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From Amaya to Zombie Repellent, The A to Z of Baazov’s Offer

TAGs: Amaya Gaming, David Baazov

What ever happened to David Baazov’s offer to take Amaya private for C$21 a share? That was back in February with shares trading in the $13.25 area, with a 5% position taken for the model portfolio . We are now at $14.76 thanks to a good earnings report that included higher revenues, more registrations, and a more than doubling of its earnings per share year over year. The question with Amaya was never centered around if it could grow. The real question was, and still is, if it can grow fast enough to pay off its rather large debt.

From Amaya to Zombie Repellent, The A to Z of Baazov's OfferFor the leverage that Amaya does have though, the situation is not too bad, at least not imminently critical. As of last statement, the company holds $3,719,904,000 in debt to be exact, and a market cap of $1.97 billion. That puts leverage at 189%, which is a lot, but most of that debt is not due for a long while. Over $2 billion of it is due over five years from now, and only $1.14 billion is due within the next three years. That’s still a lot and that will be hard to pay off, but it is doable through an equity financing, which would be bad for shareholders, or perhaps rolling over the debt. Most likely though, it will be dealt with by taking the company private again within the next 3 years.

What’s the holdup on the offer though? Probably the fact that Baazov is now in hot water over insider trading allegations. This puts both sides of the Amaya public/private convoluted business in a strange situation. On the one hand you have the Scheinbergs, the original owners of PokerStars parent Rational Group, who probably want to do business in the US without being on the books and may be using Baazov as their proxy because the Scheinbergs are guilty of doing business in the United States illegally. But now we have Baazov himself in trouble for equally inane reasons, this time from Canadian authorities for basically being too shrewd and shareholders are complaining about it. Regulators always need someone to chase in order to look busy rather than be caught watching porn all day.

Though it was US regulators who have the documented porn problem, things can’t be all that much different in Canada, where reportedly 20% of residents in the country’s capital where all the regulators are had Ashley Madison accounts. Perhaps instead of annoying David Baazov, they should go back to watching porn. That way Canadian taxpayers will only be paying them to waste time rather than to attack businessmen who provide them with goods and services.

A quick foray into the inanity of all insider trading charges though, they are like antitrust charges. No one can define objectively when information that someone has is considered public or not, just like no one can define what a “trust” is. We all know different things. Trading is partly a game of who can find the best information and keep it secret. When Warren Buffet for example announces that he took a huge position in X and X goes up 10% because everyone wants to follow Warren Buffett, shouldn’t he have been obligated by insider trading logic to file that he intends to take a position before he does it? After all, he is the only one who knows he is going to buy before he does, and that moves markets. By insider trading logic, Buffett should not be legally allowed to act on his own intentions before disclosing them publicly, which is absurd.

Aside from that, even if insider trading could be objectively defined, there is no moral problem with acting on private information. For example if any of us had insider information from a backyard telescope that spotted an asteroid on the way to crash into the planet that nobody else knew about (theoretically speaking of course) then you would not be at fault for buying and hoarding food, water, gold, guns and zombie repellent and whatnot before filing your asteroid finding with the SEC. That would be insider trading as you are the only one who knows the price of food and water is about to skyrocket, but to tell everyone before you buy would bring the price of what you want to hoard much higher and would lower your chances of survival.

In any case, Baazov’s deal to take Amaya private then will probably have to wait until he is cleared of all charges. There wouldn’t be much point in the Scheinbergs using Baazov as a proxy for their US business if Baazov himself has his own legal troubles and is blacklisted. When will that be? Who knows. Good luck trying to predict timing for court cases. We’ve seen how well that goes with Caesars, which will probably be locked in its battle with junior creditors until it’s their great grandchildren who finally succeed in forcing their hand for money that will by then be so inflated that any payoff won’t matter.

This puts Amaya in an interesting position in terms of trading. If we assume that Baazov and the Amaya board will sit on the offer until and if Baazov is cleared, then if and when he is cleared, it’s a big buy, because the shares will shoot up to the $21 offer. If he is convicted then shares will decline at least temporarily, because it will be difficult for any large business transaction such as this to be cleared legally when the government hates you. At that point Baazov may need his own proxy in order to become the Scheinberg’s proxy and you’ll have double shadow operators that no one will be able to keep track of.

On the plus side though, Baazov has resigned from the Amaya board, which probably means he still intends on taking the company private again. He wouldn’t be able to vote on the deal as an interested party, and the board probably wants to sell because why worry about all that debt due in three years when you can offload it on someone else and take his money in exchange?

In Talmudic law there’s a concept called a sfeik sfeika. It literally means “doubt on doubt”. If A leads to B leads to C, and there’s a doubt about the truth of both A and B, then we assume C will not occur. In this case, if (A) Baazov is convicted and prevented from taking Amaya private, and (B) Amaya has no alternative buyer, then (C) Amaya will stay public and try to pay off its debt alone. But there is a doubt about both A and B, so we can assume that C won’t happen. Somehow Amaya will go private again rather than tackle its debt load by itself.

Which, again, means that Amaya will probably eventually reach $21 a share, so hold on for now.

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