Third Time's the Charm

The Rundown - Your weekly SPAC Deep Dive (06/30/22)

Welcome to The Rundown! Each week we’ll identify and break down for you SPACs that are capturing market share and making an impact.

Hello Friends,

De-SPACs have wiped off a combined $150 billion in market capitalization since the height of the bubble back in February 2021. One company that has bucked the trend of the Downward Spiral in valuations is Bowlero. Bowlero certainly has a lot of qualities that separate it from most De-SPACs. The bowling alley operator is a legacy business with solid cash flows, operating the largest chain in the world, which is vastly different from routine cash-guzzling EV Operators, Space Launch Companies, or Biopharmaceutical Companies looking to change the world that routinely merge with blank-cheque firms. Given Bowlero's illustrious history, can the company consolidate on a vastly diversified industry, or will it succumb to failures seen with other operators in the past?

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Strike Out 

For those unfamiliar, Bowlero is the largest operator of bowling alleys in the world and the owner of the Professional Bowlers Association (PBA). The company operates its bowling lanes through the Bowlero brand, the upscale Bowlmore Lanes, and the legacy AMF Bowling brand, serving over 26 million customers per year. At the end of 2021, the company had 321 centers across the US, Mexico, and Canada, which is nearly seven times as much as its nearest competitor, Main Event.

Given that the Bowling Industry is largely diversified and comprises of 3,500 independent operators, the company could look to capitalize by becoming an industry consolidation. The pandemic crushed retail entertainment businesses like bowling allies, with most of the independent operators in the United States struggling to keep the lights on.  

After seeing its business being decimated due to the pandemic, Bowlero has seen a rebound in demand from cash-flushed households & consumers who desperately wanted to experience recreational activities after being stuck at home for the better part of a year. The company may now take advantage of its competitors' misery through a combination of a strong cash balance of $170 million+ and a positive cash flow generation business.

Bowlero is rapidly emerging as an aggregator in the space, having acquired independent locations across Colorado, Florida, and Kansas. While it is encouraging to see that the company is fuelling growth through an acquisition spree, Bowlero needs to be cautious so as to not be over-leveraged and get caught out as it did in the past. 

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A Shrinking Market 

Investors need to be wary of a debt-fuelled acquisition spree, however, considering the company's history. AMF Bowling Worldwide (a former company that merged with Bowlmor Lanes to form Bowlero) has twice declared bankruptcy in 2001 & 2013. In the former instance, the company was delisted from the New York Stock Exchange after racking up $1 billion in debt in 2001 (after going public four years earlier at close to $1.5 billion), after being bailed out by a Leveraged Buyout from Code Hennessy & Simmons.

In the latter instance, the company was operating close to 250 locations, generating $450 million in revenues and employing 7,500 strong, before succumbing to the pressure from the increased debt load and weak demand as a result of the recession in 2008. To understand the uncertainty around the bowling industry, it is important to examine the root cause of the gradual decline since the peak of the industry in the late 70s. 

Back in the 70s, over 9 million Americans belonged to bowling leagues, leading to a thriving industry that had over 10,000 locations packed on weekdays by Blue Collar Workers across the Midwest. Since leagues generated over 70% of the revenues (most leagues take place during the evening weekdays), operators looked to expand aggressively and capitalize on the advancement.

However, over the next few decades, Bowling did not evolve quickly to attract younger demographics, failing to grow the recreational sports business to compensate for the losses in the bowling league business. Subsequently, four decades later, the number of bowling league members had shrunk to 1.3 million, with bowling alleys shrinking to a third of the number seen in the late 70s. The decline in interest could be an alarming sign for investors, and could pose as a long term challenge for operators looking to expand their customer base.

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Financials and Valuation 

Bowlero has seen a massive rebound in demand over the past year, generating $258 million in revenues in the most recent quarter and $108 million in EBITDA (indicating growth of 25.8% and 60.9% growth relative to pre-pandemic levels). Even before the pandemic, Bowlero had the highest EBITDA and Cash flows across the industry as a result of its economies of scale, geographical positioning near major cities, and revenue diversification, suggesting that the underlying business is functionally sound. The company is on track to generate around $900 million in revenues, $250 million in EBITDA, and around $150 million in Free Cash Flows. 

This, in addition to the $172 million in cash on the balance sheet, has enabled the company to institute a share buyback program of $200 million (the company bought back 109,754 shares in the most recent quarter). One thing that management needs to keep a note of is the high debt level of $1.2 billion, which has been used to fuel the company's recent acquisitions. With quarterly interest expenses expected to be around $25 million, the company could see additional pressure on the balance sheet. 

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Bottom Line 

Bowlero has bucked the trend of slumping valuations across the broader De-SPAC market by operating a large legacy business, generating substantial cash flow. Furthermore, with the rebound in demand from the pandemic & a strong cash balance, the company is now looking to fuel its growth through an acquisition spree. Furthermore, Substantial free cash flows have aided the company in buying back stock and returning value to shareholders. However, investors need to be cautious, considering the long-term decline of the bowling industry, the multiple instances of filing for bankruptcy due to substantial debt buildup, and the upcoming recession that could kill demand & put pressure on the balance sheet. 

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