Amaya On Release Of AMF Investigation Documents: “Nothing New” To Us

Amaya released a statement following the close of trading today in response the Quebec Court’s decision to lift a publication ban on documents related to the AMF investigation into trading in Amaya shares.

The decision was reported by the Globe and Mail. OPR has yet to acquire a copy of the documents, which reportedly include redacted versions of search warrants and affidavits related to the launch of the AMF investigation in December 2014.

“The release of the redacted documents presents nothing new to Amaya. Amaya has previously received the redacted affidavit and reviewed its limited contents and did not contest the court’s decision today,” Amaya’s statement read in part.

“The AMF investigation has not resulted in any proceedings and no charges have been filed. The company is confident that at the end of the investigation the AMF will come to the same conclusion as Amaya has — that if there were violations of Canadian securities laws, they were not committed by the Company, officers or directors.”

Read the full statement.

Baazov addressed investigation on recent call

On a March 31 2015 earnings call, Amaya CEO David Baazov offered a firm rebuttal to suggestions that Amaya was at risk from the AMF investigation (while also pushing back against reports of a FINRA investigation):

I do want to address the ongoing AMF investigation briefly. At this time, I do not have any additional information regarding the substance of the investigation, but I can provide you with these key facts.

Amaya thoroughly reviewed the relevant internal activities around the Oldford Group acquisition and has found no evidence of any violation of Canadian securities laws or regulations, nor has the company been provided with any evidence that any executives, directors, or employees violated any securities regulations.

The AMF investigation is, to our knowledge, the only investigation into the trading of our shares. We continue to cooperate with the AMF and respond to requests by all relevant parties. We are confident that once reviews are complete, the AMF will reach the same conclusion that we have. If there were any violations of Canadian securities laws, they were not perpetrated by the company, officers, or directors.

Full statement from Amaya

The release of the redacted documents presents nothing new to Amaya. Amaya has previously received the redacted affidavit and reviewed its limited contents and did not contest the court’s decision today. It will wait to see the actual unredacted affidavit, but it does not believe there is a reasonable basis for proceedings against Amaya or its employees.

Ben Soave, retired Chief Superintendent of the RCMP, a member of Amaya’s Compliance Committee and an advisor to the Board of Directors since 2012, said: “We have thoroughly reviewed the relevant internal activities around its acquisition of Oldford Group and have found no evidence of any violation of Canadian securities laws or regulations including tipping and insider trading by CEO David Baazov and CFO Daniel Sebag. Additionally, the company has not been provided with any evidence that any executives, directors, or employees violated any securities laws or regulations.”

The AMF investigation has not resulted in any proceedings and no charges have been filed. The company is confident that at the end of the investigation the AMF will come to the same conclusion as Amaya has — that if there were violations of Canadian securities laws, they were not committed by the Company, officers or directors.

Certain documentation related to the investigation are and have been sealed by court order and Amaya has not been able to discuss the details of their contents without risking being in contempt of court. This means Amaya has not been and is still not permitted by the court to comment on individuals named in the investigation documents.

Amaya has also yet to obtain an unredacted version of the affidavit since the investigation was first announced. A court ordered seal remains in place related to details of the warrant and the redacted contents of the affidavit.

Upon request, the company has provided regulators with a large amount of publicly accessible information that occurred in the time period leading up to the transaction, including the following:

• The Oldford Group transaction was of significant magnitude and scale, with a long list of external bodies necessarily apprised of the transaction prior to its announcement including government agencies, justice officials, gaming regulators, the stock exchange, banks, funds, law firms and consultants.
• From the day before Amaya signed a letter of intent in January, 2014 to acquire Oldford Group until May 15, 2014, while the company conducted due diligence and worked with external bodies, the price of Amaya’s stock declined. The stock price rose considerably in the week following Amaya’s Q1 2014 press release on May 15, in which the corporation stated it had secured new debt that gave it access to $300 million which could be used to support organic growth and/or a strategic acquisition. Additionally, the corporation provided its 2014 financial guidance and announced that it had provided common share purchase warrants to the lender of the new debt which were priced at $15, approximately double Amaya’s stock price at that time.
• Analysts published reports subsequently that noted Amaya’s history of acquisitions and anticipated Amaya was pursuing a transformative acquisition, with one notably speculating we were looking to buy a poker company to replace the one we had put up for sale.

Due to this run up, fuelled by speculation from a media report and a post on a stock chatroom, Amaya anticipated an investigation and has been fully cooperating with regulators since approximately one week after it announced its acquisition of Oldford Group on June 12, 2014, and has been required to maintain strict confidentiality during the process. Amaya will continue to cooperate with the regulatory authorities.

A deeper look inside the run up period

The common characterization of Amaya’s stock having “more than doubled” in advance of the announcement is technically correct but reductionary to the point of being misleading. A more accurate range of the movement driven by the acquisition speculation would be from $8 to $12.

The movement of Amaya’s stock during the period in question can be tracked reasonably tightly to publicly-available information.

The chart below (click for a larger version) illustrates both points. Annotations follow.

• April 1: Shares of Amaya – which had been trading in the $7-$9 range in the six months prior – nosedive on weaker-than-expected earnings.
• April 16: Amaya begins to pull out from the bottom of $5.81 on news of gaming machine shipments.
• May 2: Amaya rallies back above the $7 mark on news of New Jersey lab approval for Amaya slot titles.
• May 15: Amaya reports reasonably strong earnings for 1Q14. The company also announces new credit facilities that give the company access to some $300mm in funds. Critically, the terms of the new credit provide the lenders with the ability to purchase up to 4 million shares of Amaya at CAD$15 per share – even though the stock is trading at around CAD$8 at the time.
• May 16: During an earnings call, Amaya executives make several comments suggesting a major acquisition is a possibility (more on that below).
• May 20: A widely-cited research note suggests that Amaya is considering a significant poker acquisition.
• May 23: The first speculation of the PokerStars purchase appears on Stockhouse: “has anyone heard the rumour Amaya may be buying PokerStars.net…someone I know high up at a major brokerage firmy mentioned this to me the other day…could this be what’s behind the sudden move…any thoughts?”
• May 24: CalvinAyre.com – a site regarded as well-connected within the global online gambling industry – publishes the first article speculating that Amaya was angling for a PokerStars takeover.
• May 26: Amaya publicly addresses the stock surge and acquisition rumors.
• June 12: Bloomberg reports that Amaya is “near an agreement” for PokerStars prior to markets closing.
• June 12: Amaya announces the PokerStars acquisition after markets close.

Connecting the dots

Looking back at the activity starting with the earnings release on May 15, it’s relatively easy to see how someone paying attention could connect the dots to a major acquisition.

And while those dots may not have led to PokerStars directly, (i) there are only so many major online poker platforms available and, (ii) any major acquisition would reasonably have been expected to spark upward interest in Amaya.

As for those dots: They start on the 15th when Amaya announces that they’ve opened up new credit facilities that brings the total they can draw to north of $300mm.

That’s a large pile of cash for a company whose market cap at the time was something in the neighborhood of $500m.

And part of the financing agreement for the new debt involves Amaya granting the lender 4 million share warrants at CAD$15 – nearly double the price of AYA on the day the debt deal was announced.

On the next day’s earnings call, Amaya executives are asked by two separate analysts about the motivation for amassing such a large war chest. Note that both analysts speak of the acquisition as a given:

Eyal: Okay, good. Obviously, you’ve expanded your capacity. It’s fairly significant, between the amount of cash you have on the books and the actual debt facilities you’ve announced last night. Is there any more you can say outside of just saying it’s strategic acquisitions? It seems like it’s a fairly sizeable amount. You have capacity for north of $300 million of cash at this point.

David Baazov (Amaya CEO): All I’d really comment is the reality is at this time, we are bolstering the balance sheet. Historically, we’ve grown via organic growth as well as via acquisition. As I stated on the call, we are looking at this from a strategic perspective.

[…]

Ralph: Okay. Again, to the extent you can give some color, on the strategic acquisition, are you going to be looking at increasing your footprint in Europe? Is it going to be land-based and/or interactive?

David: I would just say that our focus is interactive and it’s global.

Robert: No, the 4 million warrants that are provided alongside the mezzanine debt.

Daniel Sebag (Amaya CFO): It’s part of the overall return negotiated between the lender and the borrower.

And Baazov’s opening remarks can be read – at least in hindsight – as a clear preview that a major acquisition was in the works:

Finally, yesterday, we announced the debt refinancing, adding additional cash to our balance sheet for working capital and corporate purposes. We believe we are now very well positioned to execute on strategic initiatives, including supporting our organic growth, and we also have the flexibility to capitalize on strategic acquisition opportunities that may arise.

Acquisitions have been an integral part of our strategy since 2011. However, we are selective. At this time, we would really be examining opportunities that would significantly bolster our solutions offering while providing value to our shareholders.

During the first quarter, we announced the hiring of Marlon Goldstein as our new Executive Vice President of Corporate Development and general counsel. Marlon was a principal shareholder in the corporate and securities practice at the international law firm of Greenberg Traurig, where he was co-chair of its gaming practice and was focused on corporate and securities matters, including mergers and acquisitions, securities offerings, and financing transactions.

Connect …

• A large amount of ready cash with
• A company that has grown almost exclusively through acquisitions, and
• A major lender that wants Amaya share warrants at nearly double the current share price

… and it’s not hard for a picture of a transformative acquisition to emerge by May 16 based completely on publicly-available information.

Image credit: meunierd / Shutterstock.com