I made a buy call on Amaya on April 29th at $6.82. I advised taking profits by taking trading capital out on June 3 at $10.71, but to keep long term-investment capital in and not to lose all of your position. AYA is now over $20 a share. I will now advise taking long-term money out as well and booking the rest of your profits but only with firm buy stops at $17 and $23. This way you will be committed to regaining your position at some point, either at lower prices, which is great or in the event of a long term revaluation of the stock on the (small) chance that this enormous move is not yet over in the immediate term..
Rumors of a major acquisition for Amaya started circulating in late May with the company even issuing a no-comment press release about it on May 26. Trading was halted by the IROC on June 12th due to a big and imminent announcement. That announcement was made on June 13th when Amaya revealed it would be acquiring PokerStars and Full Tilt Poker for $4.5 billion plus $400 milion in deferred payments.
A quick economics lesson on the enormous movement in Amaya shares and then I’ll get on with investment analysis in light of the merger. It is widely believed that governmental securities regulators like the SEC and the IROC exist in order to stabilize the capital markets. This case is a perfect illustration as to how exactly the reverse is true.
AYA saw a spectacular 70 percent rise in one day from June 12th to the 13th on the news. Though this is euphoric for shareholders assuming they all get out at the top (which is impossible), it is a signal of major instability in the market, and it hurts novice investors and traders. Every time there is an enormous move in a very short time period, somebody has to buy at the top. Those people are often retail traders or dumb money who trade emotionally. Usually, they get burned, donating money to those who got in early.
And what do regulators have to do with this? Because by law, insider trading is illegal. Insider trading is a non-crime where information that for arbitrary reasons the public is forbidden by regulators from knowing is acted upon. The reason Amaya released that no-comment press release on May 26th was that if it didn’t; it might have gotten in trouble for fueling rumors or some other violations. Because the public is not allowed to know what’s going on by law before an official public statement, this creates enormous moves when news does come out and the reaction comes in a torrent.
Imagine if the public were allowed to know what was going with merger discussions earlier on, with information coming gradually to the market instead of all at once. We would have seen a more gradual, smoother price rise over a longer period of time instead of a 70 percent move in one day. Picture 50 people slowly wading into a pool over time as news slowly spreads that it is sourced from the Fountain of Youth or something. Now picture those same 50 people all being informed at once, and then all cannonballing in together. Someone is going to get hurt, and the pool is going to lose a lot of water in the process.
But regulated markets are what they are. Now that the short term overbought conditions for Amaya are in the stratosphere and the deal is done, what does the future look like?
First of all, it is critical to understand how this deal is being financed, and what Amaya is gaining. To come up with the $4.5 billion at closing, Amaya will be issuing $2.9 billion in debt, and $1.54 billion in equity, all through private placement. At $20 a share, this will roughly double the float over time as shares become unlocked, counting both preferred and common shares as one share each.
A $2.9B in debt will increase Amaya’s debt load by a factor of 13.5. As I reiterate in nearly every column, I am not a fan of high-debt levels and this will bring Amaya’s debt to equity ratio to 155 percent. This is quite high. The big question is, what are the rates and are they floating or fixed? Apparently, someone named Offer asked that very question during the conference call on the big acquisition. Baazov stiffed him.
Offer: Thanks. I probably have like a hundred questions for you guys, but I’ll start off number one, I guess the more simple one people probably have on their minds is: Can you give us the interest rate costs related to the debts that you’re putting on the balance sheet?
Baazov: At this time I don’t think we’ll be able to comment on that.
Well okay, it may be fine but that’s not a good sign. Second question, can the combined value of the company grow its way out of the new debt? With combined revenues of $1.278 billion in 2013, that puts PokerStars and Full Tilt Poker at $1.1 bilion in annual revenue, which is over 7x Amaya’s 2013 revenue. That looks encouraging but the follow up question is what are the net earnings of PokerStars and FTP? That we don’t know yet.
The dilutive equity financing question is a nonissue, because while technically dilutive in terms of share float, they are all pre-negotiated private placements and most of the shares will likely be locked up for a while. It will be very important to pay attention to upcoming filings to find out when these shares will be unlocked and able to be sold on the market.
Another thing to keep in mind is that past mergers have not gone well for gaming companies recently in terms of stock gains. WIlliam Hill (WMH) is lower now than it was before it acquired Sportingbet. The Zynga OMGPOP merger failed miserably. IGT acquired doubledown in January 2012 and the stock is down from then, though now finally climbing back up. Bwin.party’s merger is a well-known flop. One of the few successful mergers has been Pinnacle’s with Ameristar. PNK is up 53% since the move, though I doubt that will last considering Pinnacle’s financial condition.
Conclusion, keep your eyes peeled and watch upcoming filings like a hawk. We need to see the first combined earnings statement and the terms of the new debt most of all. For now get out with buy stops at $17 and $23.
If the terms are good—and by that I mean fixed rate—and we see the new debt shrinking over the next two quarters, we will know that Amaya can pay it off relatively quickly. Don’t get too excited about Amaya debuting online in US markets. That won’t be a big factor going forward and US government regulators won’t stop harassing gaming companies and extorting big fines there anyway. The next earnings statement will be the key to see what direction this deal is taking Amaya.
