Put yourself in Norbert Teufelberger’s shoes. Your company, bwin.party, has been shrinking ever since going public due to loss of grey market opportunities and heightened exposure to government regulation. You’re looking for a new home to help grow what’s left, and two companies approach you. The first is a pair, an odd duo (GVC/Amaya) consisting of a grey market specialist with another who made its fame through leveraged buyouts. The grey marketer wants to take whatever is left of your grey market business, and put all the debt in the hands of its already highly leveraged partner.
Another company approaches you (888), one with no debt whatsoever, who already knows and understands the pain and risk of operating in grey markets and then having to leave them, just like what happened to you. But they have grown out of it despite the tribulations. And you already do business with them, so you know how they operate and you understand the stability of their business plan.
Which do you go with?
Bwin.party is not stupid. Its top management does not want to make the same mistakes it did when Bwin and PartyGaming merged, thinking that grey market opportunities can survive for long when a company becomes too visible to the authorities.
Incidentally, CalvinAyre was the closest to a correct estimate of a deal, which went through (preliminarily) at €1.3B. CalvinAyre had estimated €1.5B.
It was essentially a choice between risky excitement and conservative, slow growth. GVC would have been the all-night rave, fast growth and keep the coffee coming, just watch out when government decides to regulate caffeine as a controlled substance and crashes your party. 888 was the safer choice, a late-afternoon backyard barbecue among responsible adult friends complete with non-alcoholic beer and gluten free veggie patties. bwin.party took veggie patties and the non-alcoholic beer.
There are news reports fluttering around that GVC could possibly make a counteroffer since the current deal with 888 includes a break-up fee of £5.7M, but I don’t see that happening. Bwin.party already decided to go with 888 even though GVC offered slightly more money, because this deal is not simply about cash. It’s about saving a company and maintaining a good legacy.
Look at it this way. The sad fact is that the buyout price of bwin.party was less than either bwin or PartyGaming was worth separately before the merger. There is no positive way to spin that. It’s as if your stock portfolio is down 50% and you’re faced with a choice, either put what’s left in a very risky derivative to try and make up your losses quickly, or hand over what’s left to a professional investment advisor who could slowly rebuild your savings over the next few years. Teufelberger does not want to go down as the guy who took the risky deal after the original risky merger already failed. He wants to be the guy who took the company back on the slow road to financial health without the frills. Even if the risky offer puts down more cash, bwin.party won’t go for it unless it’s significantly higher, but it won’t be, because GVC probably can’t afford much more than it has already offered.
This deal won’t fail like the original bwin.party merger because what was lost in that merger is already lost. It’s not like if it becomes “even more merged” it will lose even more of its business than it has already lost. The two best things about this merger are that 888 already provides some of the technology that powers Bwin.party’s online games, which translates into significant cost savings already. Second, it can now cross-market products to its combined user base, which saves in marketing costs.
Financially, the deal looks healthy. I have already written why 888 is the gaming industry’s #1 defensive stock par excellence, it being the most fiscally conservative and responsible public gambling firm out there. Up until now, 888 had zero debt, and was actually a net creditor rather than a debtor. It actually benefits from higher interest rates unlike its competitor debtor companies. This deal will be financed by a $600M term loan credit facility, which will be floating rate and put its debt to equity at about 63%. This is manageable, as long as it is paid back quickly.
That number is a bit strange because it is about $115M more than it needs. 888 will be capping the amount of equity it offers to BPTY shareholders at 341.6M shares. At today’s prices, that totals £587.55M. Since the total value of the deal is about £898M, that puts cash needed at about £310.45M, or $485M. So why go for a $600M loan if all you need is $485M? I’m not exactly sure, but my guess is that the rest (or at least some of the rest) of the loan will go into interest-bearing fixed-rate investments it will use to naturally hedge the debt it takes on for the deal. If interest rates go up, so do the earnings on its investments. It may be trying to act like a bank in this respect, borrowing short and lending long. It could also use the extra cash to jumpstart joint operations.
Also, as underwhelming as bwin.party’s performance has been since going public, its finances are not all that bent out of shape. Its debt is miniscule and it has a healthy amount of cash on its balance sheet which will be absorbed by 888, so the merged company will have about £325M in cash on hand.
Given 888’s history, we can expect the $600M loan to be paid back relatively quickly. If that is indeed what we see, along with cost savings and cross marketing synergies registering within the next year or two, then the deal should work well, and Norbert Teufelberger will have salvaged his legacy.
