Trans World Corporation owns and operates three casinos in the Czech Republic. These casinos are American-themed and are located near the borders of Germany and Austria. Trans World also owns a luxury hotel and spa attached to one of its casinos and manages a casino and entertainment complex in Croatia.
Trans World has a consistent history of profits, but earnings declined 39% in 2012 to 18 cents per share. The decline was largely the result of the Czech Republic’s new taxes on gambling revenue and profits. Beginning in 2012, taxes were changed from a graduated scale to a flat 20% of company gambling winnings and 19% of adjusted net income. The company also blamed the 2012 Euro Cup for temporarily depressing revenues.
At a share price mid-point of $2.55, Trans World has a market capitalization of $23.0 million versus book value of $41.2 million. Price-to-book ratio is 0.56. Price-to-trailing earnings is 14.2. Trailing return on equity was an anemic 4.8%.
Against this backdrop, two micro-cap investors see significant opportunity. These investors are Lloyd I. Miller, III and Wynnefield Capital. Mr. Miller has a long history of investing in micro-cap and unlisted stocks, including Great American Group, Emerson Radio Corp and Capstone Therapeutics. Wynnefield Capital has a similar focus.
As of April 18, Wynnefield and Miller have succeeded in buying up 50.7% of shares outstanding, giving them effective control of the company. Funds managed by Wynnefield own 26.6% and Miller owns 24.1%. Both investors are active, having filed schedule 13Ds. In its 13D filing dated November 14, 2012, Wynnefield explains its rationale:
The Wynnefield Reporting Persons believe that while the Issuer possesses a superior management team, it is apparent to the Wynnefield Reporting Persons that the Issuer lacks the critical mass required to allow the Issuer’s shares of Common Stock to trade meaningfully above its current depressed market price. In light of the Issuer’s past unsuccessful efforts to raise capital through the issuance of debt securities, the Wynnefield Reporting Persons have urged the Issuer’s Board of Directors (the “Board) to continue to seek alternative ways for enhancing stockholder value without diluting existing stockholders or otherwise consider selling the Issuer.
Wynnefield’s contention is straightforward: Though its management is capable, Trans World’s small size makes its existence as an independent entity sub-optimal for shareholders. If Wynnefield is correct, Trans World’s value could be much higher if sold to a larger competitor rather than run as an independent company.
Wynnefield’s claims can be tested by comparing Trans World’s revenue growth and operating margins with its larger competitors. If Trans World’s small size truly is holding it back, the handicap could manifest as below-average revenue growth, poor operating margins or both. The chart below compares Trans World’s results with casino companies with over $1 billion in revenues. Revenue growth is presented on a per share basis to correct for large mergers (and businesses that choose to return capital to shareholders versus reinvest it for growth.) Operating income is adjusted for one-time gains or losses and pre-opening/development costs.
This brief look suggests Wynnefield’s argument may have merit. Trans World’s revenue growth has lagged competitors, and its operating margins are below average. Of course, these figures do not take into account geographic differences. Las Vegas Sands and Wynn each operate in the booming China/Macau markets. Economic conditions on the ground in the Czech Republic may be very different. The Eurozone’s economic troubles are well-known. Perhaps Trans World’s lackluster growth couldn’t be helped.
Regardless, Wynnefield and Lloyd Miller clearly have plans for Trans World. Probably the simplest means of realizing value would be to shop Trans World and sell to a strategic or financial buyer interested in the European casino market. Taking over existing facilities would almost certainly be more cost-effective than lobbying governments for new licenses, and would avoid years of expenses while new construction was completed. If these activists were to succeed in selling Trans World at book value, investors at current prices would reap a gain of 79%. On the other hand, investors should be aware that Europe’s economic woes and the new Czech taxes could lessen Trans World’s attractiveness to competitors and result in a lower deal price, or a lengthier sales process.