SBC News Scott Longley - D’oh Canada...Toronto turns against gaming stocks

Scott Longley – D’oh Canada…Toronto turns against gaming stocks

scottlongley-600x450
Scott Longley

Toronto listed gambling investment firms buying industry assets in 2014 & 2015 were branded as game changers for the sector.

In 2016 business-wide scepticism and criticism has grown of these merged enterprises and their governance, Scott Longley examines how and why opinion has turned on these new Canadian giants.

________________________________

David Baazov, the chief executive of Amaya, may be intent on turning his back on the public markets with his attempt to forge a new buyout for the company to take it private, but among the analyst community in Canada he is still the object of considerable respect. According to a report in the Toronto business press, one analyst described Baazov as a “brilliant strategist” who is “one or two pieces away from creating an online juggernaut”.

A more nuanced view, perhaps, comes from one UK-based analyst who suggested Baazov was “a great salesman” who was not short of confidence but is maybe deficient in the art of managing listed company expectations. Now investors must weigh up whether the C$21-a-share offer on the table from Baazov and his unnamed backers is enough to let the new owners, as our admiring Canadian analyst puts it, “finish the puzzle and spin this out once all the headlines are gone”.

There is nothing new about relatively young public companies finding life in the listed spotlight tougher than presumed and heading back into the clutches of private ownership when valuations fail to live up to expectations.

In Amaya’s case, the hype surrounding the company since the PokerStars reverse takeover has proved to be strong meat. At the time of the $4.9bn debt-fuelled deal, ‘Stars was indeed an online juggernaut, but only in the comparatively limited confines of poker. The company’s intention since has been to move into casino and latterly sportsbook and so greater leverage of the claimed nine million registered players on its books.

To an extent it has been successful. It’s most recent results for the third quarter 2015 released in November showed that 300,000 played real-money casino games in the period, while 100,000 made a sports bet in the three months. However, the company blamed unhelpful currency movements and slower-than-expected full casino and sportsbook rollout for a predicted potential $225m shortfall in full-year earnings.

Since then, PokerStars has been embroiled in a players strike among its poker player base after it proposed changes to the way it treated its VIPs and it has also been the subject of an $840m damages award in Kentucky. Then within the past fortnight it gave the heave-ho to the architect of its sportsbook push Stephen Fisk.

Combined, the bad news surrounding the PokerStars helps explain the current lowly valuation of the company – but it doesn’t help with the fact that since the news broke of the buyout bid the shares have failed to rise in sympathy.

One conclusion for this would be that the market doesn’t believe that Baazov’s C$2.8bn bid will succeed. This isn’t surprising. Much as with the initial Amaya bid for the PokerStars holding company Rational Group, the bid will involve a large amount of debt and with very little detail made available publicly there must remain a doubt over the likelihood of the deal completing, despite Baazov himself owning nearly 19% of the shares.

The analysts also believe that the takeout price level is too opportunistic. “In our view, the Amaya shareholders may have difficulty approving a deal at these levels,” Macquarie Securities gaming analyst Chad Beynon told investors. “We believe they will want to hold out for more, particularly given the flurry of major acquisitions in the last 24 months,” Beynon said.

X-HEAD: I’m not in love

Still, the lack of enthusiasm for Amaya shares is telling. Since those heady days of summer 2014, Toronto has fallen out of love with online gaming stocks generally; Intertain is another Toronto-listed company which is struggling to raise investor enthusiasm in the wake of its (somewhat surprisingly) successful (£425) acquisition of the JackpotJoy business from Gamesys.

Since then the share price has struggled not least due to the actions of a short-selling hedge fund Spruce Point which issued a report late last year that accused Intertain of effectively being a Ponzi scheme and which the company furiously denied. It subsequently went to the lengths of appointing an independent committee which absolved the company of all accusations last week – yet just a week later chief executive John Kennedy Fitzgerald stepped down acknowledging “market concern” regarding a controversial management incentive plan which has now been scrapped.

The departure of Fitzgerald brought some short-term relief to the Intertain share price. But a look at the longer-term trajectories of both Intertain and Amaya unsurprisingly displays a degree of correlation in terms of performance with both stocks down over 50% within the last year.

The poor share price performance is matched by the third leg of Toronto’s online gaming trinity which took flight off the back of Amaya, the Stockholm-based NYX Gaming. It too shares the profile of 50% share price decline in the past year, and even the most recent news of the William Hill-funded bid for OpenBet has failed to raise barely a couple of percentage points rise in the last week.

The telling point here is not that this is another reverse takeover – NYX has a market cap of C$127m (£63.9m) compared with the rumoured price tag on OpenBet of £300m. Only a year ago, Canadian investors might have been more than willing to stump up for just such a bold action. Now, however, the company has had to seek alternative funding options via William Hill to finance this transformational bid. Leaving aside the many unanswered questions of this bid, it is clear that Toronto is no longer awash with cash looking for a home in speculative online gambling stocks.

If the rumours in the UK press last weekend are right, if Baazov fails in his MBIO big, then Amaya’s independent status might be in danger with Palytech reportedly waiting in the wings. As one analyst said of the recent news from Toronto, “the gold rush is over”.

Check Also

SBC News Jordan Levin: OpenBet DNA strengthened by IMG ARENA refresh

Jordan Levin: OpenBet DNA strengthened by IMG ARENA refresh

Jordan Levin is confident that the Integration of IMG ARENA under OpenBet will create global …

SBC News Will Whitehead: How to truly stand out in the dynamic igaming landscape

Will Whitehead: How to truly stand out in the dynamic igaming landscape

Ahead of ICE London next month, Will Whitehead, Commercial Director at mkodo, underlines the importance …

SBC News Sportradar appoints Jim Bombassei as SVP of Corporate Finance

Sportradar appoints Jim Bombassei as SVP of Corporate Finance

Jim Bombassei has been appointed as Sportradar’s Senior Vice President of Investor Relations and Corporate Finance. He …