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NASCAR Offers Paltry Premium for International Speedway

Jaime M. Katz, CFA (jaime.katz@morningstar.com)

Narrow-moat  International Speedway  ISCA received a nonbinding cash bid for the acquisition of its Class A and B shares of $42 per share on Oct. 9, representing an 8% premium on ISC's prior market closing price ($39.06). While an offer at 11 times 2018 EV/EBITDA is generally lower than the multiples we have seen offered on recent acquisitions, we believe there are two reasons for a depressed offer. First, with the Frances implicitly agreeing to the offer and as the owners of NASCAR, the impetus to pay a significant premium is low. Second, the returns on invested capital on the business remain weak, at a mid-single-digit level (below our 8% weighted average cost of capital estimate), which we believe would limit the premium any buyer would want to pay up on a business capturing negative economic rents.

Despite the Frances holding more than 70% of the voting power to affect the transaction, we believe there are a few mitigating factors that could delay a formal bid. Importantly, ISC has initiated a special committee of independent directors to consider the proposal. We think this alone could push the share price offered modestly higher to complete the deal, representing closer to a midteen EV/EBITDA range that has recently been paid for other consumer discretionary companies, in order to be deemed favorable for shareholders. Additionally, for the transaction to be successful it would have to be approved by a majority of ISC's shareholders other than the France family, representing outsiders that may have invested close to the offer price (since shares rallied to $47 earlier this year). Furthermore, competitors could view the transaction unfavorably. Leadership at peers Speedway Motorsports and Dover could raise competitive concerns given that their negotiating positions could deteriorate with NASCAR if the current transaction proceeds. Given the nonbinding nature of the offer and the above mentioned issues, we plan to maintain our $37 fair value estimate for now.

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