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On Friday, June 13th, Amaya Gaming held an investor presentation announcing the company’s planned acquisition of PokerStars’ parent company the Rational Group.
Below you’ll find the full transcript of that presentation, along with the relevant slides from the webcast as they’re referenced by Amaya CEO David Baazov.
Operator: Good afternoon, Ladies and Gentlemen. Welcome to the Amaya Gaming Group Investor Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for company analysts to queue up for questions.
I would now like to turn our call over to Daniel Sebag, CFO and David Baazov, CEO. Please go ahead, gentlemen.
Daniel Sebag: Thank you, and thank you to everyone for joining us today. I’m here with Amaya’s chairman and Chief Executive Officer David Baazov.
Before we begin, I would like to remind listeners that today’s discussion will contain forward-looking statements about the proposed acquisition by Amaya of Rational Group Limited that reflects current use with respect to future events. These forward-looking statements reflect current estimates, beliefs, and assumptions which are based on Amaya’s perception of factors management believes are appropriate in the circumstances. We can give no assurance that such estimates, beliefs, and assumptions will prove to be correct. Investors are cautioned that there are a number of risks and uncertainties that could also cause actual results or events to differ materially from those expected in these forward-looking statements. Amaya does not undertake [xx] [01:13] any forward-looking statements except as required.
In addition, in the presentation this morning management makes reference to non-IFRS measures such as EBITDA and adjusted EBITDA. Amaya’s management believes that these non-IFRS measures provide useful information to both management and investors in discussing the proposed transaction. These measures do not have a standard meaning prescribed by IFRS, and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies.
For additional information regarding forward-looking statements and non-IFRS measures, please refer to the full text of the press release issued by Amaya earlier today which has been filed on SEDAR, and to the disclaimer slide containing today’s presentation materials available on the webcast version of this presentation. I will note that the figures used in today’s calls will be in USD unless noted otherwise. I’d like to remind everyone that this call is being recorded today, Thursday, June 12, 2014.
I will now turn the call over to David.
David Baazov: Thank you, Danny, and thank you to everyone joining us today.
As you know, we’ve announced the agreement to buy 100% of the Rational Group. This is not only a transformation transaction for Amaya, but for the entire global gaming industry, one that would result in Amaya becoming the world’s largest publicly traded online gaming company, a true powerhouse.
Rational is the owner and operator of PokerStars and Full Tilt Poker. They are combined the world’s most profitable and powerful online gaming events. Over the past 14 years, Rational has become the world’s largest poker business, earning the loyalty of millions of players. With the continued trend toward regulation of online gaming around the world, the company now has in front of it an enormous opportunity to leverage its brand recognition and customer loyalty to diversify into other gaming verticals, notably casino, sports betting, and social gaming, which represent a combined global market size of approximately $25 billion. For context, Rational’s addressable online poker market is approximately $4 billion at this time.
The growth opportunity is not only in new verticals, but also in geographies. Rational does not currently operate in the United States. Amaya’s track record in the United States has the potential to facilitate a speedier entry into the U.S. for Rational’s brand, one that would certainly be welcomed by players due to the company’s status as the world’s leading online poker operator; not only having the highest liquidity, but also a recognized dedication to game integrity, player protection, and responsible gaming, as well as being an innovator in technology, game format, and marketing and loyalty programs.
From a financial point of view the acquisition provides Amaya with this premier gaming platform at an attractive valuation. It significantly diversifies us both geographically and in gaming verticals. We anticipate the transaction will be highly accretive to our earnings and provide strong cash flow.
Additionally, this is a wonderful combination of Rational’s B2C operations with Amaya’s B2B business with minimal overlap between the two companies.
Turning to Slide 3, with the page number noted on the bottom right of the slide for those following the webcast, I’ll now provide an overview of the proposed transaction.
The agreement would see a wholly owned subsidiary of Amaya acquire 100% of the securities of the Oldford Group, which is the parent company of Rational Group. As I noted, Rational is the world’s largest poker business, not only owning and operating PokerStars and Full Tilt Poker, but also numerous live poker tours and events, and providing online TV poker programming.
After closing the transaction, Rational CEO, founders, and other principals will resign from the company; however, we anticipate retaining the company’s proven and experienced executive management team and staff, and poker players will be unaffected by the transaction and will not see any negative impact to the game experience they love.
We intend to support Rational’s growth initiatives in new verticals and geographies. No changes to Amaya’s board or chief executive officers are planned as a result of this transaction.
Turning to Slide 4, this is a strong deal from a financial perspective. The aggregate purchase price is $4.9 billion including approximately $4.5 billion payable in cash upon closing and a deferred payment of $400 million payable 30 months after closing, or July 31, 2017, whichever is earlier, and subject to certain other customary adjustments.
This represents a valuation of approximately 11x Oldford’s calendar year 2013 EBITDA. Financing is fully committed and will be provided through $2.9 billion in committed debt, $1.64 billion in equity, and the balance from line [?] [06:42] cash and cash equivalents.
Details on the financing including underwriters and participants are available in the press release for this transaction which has been filed on SEDAR. Completion of the transaction will be subject to the approval of Amaya’s shareholders and to customary closing conditions including receipt of required regulatory approvals and that of the TSX regarding the transaction and the listing of the common shares issuable in connection with the transaction including those underlying warrants, subscription receipts and the convertible preferred shares.
We anticipate that the transaction will be completed on or about September 30, 2014.
Turning to Slide 5, I’ll provide some more detail on Rational Group. PokerStars and Full Tilt are collectively the world’s leading online poker brand with a combined registered player base of more than 85 million players. This leadership has been attained by providing high quality player experiences, unrivaled customer service, and innovative software and game innovation.
Rational is also the world’s largest producer of live poker tours and events, and operates notable brands such as the European Poker Tour, the Latin American Poker Tour, the Asia-Pacific Poker Tour, and the PokerStars Caribbean Adventure. The company hosts hundreds of live tournaments annually as well as having PokerStars live poker rooms in casinos in London, Macau, Madrid.
Its high global brand awareness and strong market reputation have resulted in formidable market position with Rational holding the majority of the market share in online poker and a leadership position in almost every jurisdiction in which it operates. The company has 10 online poker licenses in various global markets including France, Spain, and Italy. To date, the company has dealt over 100 billion hands of poker, truly an astonishing figure.
Turning to Slide 6, Rational has developed a premium robust software and operating platform, and the company’s leadership has spearheaded industry-leading practices in customer service, payment security, game integrity, player fund protection, and responsible gaming.
We believe its marketing investments are above those of anyone else in the online poker industry and it supports this effort through leading player loyalty programs.
The company is now able to leverage its success from these investments and practices to both attract new players as well as existing players in their extremely large database to new adjacent gaming verticals notably casino, sportsbook, and social gaming initiatives I will detail in a bit. The company has a robust and scalable platform that can support player volumes in excess of 600,000 simultaneous players.
Turning to Slide 7, while Rational is a business to consumer powerhouse, Amaya is a business to business provider of a range of online, land based, and lottery solutions for the regulated global gaming market. Our hundreds of customers include licensed casinos and gaming operations as well as government lotteries and gaming agencies located in the U.S. States, Canadian provinces, and European jurisdictions.
Specific to iGaming, our extensive library of hundreds of aggregated proprietary [inaudible 10:16] party online casino games are licensed by online casinos in the recently regulated state of New Jersey as well as in regulated jurisdictions in Europe. Our vision as a company has always been based on the fact that customer acquisition is the most important aspect for any operator.
On Slide 8, you’ll see a visual summary of the complementary gaming products and services of Amaya and Rational Group.
We believe the combined company will be a global online powerhouse in a large and growing global online gaming market which is estimated by H2 Gambling Capital Data to grow by more than $13 billion to approximately $42 billion by 2018, as can be seen by the charts on Slide 9.
I’ll now discuss the target growth initiatives of Rational. As can be seen on Slide 11, H2 Gambling Capital estimates the onshore iGaming opportunity for online poker and online casino in the United States to be $3.5 billion by 2018. This is essentially growing from a very small number as the first three states have only legislated licensed online gaming.
However, as can be seen on Slide 12, many other states have examined or are currently examining legislating online gaming.
We believe our track record of working in licensed jurisdictions in the United States and the recognition of our suitability by numerous regulators will help facilitate the licensing of Rational’s brand as iGaming operators.
In New Jersey for example, we currently have transactional waivers by the regulator to supply online casinos with our gaming solution. Rational already has a partnership established with a land based casino in the state Resorts, and would be able to be operating in a short time if and when it receives a similar waiver.
PokerStars is not only the leading global iGaming brand, U.S. players have indicated they want the choice to play on the platform due to its strong reputation as a company focused on consumer protection. This transaction therefore has the potential to excite U.S. players and by bringing to market the world’s number one brand can help grow these young and emerging licensed iGaming markets. Of course, the U.S. is one of Rational’s growth initiatives. We also intend to support the company’s growth in real money, online casino, sports betting, and social gaming.
As noted on Slide 13, the company recently entered into real money online casino, a $7.5 billion global market. This is an exciting initiative for the company as it not only has the ability to attract new players, but they will now be able to offer popular table and slot games to the millions of players using their poker platform.
In Q1 the company launched roulette and blackjack games in select markets and is rolling out online slot games as well. Amaya is going to bolster this offering by integrating games from the extensive library of popular titles to Rational’s platform. Currently the games are offered on Rational’s poker client, but the company anticipates providing a full-feature casino client later this year.
Sportsbook is another important adjacent gaming vertical to online poker. It accompanies planning on entering this vertical in 2015. As noted on Slide 14, this is a huge online gaming market, estimated at $17 billion in 2013 per H2 Gambling Capital.
The company anticipates the incremental cost to launch a sportsbook offering to be minimal, and we estimate it to become a strong operating in market in a few years including by keeping its existing online poker players from spending their dollars with other sportsbook operators. With online casino and sportsbook added to online poker, the company will truly become a one-stop shop for gaming.
Turning to Slide 15, a less traditional gaming vertical, but one growing in importance, is social casino gaming, which is estimated by Eilers Research to be more than $3 billion in 2015.
Rational already has a huge database of play money poker players through its dot net offerings which have extremely strong liquidity. The company is building on its brand awareness of play money players and recently launched its beta version of PokerStars Play on Facebook, a social poker offering with gamification elements to attract casual players.
While this social poker offering is not real money gaming, Rational has begun to modify this offering through the sale of chips to players with important upgrades. Including for mobile to its offering in the works, we anticipate social gaming will be an important growth opportunity for the company.
Turning to financials. As noted on Slide 16, in 2013 the combined revenues of Amaya and Oldford Group were $1.278 billion and adjusted EBITDA was $474 million which are significantly higher than the other major publicly traded online gaming operators.
Now you can see on Slide 17 while these competitors were more diversified into casino and sports betting, Rational’s revenues are currently just poker. In short, there is a potential for growth and diversification through its expansion into other verticals.
Slide 18 illustrates the historical financials for Amaya and Oldford Group with the entities recording strong growth and revenue, EBITDA, and adjusted EBITDA for the past three years. EBITDA and adjusted EBITDA are non-IFRS measures, so I will remind listeners to review our disclaimers in our press release on these measures and what they are defined by as a corporation.
Slide 19 provides a visual breakdown of our planned sources and uses of financing and debt leverage ratios post-transaction. On a pro forma basis, the debt to 2013 adjusted EBITDA ratio would be approximately 6.5 post-transaction.
We anticipate the combined companies’ significant cash flow should allow for rapid debt repayment and provide Amaya with sufficient liquidity and flexibility to support ongoing growth prospects. I will remind listeners they can view the slides on our webcast and additional details of the financing are included in our press release.
Before concluding our formal remarks, I want to reiterate how excited we are about the growth opportunities we envision from this acquisition.
A transformative transaction such as this is not simply about financial figures, it is about people. I first approached Rational’s ownership almost a year ago, many months ago, to propose this acquisition because I saw the potential to create a global online gaming powerhouse with a scalable platform for growth.
To me, the combination would positively affect both companies along with players. However, it wasn’t just a complementary product suite to the two companies, or a commitment to support Rational’s growth in new markets and verticals, it was also about shared values.
The principles of transparency and good business practice are essential to Amaya’s corporate approach, which has been recognized by gaming regulators as evidenced by our almost 100 licenses and certifications from national and U.S. travel jurisdictions, and internationally.
Rational has been an industry leader in providing the best gaming experiences, customer service, and online security. It’s a company that operates with the utmost integrity and respect for its player base, and we intend for Rational to continue that approach, led by its experienced executive management team and dedicated employees.
I will now turn the call over to the operator for the Q and A.
Operator: I will now open the lines for analysts to queue up for questions. If you would like to ask a question, please press *1 on your telephone keypad. To withdraw your question from the queue, press the # key. In the interest of time we ask that you please limit yourself to one question and one followup question per person. Please be mindful of others. If anyone has any difficulties hearing this conference, please press *0 for an operator to come on the line to assist you.
Again Ladies and Gentlemen, that is *1 to ask a question.
Your first question comes from the line as David McVane from Cormack Securities. Your line is open.
David McVane: Oh, hi guys. Congratulations on this transaction.
Sebag and Baazov: Thank you.
McVane: A couple of questions. Are there really any regulatory hurdles that you need to overcome to get this deal done?
Baazov: As we said, there’s going to be some required regulatory approval.
McVane: What would they be? Can you elaborate at all?
Baazov: Some select European jurisdictions.
McVane: Okay. I would imagine those shouldn’t be any issue, right?
McVane: Okay. Can you talk about the opportunity to grow on the social side?
Baazov: As I said, social is a different consumer behavior we find than in real money gaming. Right now what Rational has been able to do with PokerStars Play Money has a similarity with Zynga Poker and some of the others. It’s building brand recognition. How we approach the social aspect from a growth perspective: I think there’s no question that social gaming is growing and it’s going to continue to grow. It’s another vertical that we see us being able to take a percentage of the consumer base. We don’t just look at it as a gaming perspective, but you’re looking at consumer acquisition.
Operator: Your next question comes from a line of A. L. Offer from Clara Securities. Your line is open.
A. L. Offer: Thanks. First off, I’ll have to say, my hats off to you guys. I’ve been working in this industry for nine years. I’ve never seen a company do anything remotely like this, so congratulations I think is in order.
Baazov: Thank you. In the analysis, it was a large effort by a team. If they are listening, I want them to know that that recognition is shared, but go ahead.
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 mind 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.
Offer: Okay, that’s fine. Secondly, can you talk about where the current revenues are from in terms of regions, and how many of them are regulated versus quality gray markets from the actual revenue. Which markets are you guys generating revenue from in terms of the Rational Group?
Baazov: Let’s say we haven’t decided how we’re going to segment revenues, as we haven’t closed the transaction yet; but I’d say that from a clear perspective, the well majority of the revenue comes from Europe.
Operator: Again, to ask a question, please press *1 on your telephone keypad.
Your next question comes from a line of Ralph Garcia from Global Maxfin. Your line is open.
Ralph Garcia: Good morning, gentlemen. Congrats again on a great transformational deal.
Baazov: Thank you.
Garcia: Do you see any leverage between your land based business and the PokerStars franchise as you try to grow outside of the business?
Baazov: Yes. We’ve always said, and I’m sure you’ve heard me say this many times, Ralph and others as well, that the vision of the company from day one has been the convergence of technology from three different aspects: the physical, the virtual, and the mobile. We’ve been doing that on a B2B basis, and we think that there are some revenue synergies and revenue potentials between those two. We’re going to be looking to do that in the B2C method as well.
Garcia: Just as a follow-on, are you still on track to see off those assets that you’ve put up for sale for the end of the month, and what are you expecting from a proceeds perspective?
Baazov: They’re still out for sale, Ralph, and we haven’t announced anything yet.
Operator: Again, the lines are open for analysts to queue up for questions. Please press *1 on your telephone keypad to ask a question.
Your first question comes from the line of A. L. Offer from Clara Securities. Your line is open.
A. L. Offer: Thanks. Just a followup, I guess. Can you guys talk about: Obviously, one of the ways to expand the revenue opportunity here as you’ve talked about is casino. You said, I think, under Full Tilt that they already began offering casino games. Can you just talk about take appraise [?] [24:57] maybe they’ve seen to date in those jurisdictions? Then maybe you can also talk about what the potential is over the next few years?
Baazov: Yeah. We really can’t give details at this time. I think that the potential of what we see is very positive. We’re very happy with what we currently see.
Offer: Okay. Then in terms of sports betting, I think you said it would be a very minimal cost for you to enter. Would you just license [xx] [25:30] sports betting platform to enter that market, or would you actually look for [xx] [25:34] to build a new one?
Baazov: It still could be decided, I think. Right now we’re looking at entering the vertical. Our approach and how we do that I think is something that will be laid out in the future.
Operator: We have no further questions in the queue. I would like to turn our call back over to our presenters.
Baazov: Thank you, Operator.
I just want to conclude on a personal note by thanking the dedicated staff at both companies as well as our financing, consulting, and advisory partners who have worked extremely hard to get us to the stage we are at today. I’m confident they will bring us home.
Finally, I wish to also thank Amaya’s investors for their ongoing support and beliefs in the vision we have for the company. I look forward to updating you on our continued progress in the future. Thank you.
Operator: This concludes today’s conference call. You may now disconnect.
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