December 17, 2014 - 11:18am EST by
2014 2015
Price: 28.97 EPS n/m 2.00
Shares Out. (in M): 210 P/E n/m 14.5
Market Cap (in $M): 6,100 P/FCF n/m 12.7
Net Debt (in $M): 3,000 EBIT 0 680
TEV (in $M): 9,100 TEV/EBIT n/m 13.4

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  • Gaming



Note Regarding Previous Write-up

Amaya was written up this year in May (congrats to tyler939--up 4x since then!). We would not normally submit a re-writeup within a year of another post. However, Amaya is a completely different company now versus then, having closed on a then-unannounced acquisition that increases run-rate revenue and EBITDA by roughly ten-fold (10X) over 2013. While some aspects of the new company were covered by tyler939, avahaz, and others in the message board, we feel the new company merits its own write-up. Additionally, the shares have come down recently on what we believe to be two immaterial issues: (1) correlation with the overall oil-heavy Canadian market; and (2) an unusual trading activity inquiry that was sensationalized in the press.


Summary Thesis

In what amounted to a back-door IPO for the dominant global player in online poker, The Rational Group—owner of PokerStars and FullTilt Poker—was acquired (closed August 1st, 2014) by Amaya, a B2B gaming solutions provider one-tenth its size. While the headline EBITDA multiple appears reasonable given online gaming comps, the true proforma profitability of the business is not widely understood: minimal taxes and CapEx means that virtually all of the EBITDA not consumed by interest becomes free cash flow. Given this, Amaya’s current $28 share price implies a 13x multiple on our estimates of 2015E FCF, which we view as very cheap for a company that dominates its global market (>60% of online cash poker games) and has been growing rapidly (PF 20% 3-yr revenue CAGR & PF 42% 3-year EBITDA CAGR). Moreover, we expect strong FCF growth to continue over the next several years through: (1) the addition of online casino games and sports betting to its poker brands; (2) organic growth of their existing offerings in this rapidly growing market; (3) balance-sheet deleveraging; and (4) expansion of their online poker brands into the US.


Business Overview

Amaya (pre-acquisition) is a provider of B2B online gaming services with US$54M in 2013 adjusted EBITDA. This piece of Amaya was covered thoroughly in a prior VIC writeup. The Rational Group is the owner of PokerStars and FullTilt Poker, which combined are the dominant global sites for online poker, with 85M registered players, >10x the player traffic of the next-biggest site, and US$420M in 2013 adjusted EBITDA (note: PokerStars is the main brand/asset here, as it is 10x the size of FullTilt).


High Quality

The first thing to understand with regards to online poker is the strong network effects. This is summarized on, which tracks the number of cash games taking place on each site in real-time: “Why do [players] care which are the biggest poker sites? For any serious player, the amount of traffic a poker site gets is one of the most important factors in choosing where to play. The sites with the most players offer the best game selection, allowing the player to hunt for the best game conditions 24 hours a day. The largest poker sites are also immensely profitable and (for the most part) smoothly run, reducing concerns about stability and viability. For the tournament enthusiast, the biggest poker sites offer satellites to major land-based events, sit-and-go tournaments starting regularly at any time of day, and large multi-table tournaments with big payouts. PokerStars, the world’s biggest poker site, offers weekly tournaments with prize pools over one million dollars, and sends over 1,000 players each year to the Main Event of the World Series of Poker.”


These network effects alone provide a significant moat, but PokerStars has taken advantage of its dominant position to further strengthen it. It has the most robust software and can handle 600k simultaneous players (versus ~30k average daily peak and ~250k record peak). In a business peppered with shady operators, PokerStars has built a reputation as the most trustworthy with respect to account protections and game fairness (see notes on the FullTilt acquisition, below). Finally, they take advantage of their scale to offer net rakes (fees) that are lower than their competitors, further enhancing their competitive position.


The economics of online poker and online gaming are very attractive: PokerStars earns revenue by collecting a “rake” on every pot played. In individual games, this rake can vary from 4.5% to <1%, though a significant fraction of this goes back to players in the form of rakebacks, bonuses, and loyalty rewards. For tournaments they collect a 5-10% fee (7.5% for their “Sunday Millions” tournament). Jurisdiction-relevant gaming duties are “above-the-line” (they are not treated as corporate taxes, and they fall between revenue and EBITDA). Online poker (and online gaming generally) features very high margins and returns on capital in the high double digits. Adjusted EBITDA margins in Q3 2014 for Amaya (PF consolidated) were 45.2%. CapEx is minimal. Corporate-level taxes are also minimal, as the company is domiciled on the Isle of Man. Also, no working capital is required to grow—in principle, the company can run on negative working capital due to customer accounts. In summary, online gaming is an extremely attractive business, and Amaya is now the leader with a substantial moat.


High Growth

Amaya/PokerStars also has a long runway of growth ahead of it. First, online gaming is a rapidly growing market. From the EU website: “Online gambling is the fastest growing service activity in this sector in the EU, with annual growth rates of almost 15%. Annual revenues in 2015 are expected to be €13 billion, compared to €9.3 billion in 2011. There is a wide offer and take-up of online gambling services in the EU, with 6.8 million consumers currently participating in online gambling.”


Second, prior to this summer, PokerStars was a poker-only company—it did not offer online slots, table games, or sports betting. This is a critically important point because poker is actually a small portion of the online gaming market. According to management (and corroborated by various other sources), the online poker market generates $4B in annual revenue, versus $17B for online sports betting and $8B for other online gaming. Moreover, online casino and sports are much more profitable than online poker. 888 and BPTY—comps whose revenue includes a substantial poker component—have EBITDA margins much lower than similar-sized peers with minimal poker exposure (18.3% avg. for 888 & BPTY vs. 25.4% avg.  for Betfair, Unibet, and Betsson in 2013). Further, BPTY broke out its 2013 EBITDA margins by segment: 22.8% for sports betting and 20.9% for casino versus 6.7% for poker. PokerStars is just starting to roll out casino games and a sportsbook on its platform. They began the roll out by testing the strategy on the (much smaller) FullTilt platform and on, and they have reported double-digit cross-sell rates in those tests already. These substantial incremental revenues will come in at extremely high incremental margins, giving PokerStars the opportunity to increase earnings several-fold over the next couple of years without entering new jurisdictions. We tend towards being highly conservative in modeling growth and skeptical of management growth claims, but this is amongst the lowest-hanging fruit we have seen.



A (very abridged) paragraph on the history of PokerStars and online gaming: online poker burst onto the scene in the mid-2000s; PokerStars-sponsored Chris Moneymaker’s 2003 World Series of Poker win is commonly cited as the pivotal event. The dominant site was PartyPoker (now BPTY) at the time. In 2006, then-President Bush signed the UIGEA, which banned online gaming in the US and led the owner of PartyPoker to discontinue offering their products in the US. This opened the door for then-private PokerStars, arguing that poker is a game of skill and therefore not gambling (and therefore not subject to the UIGEA). Authorities in the US initially did not enforce the UIGEA, and this led to PokerStars’s becoming the dominant global online poker site, a position that it has held onto firmly since, even after it was finally ejected from the US in 2011. Poker players refer to the April 15th, 2011 ejection of PokerStars from the US as “Black Friday;” on this day, the Department of Justice seized the domain names for PokerStars and FullTilt and indicted both companies and their principals for bank fraud and money laundering. PokerStars promptly refunded all US accounts and later purchased the assets of then-rival FullTilt through a settlement with the DOJ (player balances at FillTilt disappeared on Black Friday, presumably stolen by FullTilt management). In addition to paying a fine as part of this settlement, PokerStars also voluntarily refunded all of the accounts of former FullTilt players, further enhancing its brand image in the global poker community. All of PokerStars/FullTilt’s revenue currently comes from outside the United States, with the majority from Europe. This history with the US DOJ explains why PokerStars has not been able to get a license to operate in New Jersey, Delaware, or Nevada (the three states that have legalized online gaming), though it is expected that the transfer of ownership of PokerStars from its founders will clear the way for regulatory approvals in the US.


The various jurisdictions (countries) around the world can be classified into three buckets by their regulatory status: regulated, grey-market, and black-market, though the lines can be blurry due to ongoing legal challenges and/or ambiguities. The majority of Amaya’s revenue comes from regulated jurisdictions in the EU, while the remainder comes from various grey-market areas. PokerStars does not operate in black markets like the US, though it does operate in some markets that may be considered “very dark-grey.” While we do not like the grey market exposure, slow progress is being made toward regulation in many of these areas, and we take additional comfort in the fact that none of these jurisdictions account for more than 10% of revenues, and lawmakers across these counties generally do not act in concert.


There is additional opportunity for Amaya with black-market jurisdictions that are becoming regulated (most notably the states of New Jersey and California), though we do not incorporate this possibility into our base-case model. Nevertheless, much of the press around Amaya/PokerStars focuses on whether the Amaya transaction constitutes sufficient cleansing for PokerStars to be allowed in these states.


Management & Owners

Amaya founder, President and CEO David Baazov has led Amaya since 2006; he is currently 34. He has an impressive track record in growing Amaya from nothing. While his age is a red flag, our conversations with him have left us impressed. His recent profile on Forbes is an informative introduction. He has a large stake in Amaya (he was flirting with billionaire status when the stock was at its recent highs). GSO (Blackstone) served as the primary advisor on the deal, and they hold a significant stake through warrants and the preferred shares. Blackrock was also a participant.


What is it worth?

PF 2013 revenue for the combined company would be $1278M (20.4% 3-year CAGR), and adjusted EBITDA would be $474M (42.5% 3-year CAGR). PF 2015E adjusted FCF projects to be ~US$420M on US$600M-640M guided EBITDA. A 20x multiple implies a C$46.00 share price (using a conservative share count pro forma for full dilution from the preferred shares converted at C$20). Even a 20x multiple may be conservative, given the business’s dominant position, operating leverage, and strong growth prospects. Note the increased benefits of deleveraging, given that the interest payments provide little tax shield.


Why is it undervalued?

·         No existing investor constituency—Rational was a private company with no debt.  There is no pre-existing group of investors familiar with the company and there are no comparable companies that trade in North America.

·         Minnow-swallows-whale dynamic obscures financials of the proforma combined business—backwards-looking SEDAR filings on Amaya are irrelevant to evaluating the business.

·         Limited financial information on the Rational Group—As a privately-held business with a checkered past, there is very limited information available on the quality, size, profitability, and growth prospects of the Rational Group.  Only the October BAR filing and the Q3 results begin to reveal the profitability here.

·         Price anchoring—Shares are up 5x on the year and 50% from the secondary offering to fund the deal. This backwards-looking perspective ignores the massive growth opportunity that PokerStars has through the roll out of casino and sportsbook.

·         Pre-deal price action inquiry—Shares climbed >50% in the month prior to the deal announcement, with a rumor of the deal having been reported on several weeks before the announcement. Canadian authorities are investigating this per standard practice, but the initial media report by Forbes (December 12th) mischaracterized the document transfer as a raid (later retracted), while other media outlets ran with the “raid” story.


Key Risks

·         Regulatory change outside the US— Regulatory disruptions are an ongoing risk in all markets, though PokerStars is reasonably well diversified and now gets a majority of its revenue from regulated markets.

·         Regulators keep PokerStars out of the US—This transaction was structured in a way to make PokerStars more palatable to US regulators, and some have already made positive comments with regards to the deal, but this is an uncertain process. Moreover, we believe that Amaya shares are cheap without PokerStars in the US, though the US-related news may dominate the headlines.

·         Additional M&A—As the Forbes profile makes clear, Baazov has even grander ambitions. While his track record speaks for itself, additional large transactions may not be viewed favorably by the market, as there are few assets out there of comparable quality.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



1.      The company reports a clean quarter (and year) of their combined results, giving the market a clearer picture of their size, profitability, and growth.  2015 guidance is also anticipated when they report Q4 2014 results. 

2.      The addition of other gambling verticals to the PokerStars and FullTilt brands starts driving substantial additional, high-margin revenue.

3.      Amaya gains a primary listing in London (where most other online gaming companies are listed). A primary listing in NY is also possible; management has committed to greater visibility through one or the other by October 2015.

4.      Major sell-side firms pick up coverage, increasing visibility

5.      PokerStars begins to earn regulatory approvals to enter US states (NJ anticipated soon).

6.      Unusual trading inquiry scare fades


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