Last week, Montreal-based Amaya Gaming Group (TSX: AYA ) announced an agreement to acquire 100% of privately held Isle of Man-based Oldford Group and its Rational Group for $4.9 billion in cash. Rational Group is the parent company of PokerStars and Full Tilt, and is the dominant global online poker room operator claiming a 66% dot-com global market share.
The acquisition instantly transforms Amaya from a bit B2B gaming supplier into a global online gaming powerhouse, and is akin to a minnow swallowing a whale.
Amaya -- perhaps best known as a slot machine manufacturer in brick-and-mortar space through its Cadillac Jack unit acquired in 2012, and for its Ongame online poker platform (acquired from bwin.party also in 2012) -- generated all of $54 million in adjusted EBITDA on $145 million in revenue in 2013. Oldford Group, on the other hand, generated a comparatively monstrous $420 million in adjusted EBITDA on $1.1 billion in revenue in 2013.
But for American poker players and legal online gaming operators in America, potentially the single most impactful aspect of the deal is that Oldford Group's shareholders and other principals -- led by founder and CEO Mark Scheinberg -- will step down upon completion of the sale.
In December 2013, the New Jersey Division of Gaming Enforcement (DGE) suspended review of PokerStars' application for an online gambling license for two years, adding that it would consider a request "to reactivate the application if significantly changed circumstances are demonstrated." The DGE's concerns relate to the unresolved situation regarding PokerStars co-founder Isai Scheinberg (current CEO Mark Scheinberg's father), who was indicted by federal prosecutors in 2011 for violating the Illegal Gambling Business Act and the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006, as PokerStars continued to operate in the U.S. following the passing of the UIGEA in 2006 through April 2011; Scheinberg is not a U.S. citizen, and has not returned to the U.S. to face the charges.
Amaya is betting that the removal of the current ownership and leadership will pave the way for the (re-)entry of the PokerStars brand into the now-legal New Jersey online gaming market, and ultimately other states in the future.
For the most part, the American constituents of the online poker community are celebrating the potential return of PokerStars to the U.S. markets, in the hope that American poker players may one day play on PokerStars' global network while situated on U.S. soil. Meanwhile, the executive director of the Poker Players Alliance stated in a press release that the deal is "a positive development for poker enthusiasts and the potential return of the PokerStars brand will grow our game."
But what's really happening, and what does this deal mean for online gaming in America?
Let's start with a few thoughts:
1. This is PokerStars waving the white flag on breaking into the U.S. markets on its own.
PokerStars has been blocked in participating in online gaming in Nevada due to a "bad actor" clause related to operating in the U.S. following the passage of the UIGEA, and the New Jersey DGE made it clear that it was not going to let PokerStars through without drastic changes at the top. Meanwhile, PokerStars' attempt to partner up with a few key tribes in California has been met with severe opposition from a rival coalition of tribes who favor a bill featuring a "bad actors" clause that would exclude PokerStars. Regardless of which side you are on, the chances of PokerStars breaking in on its own only worsen as you get to states less desperate than New Jersey.
2. Amaya scored a decent deal excluding U.S. prospects.
The $4.9 billion purchase price represents a multiple of 11.7 times Oldford's 2013 adjusted EBITDA of $420 million, which was up 22.8% over 2012. Meanwhile, Amaya projects that the combined company (assuming Amaya and Oldford were a single entity as of Jan. 1, 2014) will generate a combined pro forma adjusted EBITDA between $600 million and $640 million in 2014, up from $473.8 million in 2013, with the bulk of the gains presumably attributable to Oldford (PokerStars).
Assuming modest adjusted EBITDA growth of 20% to $504 million for Oldford Group in 2014, that adjusted EBITDA multiple would fall to single digits, which has to be viewed as fairly attractive for what is probably the only gaming business worth owning on the basis of online poker alone, and one that apparently is still growing.
3. Amaya's debtload should be manageable.
To raise cash for the deal, Amaya has raised $2.9 billion in debt, along with $1 billion in mandatory convertible debt and $642 million in equity. Following the deal, Amaya will have $3.2 billion in debt excluding the mandatory convertibles, which amounts to 5.0 to 5.3 times projected 2014 adjusted EBITDA of $600 million to $640 million. This is high but not terribly so, and should be manageable if PokerStars remains a cash cow.
At this point, the question is, what is PokerStars' upside in the U.S.?
PokerStars' upside in the U.S.
With a purchase price near a single-digit EBITDA multiple, it looks as if Amaya is getting a decent price on PokerStars' current business, and freerolling on the upside in the U.S. But what really is the upside for PokerStars in the U.S.?
It's easy to assume that Amaya/PokerStars is staring at a "huge" opportunity in the U.S. However:
1. PokerStars would not be coming into the U.S. markets as an operator.
Amaya currently does not own any brick-and-mortar casino assets in the U.S. -- in states with legal online gaming or otherwise. And though brick-and-mortar rules appear to be flexible in New Jersey, where Wynn Resorts -- which does not own or operate a casino -- apparently would be able to satisfy the requirement by keeping hardware in a Caesars Entertainment-owned casino, other states may not be so flexible. While both of those things could change in the future, PokerStars' role in the U.S. for the time being would seem to be relegated primarily to that of a software supplier.
As it stands, PokerStars currently has a deal in place to supply the online gaming operation for Resorts Casino Hotel in New Jersey.
2. Even if Amaya is able to sneak PokerStars through New Jersey, it may not get past New Jersey.
PokerStars seems to have bought enough political clout to potentially sneak into New Jersey under new ownership -- that the New Jersey DGE stated that it would even consider reviewing PokerStars' application back in December 2013 is a huge win, as the DGE could just as easily have said a flat "No." The problem is, other states may not be lenient toward PokerStars even under Amaya ownership, despite Amaya's own good standing in such jurisdictions.
The fact is that Party Poker was in PokerStars' current dominant position prior to the UIGEA; PokerStars only earned its position as the global leader by staying in the U.S. market after Party Poker abandoned the U.S. market following the passing of the UIGEA in 2006. And so, even if New Jersey lets the PokerStars brand in, other states may be more likely to continue to penalize PokerStars the company rather than just its current ownership and leadership.
3. PokerStars the brand does not come with the ROW dot-com network.
When poker players say they want PokerStars back in the U.S., what they are really saying is that they want to play on PokerStars.com with the rest of the world (ROW) as it was in 2010. What poker players really want is to play the games they want to play, when they want to play them, at the stakes they want to play at, and with the players (fish) they want to play with. This comes with the liquidity of a large shared network. The problem is, the chance of Americans situated in the U.S. being able to play on a global PokerStars network in the foreseeable future remains slim; even getting New Jersey to hook up with Nevada is a challenge.
And this last point is really the key.
PokerStars may arrive in the U.S., and it might do so with arguably a best-in-class brand, best-in-class software, and best-in-class customer service. But it is not likely to come with what American poker players really want, which is a link to PokerStars' ROW network. That network is PokerStars' trump card -- the problem being that Amaya likely won't get to play it.
One way or another, the possibility of PokerStars is certainly not good news for incumbent online poker room operators including Caesars' WSOP.com, the MGM Resorts International/Boyd Gaming/bwin.party partnership, Ultimate Gaming (with which Amaya has an agreement as an online casino supplier for the Trump Taj Mahal in New Jersey), and 888 Holdings. That said, it's an open question how much upside PokerStars really has in the U.S. in Amaya's hands, and what PokerStars' ultimate impact will be.
For more online gaming commentary by Jeff Hwang, check out:
- "G2E: The State of Online Gaming" (2013)
- "On AGA vs. PokerStars"
- "Sorry, Mr. Online Poker. Nobody Cares About You"