If the bid is accepted, Amaya will return to being a private company.
Amaya announced the bid only a couple of hours after publishing its results for Q3 2016.
The company’s share price was lifted by the results, but following the announcement of the bid, investors drove the stock up to over CA$21—an increase of more than 15 percent.
On October 18, less than a month ago, Amaya and William Hill ended their merger talks. The press release announcing the decision also said that the period of review of strategic alternatives had “concluded.”
The release also suggested that a bid from Baazov was not imminent:
“The Special Committee has not received an offer from Mr. Baazov that it or its advisors believes is capable of resulting in a completed transaction. Accordingly, while the Board will consider any bona fide offer that Mr. Baazov or any other party may make, Amaya’s review of strategic alternatives has concluded.”
The Amaya board will now consider the new offer from David Baazov before making its recommendations. The offer is non-binding, but looks to have credible funding in place.
Amaya confirmed that the offer provides for a:
“USD$200 million deposit into escrow upon execution of a definitive agreement in respect of a potential transaction that would be converted into a one-year structurally subordinated, interest bearing debt obligation to fund a portion of the USD$400 million deferred purchase price for Amaya’s acquisition of the Rational Group in August 2014, such amount to be convertible into equity following the closing of such potential transaction.”
That is the only detail of the financing revealed by today’s press release, but it implies that the offer has a prepared structure and that Baazov’s financiers have put some work in to ensure that the deal can complete.
The price of CA$24 is interesting. It is higher than Amaya’s shares have traded at any time in the last 12 months, but only just. During the week when the company confirmed that it was in talks with William Hill, the stock peaked at CA$23.21.
When Baazov first announced that he was interested in buying Amaya, he offered a price of CA$21 per share, a 40 percent premium to the last trading price.
The share price he is now offering is CA$3 higher, but the premium over Friday’s closing price of CA$18.34 is a little over 30 percent. In relative terms, the new offer is less generous than his first position.
The board’s decision to end the Special Committee’s investigation of strategic alternatives, meaning other potential buyers or merger partners, may have emboldened Baazov. He may now feel that his bid is unlikely to see much competition.
In the absence of a competing offer that the board can find acceptable, a 30 percent premium to the current share price may be difficult to turn down.
In the Q3 results, full year earnings forecasts have been presented for the first time this year.
Full Year revenues for 2015 were CA$1,371,040 ($1,009,621) at today’s exchange rate. The new forecasts imply a growth rate of 13 to 15 percent, healthy, but not out of line with the experience of other major gaming companies.
If that rate of growth continues through 2017 it will not be long before the share price catches up with the Baazov offer price.
The board and investors are being offered a premium, but it may not be enough if their expectations of future growth as a public company outweigh their desire to pocket a quick profit.
The upside potential from endogenous growth is based on the performance of the new casino and sports verticals. The Q3 results showed that on the whole this business area remains small but is growing well.
Casino and sportsbook revenues now account for 24 percent of revenues, up from 15 percent in the same quarter of 2015. In absolute terms, revenues hit $62.4 million, up almost 70 percent on Q3 2015.
Total casino and sportsbook revenues to date in 2016 are $183.9 million.
Online poker revenues showed a decline of 4 percent to $196.8 million, but during the earnings conference call, CEO Rafi Ashkenazi said that he believes that declining poker revenues have stabilized. Around one percent of the reduced revenues were attributed to cannibalization.
Casino and sportsbook marketing will benefit from the introduction of a common VIP benefits scheme that reaches across all verticals. Amaya is working on improving its sportsbook offer which it believes is not yet fully competitive with its peers.
Investors analyzing whether to accept the Baazov bid can see that there is a clear strategy for growth in the casino and sportsbook businesses.
They may or may not believe that the decline in online poker has halted, but at least PokerStars is the dominant player in the market and set to benefit from the market shakeout.
At the end of the day it will be a fine judgment. It may boil down to the question as to whether David Baazov’s deal making skills add more value to Amaya than it can provide by growing its existing businesses.