EUR 407.14 For Business Accounts Only

Löwen Play - New Issue Comment

TRANSACTION OVERVIEW

Löwen Play, Germany’ second-largest arcade operator, is marketing €350m of 5NC2 senior secured bonds. The net proceeds, alongside €71m of cash on balance sheet, is to repay the existing €155m 8.25% senior secured bonds due 2021 and €44m of shareholder and vendor loans issued by existing shareholders, plus to pay €5m to ex-shareholder ICG through a warrant agreement as well as distribute €198m of dividends.

The move will entail an important increase in net leverage, to 2.6x from 0.4x as of September 2017. The cor-porate and the issue have been rated B by S&P and B2 by Moody’s, both the same as the previous bonds. A road-show will run until Friday 1 December with pricing expected thereafter.

WE INITIATE OUR COVERAGE WITH A STABLE-TO-NEGATIVE VIEW

We initiate our coverage on Löwen Play with a Stable-to-Negative view as a new regulation will prove to be a hard blow from 2018. It will force the group to cut its arcade sites and gaming machines fleet by around 25% next year. On the one hand, we believe that the German operator will be able to partly offset the move with acquisi-tions and openings of compliant arcades as well as some diversification towards the Netherlands. All the more so as the German market is highly fragmented with many small arcades as potential targets. However, we expect EBITDA to decline 19% yoy to €95m in 2018, leading to a re-leveraging by 0.4x to 3.0x (against 2.6x pro forma of the trans-action). Furthermore, we deplore shareholder policy with the new, aggressive dividends that come at a time when the group more than ever needs financial flexibility. In addition, Löwen Play remains a small-scale player vis-à-vis the gaming industry, with lower financial means and innovation abilities than its direct competitors.

On a more positive note, we recognize the group’ solid No. 2 position in the German market, with a large network of Amusement-with-Prices (‘AWP’) gaming machines mainly located in the most attractive areas of the country. We also take comfort from its asset-light strategy, whereby the bulk of arcades and machines are rented, entailing strong flexibility to respond to changing regulation.