“Analyst Predicts Game-Changing Acquisitions for Accel Entertainment by 2025”

Accel Entertainment has been granted a Buy rating from Wall Street, acknowledging its robust financial position, the acquisition of Fairmount Holdings, and the potential for additional purchases.

The Fairmount transaction, which concluded in December, allowed Accel to procure FanDuel Sportsbook & Horseracing for $35 million, to be paid as 3.45 million shares of Accel A-1 common stock. This arrangement added a single-site racetrack along with a prospective casino in Illinois within the St. Louis market.

Deutsche Bank analyst Carlo Santarelli highlighted that the acquisition encompasses a master sports-betting license and a collaboration with FanDuel for both retail and online sports wagering in Illinois, racetrack operations, and three active off-track betting establishments in Illinois, along with the chance to create a casino.

“While the acquisition does provide Accel with additional exposure to Illinois, we believe it also presents Accel with a new, longer-term growth avenue in a largely complementary business to its core distributed route gaming operations,” Santarelli mentioned. “We anticipate Accel will inaugurate a temporary facility in the middle of 2025, with the permanent establishment following in late 2027.”

Accel is expecting to produce adjusted EBITDA of $20 million to $25 million from the Fairmount Park Racino within a five-year timeframe. The performance of the temporary casino and the establishment of the permanent one will be pivotal for investors in 2025 and onwards.

Thanks to Accel’s solid balance sheet, with 1.6 times net debt to EBITDA at the conclusion of the third quarter and healthy free-cash-flow generation, capital allocation will be a significant focal point for investors in 2025, Santarelli stated.

Accel has been proactive in the mergers and acquisitions sector, and management has observed that the pipeline continues to be lively, offering diverse opportunities across various geographies, sizes, and asset types.

“We are convinced M&A will persist as a priority for Accel, as it aims to broaden its reach into new markets and further diversify away from Illinois. We also expect Accel will continue to actively buy back shares moving forward, having repurchased $30 million in 2023 and $22 million during the first three quarters of 2024.”

Santarelli believes that the legislative landscape in Illinois will also be a point of interest in 2025 and beyond. Recently, Illinois applied a 1% tax hike on distributed gaming revenue. Accel will absorb half of the tax, while the venues will take on the other half. He estimates that the 50-basis-point increase signifies a $4 million headwind over a year.

The ramifications were clear, with gross margins declining by 25 basis points year-over-year in the third quarter, according to Santarelli.

Accel has sought to mitigate the rise through cost management and a strategy to eliminate the bottom 10% of its Illinois locations that are less economically viable. Moreover, Accel still sees the potential for TITO legalization, which could serve as a beneficial tailwind to revenue, Santarelli stated. Illinois is also among the states considering the legalization of igaming, which would directly compete with the VGTs.

“As previously mentioned, we assess the probability of this legalization as low,” Santarelli remarked. “Finally, while not our core expectation, any additional distributed gaming legalization in 2025 would act as a tailwind, further extending Accel’s total area market.”

Accel shares have been fluctuating around $10, while Deutsche Bank has set a price target of $14 by applying a 7.5 times multiple to its 2025 adjusted EBITDA forecast, compared to a 7.7 times forward-year average since the business amalgamation and 7 times average since January 2021.