and realign management (including new hires, as needed) to address margin deficiency across (i) player targeting, visitation, engagement and loyalty, (ii) scope of casino operations, and (iii) cost structure. An increase in margins of 400bps, to bring in-line with its peers, is worth ~$7 per share at current valuation multiples. This value is owed to the public shareholders, not to Standard General post having acquired the Company for a low-ball offer. Step 3: Monetize non-core international interactive operations and use the proceeds to de-lever There is minimal overlap between the legacy international Gamesys business and the core U.S. casino operations (e.g., brand, customer, platform, operations) and it is our belief that U.S. public investors do not separately value the international operations such that the international assets Bally's paid ~10 times EBITDA to acquire will continue to trade at a lower regional casino multiple of EBITDA. It is also our belief that a U.S. public company should not be in the business of supplying gaming equipment and operations to the Japanese market under the country's current regulatory framework. In so doing, we believe there are negative implications to Bally's access to capital. Bally's should pursue a sale or structured separation of the International Interactive business as the universe of potential acquirors is expansive (across both strategic and private equity parties). Recent corporate transactions, for example the acquisition of Kindred Group by La Française des Jeux SA at ~10 times EBITDA, evidence the actionable and material value creation from this strategy. A sale of the division at a highly conservative 2 times EBITDA premium to where Bally's currently trades is worth an incremental ~$11 per share, and would enable the Company to either materially de-lever, or use the funds to support continued growth. Again, this value is owed to the public shareholders, not to Standard General post having acquired the Company for a low-ball offer. Step 4: Eliminate construction and operating risk in Chicago, Las Vegas and New York Bally's should not, nor has the standalone capacity, to be in the business of "bet the company" projects. Projects of the magnitude of Chicago, Las Vegas and New York require a team with extensive experience in major (north of $1 billion) project development, experience dealing with (and a database of) high-end destination customers, and a balance sheet with the capacity to fund the project and maintain the property. Chicago: as currently structured and with Bally's as the sole owner of the permanent casino resort, it is our belief that the project will yield a return on investment well below Bally's cost of capital. Bally's should immediately pursue operating partnership conversations. There were two other parties formally interested in the Chicago license, and we are confident there are myriad alternatives available to Bally's to offload or de-risk the Chicago project. We are not alone: research analyst reports support our thesis that Bally's, operating alone, is unlikely to generate an attractive ROIC while simultaneously jeopardizing the future of the Company. In a strategic partnership, enormous value could be created. It is critical Bally's does not allow the Chicago project to hamstring for years to come its capacity to pursue other strategically compelling, synergistic opportunities. Contrastingly, levering the Company to take it private would only reduce the Company's capacity to finance and pursue the project, to the detriment of the Chicago community and the state of Illinois. Las Vegas: creates a cloud of uncertainty for the foreseeable future as Bally's has no ability to fund development while concurrently building Chicago and bidding on a New York license. Bally's should immediately engage in exploratory discussions with potential operating partners and acquirors. New York: our strategy is simple - as we believe it is highly unlikely Bally's wins one of the three down-state New York licenses and the pursuit of the license is an enormous management distraction and financial cost, Bally's should immediately withdraw its application to refocus management on core operations. Step 5: Focus U.S. interactive operations on casino products and eliminate further investment in sports product / user acquisition The strategy employed over the last three years has been an unmitigated disaster. Three acquisitions (SportCaller, Bet.Works, Monkey Knife Fight) for in aggregate over $300 million, the to-be-abandoned Sinclair partnership (in which Bally's granted penny warrants for Sinclair to acquire a 15% ownership stake), and cumulative operating losses to-date exceeding $125 million, have combined yielded <1% market share in sports betting and 2-3% share in casino. Management is forecasting continued material losses in 2024. We cannot continue to throw good money after bad. Bally's should curtail all online sports activity to a business that is purely an amenity offering (akin to Boyd) and employ a holistic rethink of all online casino to focus all activities on the core physical-casino customer. Why not consider an interactive casino product that provides a highly differentiated experience (e.g., tournaments, social and community play) rather than a "me-too" app? Step 6: Institute a substantially more disciplined, return focused M&A strategy Enacting the steps above and utilizing the monetization proceeds and optimized margin performance to materially de-lever the balance sheet puts Bally's in a position to execute on a strategy not too dissimilar to that the Company employed prior to 2020: acquire strategically compelling and synergistic land-based casino resort assets. A strategy that must include an unwavering commitment to evaluating every capital allocation opportunity against a disciplined return on invested capital framework that targets returns well in excess of Bally's cost of capital. We believe our straightforward plan to strengthen Bally's serves all its stakeholders - employees, management, fellow shareholders, and debtholders. This plan will reduce debt, increase profitability, and create significant shareholder value. We look forward to an opportunity to discuss in detail our proposed plan with Bally's management and the Special Committee and offer our assistance to implement our proposed plan. We believe Bally's and its stakeholders can benefit from our experience, an "owner's" perspective, and sound advice on strategy and capital allocation, which we have brought to numerous public companies in the past. K&F Growth Capital would not have made this investment if we did not believe in a bright future for Bally's as a public company with an enviable portfolio of high-quality assets, a well-capitalized balance sheet and a talented, dedicated group of leaders and employees. We are confident that by acting as partners, Bally's will grow stronger. Sincerely,
K&F Growth Capital
Dan Fetters
Edward King
Important Disclosure Information Special Note Regarding this Communication: THIS COMMUNICATION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A RECOMMENDATION, AN OFFER TO PURCHASE OR A SOLICITATION OF AN OFFER TO SELL SHARES. THIS COMMUNICATION CONTAINS OUR CURRENT VIEWS ON THE VALUE OF BALLY'S CORPORATION SECURITIES AND CERTAIN ACTIONS THAT BALLY'S CORPORATION'S BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED ON OUR OWN ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED AND ANALYZED IS ACCURATE OR COMPLETE. SIMILARLY, THERE CAN BE NO ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. BALLY'S CORPORATION'S PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS COMMUNICATION. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING BALLY'S CORPORATION WITHOUT UPDATING THIS COMMUNICATION OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES (EXCEPT AS OTHERWISE REQUIRED BY LAW). Forward-Looking Statements: Certain statements contained in this communication are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance or activities and are subject to many risks and uncertainties. Due to such risks and uncertainties, actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Forward-looking statements can be identified by the use of the future tense or other forward-looking words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "should," "may," "will," "objective," "projection," "forecast," "management believes," "continue," "strategy," "position" or the negative of those terms or other variations of them or by comparable terminology. Important factors that could cause actual results to differ materially from the expectations set forth in this communication include, among other things, the factors identified in Bally's Corporation's public filings. Such forward-looking statements should therefore be construed in light of such factors, and we are under no obligation, and expressly disclaim any intention or obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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