Accel Entertainment, Inc. current report, 20 November 2019

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Business Context and Reporting Period

This Form 8-K, dated November 20, 2019, reports the consummation of a business combination between TPG Pace Holdings Corp. (now Accel Entertainment, Inc.) and Accel Entertainment, Inc. (the target). Following the closing, TPG Pace Holdings Corp. changed its name to Accel Entertainment, Inc. Accel is a leading distributed gaming operator in the United States, primarily operating video gaming terminals (VGTs) in non-casino locations in Illinois. The filing also details the company's financial performance for the nine months ended September 30, 2019.

Key Financial Metrics

Revenue and Profitability (Nine Months Ended Sept 30, 2019):

  • Total Net Revenues: $303.0 million (up 25.7% year-over-year).
  • Operating Income: $19.0 million (up 2.4% year-over-year).
  • Net Income: $6.7 million (down 24.9% year-over-year).
  • Adjusted EBITDA: $58.8 million (up 26.1% year-over-year).
  • Adjusted Net Income: $21.4 million (up 17.4% year-over-year).

Cash Flow and Liquidity:

  • Cash and Cash Equivalents (Sept 30, 2019): $111.2 million.
  • Net Cash Provided by Operating Activities: $45.7 million.
  • Net Cash Used in Investing Activities: $(126.3) million, primarily due to the Grand River Jackpot acquisition.
  • Net Cash Provided by Financing Activities: $99.6 million.

Debt and Capital Structure:

  • Senior Secured Credit Facility: Total capacity of $390.0 million (as of Oct 2019 amendment), consisting of a Term Loan, Contract Draw Loan, and Revolving Credit Facility.
  • Outstanding Debt (Sept 30, 2019): Approximately $332.3 million drawn across facilities.
  • Weighted Average Interest Rate: Approximately 4.6% for the nine months ended Sept 30, 2019.
  • Availability: $29 million under the Revolving Credit Facility as of Sept 30, 2019.

Operational Metrics (Sept 30, 2019):

  • Licensed Establishments: 2,290.
  • Video Gaming Terminals (VGTs): 10,346.
  • Hold-per-Day: $133.
  • Average Remaining Contract Term: 7.0 years.

Material Changes vs. Prior Period

Revenue Growth: Total revenues increased by $61.9 million (25.7%) compared to the prior year period. This was driven by a $59.6 million increase in net video gaming revenue, attributed to acquisitions (Skyhigh, Quad B, G3, Mike's, Family, and Grand River Jackpot) and organic growth in licensed establishments and VGTs.

Expense Increases:

  • Video Gaming Expenses: Increased 26.6% to $193.4 million, largely due to higher revenue and an increase in the Illinois gaming tax rate from 30% to 33% effective July 1, 2019.
  • Interest Expense: Increased 48.0% to $9.5 million due to higher debt levels associated with recent acquisitions.
  • Other Expenses: Increased 288.7% to $7.5 million, primarily due to one-time costs related to the Business Combination.

Net Income Decline: Despite revenue growth, Net Income decreased by 24.9% to $6.7 million, impacted by increased interest expense, higher gaming taxes, and transaction-related costs.

Guidance, Outlook, and Risks

Outlook and Strategy:

  • Expansion: Accel plans to expand into Pennsylvania (where it holds a conditional license) and potentially other states like Georgia, Louisiana, and Montana.
  • Illinois Growth: The company aims to increase its VGT segment share in Illinois, leveraging recent legislative changes that allow more VGTs per location and higher wager limits.
  • Capital Expenditures: Expected to be approximately $25 million for the year ending December 31, 2019.

Risks and Contingencies:

  • Regulatory Risk: Operations are heavily dependent on Illinois Gaming Board (IGB) regulations. Recent tax rate increases (to 33% in 2019 and 34% in 2020) may impact profitability. The IGB has exclusive jurisdiction over contract validity disputes.
  • Legal Proceedings: Accel is involved in litigation regarding contract rights with J&J Ventures Gaming, LLC, and a lawsuit filed by a competitor alleging non-compete violations. No reserves have been established as damages are not estimable.
  • Internal Controls: Accel identified three material weaknesses in its internal control over financial reporting as a private company. Management expects to fully remediate these by the end of Q1 2020.
  • Debt Covenants: The company must maintain compliance with financial covenants under its credit facility to ensure liquidity.

Key Facts for Investor Verification

  • Transaction Completion: Verify the final consideration paid to Accel shareholders (approx. $642 million total) and the specific mix of cash vs. stock.
  • Debt Capacity: Confirm the current drawdown status and availability under the $390 million credit facility post-closing.
  • Regulatory Status in Pennsylvania: Monitor the progress of Accel's conditional license and the licensing status of potential truck stop partners in Pennsylvania.
  • Remediation of Internal Controls: Track the progress of fixing the three identified material weaknesses in internal controls over financial reporting.
  • Legal Outcomes: Watch for rulings from the Illinois Gaming Board regarding the pending petitions with J&J Ventures Gaming, LLC, which could impact contract validity and potential damages.
  • EBITDA Triggers: Note the performance-based triggers for the exchange of Class A-2 restricted stock, which require LTM EBITDA to reach $132 million, $152 million, and $172 million in subsequent years.