by Lawrence Meyers | August 22, 2014 1:50 pm
I stumbled onto online poker many years ago, and all I could think about at the time was the fortunes being made by the operators of popular sites like PokerStars and Full Tilt.
Online poker had taken the world by storm, so every time I logged in, I was playing with people all over the world. There were always tens of thousands of people at the table. Always. And each person was paying the poker site to play, either through tournament fees or rake. I just wanted to find a way to own a piece of one of these sites because they had to be cash cows.
The sector blew up when the Department of Justice went after all the websites and payment processors, shutting them down, indicting their management and confiscating player accounts.
But online poker sites didn’t die — they continued to operate internationally. And finally, my chance to invest arrived.
Earlier this year, a publicly traded Canadian company, Amaya Gaming (AMYGF), purchased PokerStars and Full Tilt, and the acquisition closed earlier this month. I got a look at Amaya Gaming’s financials, and they are what I expected.
I’ve bought into Amaya, and regardless of whether you buy the over-the-counter AMYGF shares or AYA on the Toronto Stock Exchange, this wildly undervalued company should be part of your portfolio, too.
Prior to the acquisition, Amaya Gaming provided interactive gaming and lottery systems. Third-party content providers would offer their games on Amaya’s servers, which included online and mobile slot play, video poker and table games. AMYGF gobbled up Chartwell Technology and well-established Cryptologic to beef up its offerings and support.
Then Amaya purchased Ongame Network in 2012, which added poker to its brand. Cadillac Jack also was purchased for access to Class II and III Tribal and Commercial gaming markets in the U.S., and Diamond Game for its lottery platform.
Cadillac Jack has received approval to offer slot machines in New Jersey in land-based casinos. It was able to do this because the state’s gaming department decided that only sports betting was subject to its oversight, and thus all other forms of online gaming are permitted. Nevada and Delaware also have come aboard to legalize regulate online gaming.
Amaya is offering its platform to gaming operators, meaning it just sits back and collects the fees.
These will not be the only three states to permit online gaming. Anywhere that tribal or riverboat casinos exist are likely going to open up as markets. That not only means Amaya’s current businesses will be able to operate there, but so will the new online poker platforms.
And it is going to be huge.
Full Tilt and PokerStars boast 85 million registered players. For FY13, the online poker sites generated $1.1 billion in revenue and EBITDA of about $473 million. Amaya paid $4.9 billion for them, or about 11 times cash flow. Blackstone (BX) put up some money, along with a host of other entities providing all kinds of debt.
Let’s take a look at the valuation. Wynn Resorts (WYNN) trades for 12.2 times cash flow. Las Vegas Sands (LVS) trades for 12.6 times cash flow. Even MGM Resorts International (MGM), which is loaded with debt and a struggling operation, trades for 9.4 times cash flow. We can’t even value Caesars Entertainment (CZR) because it is cash flow negative.
But here’s the thing — these are all land-based resort and casinos. Hotels are a capital intensive business, with more irregular cash flow. Amaya is almost entirely an online operation without expensive capex to deal with.
Moreover, its strategy is clear: become the biggest public online gaming company, by gobbling up every premium asset it can. The CEO wants Amaya Gaming list on the New York Stock Exchange, which is only going to enhance interest.
Heck, I’m a poker guy and even I came to this story late. What happens when other investors realize what they are on to?
I believe this is the beginning of a great story for AMYGF. At some point down the line, after tons of states have permitted online gaming to collect the juicy tax revenues it will generate, Amaya probably will be taken out by one of the big casino operators above or private equity.
By then, I expect to be sitting on a tripler, if not more.
That’s exciting, but you do have to deal with the nitty gritty of actually buying Amaya Gaming. Here, you have two choices:
I elected the OTC option because, while the spread was 12 cents, the currency conversion fee was 1% in both directions. No thanks.
As of this writing, Lawrence Meyers was long AMYGF. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.
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