Why Boyd Gaming Is an Activist Investor Target

Boyd's abandoned Las Vegas project. Source: Bobak Ha'Eri via Wikimedia Commons.

In the casino gaming industry, there's a huge divide between domestic-focused companies and those with a broader international scope. Boyd Gaming (BYD -1.10%) is a company that put all its chips on the health of the U.S. gaming market, and even as Las Vegas Sands (LVS -0.63%) and other better-diversified casino companies have recovered much of the ground they lost during the financial crisis, Boyd shares still languish well below where they traded in the mid-2000s.

Yet with shares looking so cheap, Boyd has attracted the attention of hedge fund Elliott Management and billionaire manager Paul Singer, a well-known activist investor. The big question is whether they can unlock the true value of Boyd Gaming, and if so, whether other investors can participate in any potential gains. Let's take a closer look at Boyd Gaming to learn why Wall Street's finest still see potential for the company.

Stats on Boyd Gaming

Source: S&P Capital IQ.

What happened to Boyd Gaming?
As Fool gaming analyst Travis Hoium recently noted, Boyd Gaming was one of the larger casualties of the tough times in the U.S. gaming industry. Seeking to take advantage of the boom in Las Vegas in the early 2000s, Boyd sought to develop a new resort on the northern end of the Las Vegas Strip, imploding the old Stardust property in 2006. Yet after two short years, the financial crisis forced Boyd to abandon construction of the project, and in the end, Boyd ended up selling the property and taking a charge of nearly $1 billion.

Meanwhile, Boyd's bets on Atlantic City and other domestic regional casinos didn't pan out either. As more states legalized gambling, existing casino companies saw competition rise dramatically as new casino resorts cannibalized revenue from older properties. In particular, Atlantic City has taken a big hit as casinos in Pennsylvania and New York have eaten away at the territory the New Jersey gaming capital had drawn its visitors from for decades.

Source: Boyd Gaming.

Why Elliott Management sees value in Boyd Gaming
Elliott Management disclosed its stake in Boyd Gaming in March. In addition to its almost 5% stake in the company's stock, Elliott also said in its SEC filing that it had another 2% or so of economic exposure due to derivative agreements.

Speculation has abounded over the goal of Elliott's activist moves. One belief is that Elliott could push Boyd to follow the lead of rival Penn National Gaming (PENN -3.64%) and reorganize its corporate structure into a real estate investment trust. When Penn completed a spinoff of its resort properties into the Gaming and Leisure Properties (GLPI -0.05%) REIT last year, it gave investors a high-dividend vehicle that currently yields more than 6%.

Another possibility involves Boyd's Borgata online gaming business. So far, the fate of online gaming is uncertain, especially as development of markets thus far has occurred on a state-by-state basis, and federal guidance has been lacking. But if Elliott can help Boyd navigate the changing legal environment for its online operations, then it might eventually seek to spin off the online business from the rest of Boyd's properties, potentially unlocking shareholder value.

The problem investors face with Boyd Gaming is that members of the Boyd family still have a substantial interest in the company, with William Boyd reporting a 23% stake as of May. As a result, it will be an uphill battle for Elliott and its compatriots to effect change for the corporation without Boyd's consent.

Boyd Gaming does have some potential for recovery, especially if the domestic economy keeps improving. Overall, though, the emergence of activist investors hasn't led to immediate change, and it's uncertain whether the long-term prospects for Boyd will improve even if Elliott Management and its peers are able to squeeze a short-term profit from their positions in the stock.