GVC reported earnings late last month and while they were quite positive on paper, once again the issue with GVC is not what the company emphasizes, but what it conceals through sleight of hand. Not in any illegal way of course – no accusations intended here – but GVC does have a way of putting crucial information on paper without bringing too much unwanted attention to it.
Before we get to that, CEO Kenny Alexander’s firm has been doing some things right. Right out of the gate, he has changed the bonus structure for Bwin.party’s executives to being performance-based rather than automatic. The term “bonus” is a bit misleading here though because it implies a salary above market rate for the job, which is not really what a bonus is. The final price for labor after all factors are accounted for is the market rate for the job, regardless of the nomenclature one may attach to different aspects of the price. Just like discounts are really a reflection of a lower market-clearing price for a good rather than an actual below-market price, bonuses are simply part of the market-clearing price for an executive in charge of a lot of capital. Simply put, if the number of buyers and sellers are equal, you are at the market price whether you call it a discount, a pay cut, a bonus or whatever.
Back when Bwin.party was being criticized for dishing out “bonuses” to an executive staff presiding over acute shareholder losses, the conundrum was that Bwin.party had to pay them because denying them would have made them look even worse. The real answer though is that the market sets the rate for high level executives, and failing to pay bonuses, which are part of the market price, means you are paying a below market rate for a job. And that means that labor migrates elsewhere. Losing your staff in the midst of turmoil is not ideal, so Bwin.party kept paying.
What GVC has done is not exactly “change culture” in Alexander’s words, but simply follow the supply and demand curve for executives. With the merger, the supply of executives at GVC/Bwin.party has gone up, and the demand to retain those executives has diminished because the combined company can now replace them more easily. Higher supply and lower demand means a lower price for the labor, and now the bonuses will be contingent on value creation, which if successful will up the market price. The test of whether GVC has hit the market price here is if Bwin.party execs start leaving the group. If they don’t, all that has happened is a new market clearing price. Either way, the move is a good one for the group.
In any case, what is GVC/Bwin.party concealing? There are of course the usual questions we’ve covered before including where exactly do its revenues come from and in what proportions besides generally “Europe” and how much of its top line comes from regulated vs. non-regulated markets, which GVC never fully discloses. Other companies are careful to break down the exact proportions of regulated and non-regulated revenues, together with a country-specific breakdown of revenue sources. GVC does not do this, which means it would rather its investors not know so easily because it might make them nervous.
But there’s more that’s concealed here in GVC’s latest annual report in a game of accounting tricks. More than usual. You may remember that GVC acquired Bwin.party for $1.7B. €400M of that sum came from Cerberus, but if you take a look at GVC’s balance sheet, you won’t find that sum anywhere. That’s technically fine because only €20M of that loan was drawn down immediately so the rest wasn’t technically debt by the time GVC had to report the numbers. But for someone who doesn’t generally enjoy combing through annual reports and letters from the CEO and Chairman looking for keywords and suffices with just glancing at a balance sheet, he might miss that rather large €380M that must be repaid by September 4, 2017. From the filing on the Cerberus loan:
It’s a cool accounting trick certainly, but it doesn’t mitigate the problem that GVC may have come late next year. GVC is still looking for €125M in cost savings with the Bwin.party merger by next year and they’ll need every penny by next year to pay the loan back in time. GVC classifies the risk accompanying the loan as liquidity risk:
While GVC’s stock has been doing well since the merger, almost as well as 888, if cost synergies come in lower than expected and something like a Brexit, a Grexit, or a surprise from one of its non-regulated markets disturbs its business, GVC will have to pay down the rest of the loan with equity, which could mean dilution. Basically, GVC/Bwin.party has about a 16 month grace period from here until September 2017 when Cerberus wants its money back. Once they get through that, they’re in the clear, at least relatively. For now though, let’s wait and see.
