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PStars merger a non-runner

William Hills and Amaya are considering a ‘merger of equals’ it was confirmed this week. This is the equivalent of a mechanic taking two over-priced sports cars which have both been in collisions and trying to make one car that looks good on the outside but is in a terrible state under the bonnet. To those that aren’t mechanically minded but with cash to burn (shareholders) this could seem a good bet (Amaya shares increased 9% and Hills was up 6.5% after the announcement). Earlier this week, market analysts were split but are now erring on the side of caution, Maher Yaghi, analyst at Desjardins Capital Markets, said ‘’the stretched balance sheet of such a union would limit the upside of a potential deal for Amaya shareholders’’. It is now thought that the deal would not result in a premium to Amaya shareholders. William Hills shareholders are being urged to reject the merger. One of the largest investors in William Hills is Parvus Asset Management and co-founder Mads Eg Gensmann said ‘it shouldn’t take more than five minutes of the board’s time to realise this deal doesn’t pass the smell test’’. Share prices in the two companies are currently on a rollercoaster ride with huge dips and climbs daily.

Amaya bought PokerStars two years ago for £4bn (at todays’ exchange rate) and has a market cap of £2bn. William Hills has a market cap of £2.7bn. Therefore, if this merger went ahead, we would have a new gaming company valued at £4.7bn (with over £2.6bn of debt). This will, in effect, be an all-share ‘reverse takeover’ by William Hills and the enlarged company shall remain on the FTSE. A joint statement said that this would be ‘‘consistent with strategic objectives’’. Basically, it gets Amaya out of a hole and gives William Hills 100 million more customers for cross-promotional activities, targeting different demographics. There will be considerable operational savings which are thought to be around £100m.

Over the past year alone, Amaya has lost 23% share price and Hills down 15%, so both companies need some good news. But will the deal happen? Most think not. The biggest issue for shareholders will be debt, not only the current debts but future debts such as the potential $870m fine against PokerStars brought by a Kentucky judge over alleged illegal dealings by the company prior to the Amaya buyout. There is also a question of deferred payments, when Amaya purchased PokerStars it almost certainly included deferred payments that would be paid in 2017 to the then owners (the Sheinberg’s), the announcement by the board at the time of the buyout included the cash purchase plus deferred payments ‘‘based upon the occurrence of certain events’’. We believe this was related to the rising online gaming markets including the Russian poker market. The Sheinberg’s believed that this market was going to be huge, the size of deferred payment would depend on the gambling laws of that country by the time 2017 came along. So come next year Amaya needs to shell out some cash (we calculate either £100m or £500m, depending on what happens with Russian gaming laws between now and then).

The good news for Hills investors is that whether this merger happens or not, the door has been wedged firmly open for a takeover. The good news for Amaya is, well there is none frankly. Since the takeover in 2014, Amaya has lost value. David Baazov has been replaced by Rafi Ashkenazi following Baazov’s indictment over alleged insider trading. The company has angered affiliates and players in a ‘cash grab’, cancelling affiliate deals and player bonuses. The only saving grace is that the Sheinberg’s are rumoured to come back in soon and make an offer to shareholders, effectively buying the company back at half of what they sold it for.

Ed’s view: ‘’This ain’t happening, it is a defensive deal aimed at appeasing shareholders of both companies. The merger will fall apart next week. Amaya will continue to make bold statements every quarter to bolster share price, William Hills shareholders will be ‘left at the alter’ of a deal for the second time this year and will accept the next deal, wherever it comes from (probably GVC Holdings PLC)’’.