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Sunday, March 23, 2014

Can Apollo Win With D&B?

Whispers abound of the PE giant considering a bid for Dave & Busters

Bloomberg had a report last week about Apollo possibly bidding to buy Dave & Busters from Oak Hill for about $1 billion. Apollo also owns Chuck E.Cheese, a restaurant and arcade for children.

"For Apollo, the move would mean doubling down on the industry after its takeover of Chuck E. Cheese, a kid-oriented purveyor of pizza, arcade entertainment and animatronic robots. The private-equity firm gained almost 600 restaurants and arcades when it acquired the chain’s owner, CEC Entertainment Inc., in a deal valued at $1.3 billion. Dave & Buster’s also runs a chain of entertainment complexes, though it caters more to adults -- with a focus on billiards, sports and beer.

A Dave & Buster’s acquisition could lead to synergies with Chuck E. Cheese, including greater purchasing scale for food and entertainment and lower distribution costs,” said Jennifer Bartashus, an analyst at Bloomberg Industries." Bloomberg
I've always liked D&B. The games yield much higher margins than the food & beverages and comprise of slightly less than 50% of revenues. Adjusted EBITDAR margins are right around 20%, and the high cap-ex of maintaining games results in a formidable barrier to entry. Also, I think it's a concept that would do well with franchising in conservative suburban America, since it gives adults an opportunity for some wholesome fun with the pretext of an edge with its psychedelic atmosphere.
I don't know about the "synergies" between D&B and Chuck E Cheese except maybe in lower costs of purchasing games. I guess food buying costs can be lowered for both concepts for raw materials such as cheese and pastas. Either way, I think D&B by itself has high potential. 
The company has two bonds outstanding. One is a $200 mil senior note that's callable this June at $105.5 and is trading at $107. Oh, and I should mention that it's about 5x levered. 

The second is a HoldCo 0% discount note that was used to pay a dividend to equity holders. This note is currently trading at $85.13 and is callable this April at $85.45. Both of those could be good yield-to-call bonds if bought right at or below their call prices. 

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