Let’s play a game of wild imagination. Let’s imagine for a moment we’re at a 2020 New Year’s party. On New Year’s Eve 2019 I ask you what would be the absolute worst case scenario for GVC, short of an alien invasion or the sun going supernova and turning the Earth into a molten blob of rock. Think of the craziest thing you could possibly conjure up within the known laws of physics. You’d probably scratch your head, think really hard, and then say something totally nuts like “The global cancellation of all major sporting events simultaneously.”
“HA! That’s totally crazy!” I’d say, “But OK,” I’d continue, sniggering, “you tinfoil hat whacknutter but yeah, I guess that could happen in tinfoil hat universe.”
And then let’s say I asked you to guess what GVC’s stock price would be in the event that this totally insane scenario actually happened. You’d probably say a 70-80% fall would be reasonable. And then I’d say “HA! No it wouldn’t! GVC never falls!” And then you’d think I was the tinfoil hat guy. Which I am not, since the only foil I wear is aluminum.
(I bet if I actually wore an aluminum foil hat and mask outside it would look basically normal. Everything is so totally nuts now that if you dare walk into a bank without a bandana over your face, they kick you out for being a danger to society and you could get fined.)
But anyway, I’d be right about GVC at least. All major sporting events have indeed been cancelled indefinitely and GVC is up 4% since last year. HA! Isn’t that funny?! Who’s wearing the aluminum foil hat now, buddy?! Despite losing money every year since 2015, despite being deep in debt with no conceivable way to pay it off now, despite cutting its dividend to zero, despite it all, nothing puts so much as a dent in this thing! GVC truly takes the term “zombie company” to a whole new and literal level. Hit it with whatever you got and the stock just keeps marching on. “Buyers…! Buyers…!” it chants as it finds the next bag-holder.
The company released a “trading update” on April 6 that reads like something out of The Onion at times. Here are a few nice, juicy lines with my own translations:
“The Group’s financial position remains robust, however given the ongoing uncertainty regarding timings of the easing of shutdown measures around the world, the Board has taken the prudent decision to withdraw the second interim dividend that is due for payment on 23 April 2020”
Translation: Our financial position is robustly screwed, so we probably can’t borrow any more money to pay dividends we didn’t earn.
“I am confident,” says CEO Kenny Alexander, ”that we will emerge from this period in a position of strength, and we will be well placed to take advantage of a range of attractive growth opportunities which we believe will be available to us.”
Translation: I don’t really know what to say here so I’ll just google “confident CEO newspeak” and cut and paste the first result.
Here’s my favorite line though. GVC is an entertainment company, and this line really fulfilled that role for me (my emphasis):
“A number of opportunities have been identified so far which reduce costs by approximately £50m per month. For example, in the U.K. GVC is eligible to receive the government grant towards employment costs as we furlough retail colleagues and retain them on full pay, as well as the business rates relief, which together the Group estimates will reduce costs by nearly £20m per month.”
Translation: The government is giving us some of its inflation, so relax. Everything will be fine.
Government bailouts are now called “opportunities”? That’s a new one. Opportunity knocks I guess, except everybody is getting bailout money and you’re assuming your costs will stay constant after these bailouts when this is all just pure inflation. There is no “robust” advantage when everyone is bailed out, because when everyone is bailed out, nobody is bailed out. So far, I, personally, have been bailed out to the tune of $5,000 I never asked for thanks to Donald Trump and Benjamin Netanyahu. Congratulations to me. I’m rich. Now all I have to do is issue shares and tell my shareholders about opportunities and stick in the word “robust” a few times.
Wait wait…here’s one more. This one was almost as good:
In Italy and Belgium GVC operates a franchising model where the store operating costs (rent, employment, utility and other costs) primarily reside with the franchisee.
Translation: Our franchisees are even more screwed than we are, which on a relative basis is, like, amazing news!
Here’s the good news though. Only 44% of net gaming revenue in the online segment is sports betting, so, like, more than half isn’t directly affected by the cancellation of all sports. That’s not all. 50% of the U.K. retail segment is sports, so the glass is half full in the U.K. Half full with what we’re not sure yet. 75% of European retail is sports. Quarter full, could be worse.
Ah, but there is a bit of actual good news. £550 million are available to GVC in a Revolving Credit Facility that is currently undrawn and the financial covenant guaranteeing it will only be tested if the facility is drawn down by more than 35% by the end of the quarter. So, 65% of that RCF may not even add to its existing debt burden. That’s great!
But, let’s get back down to earth here. Three quarters of outstanding debt are floating rate, and management thinks a reasonable assumption is a 25 basis point rise. Not quite. Either rates skyrocket within months to all time record highs substantially above the peak of the 1980’s, or there will probably be no pound sterling worth the paper it’s printed on by this time next year. That’s the reality as I see it at least.
No matter though. GVC shares should keep climbing anyway. They always do.
