Description

Special situation illiquid small-cap with a fatigued shareholder base likely nearing the end of a months-long strategic review with upside of 40+% in the event of a deal and limited downside if not, as the current price implies punitively low odds of a transaction.  I expect resolution either way by the end of the year.

Bragg Gaming Group was last written up nearly four years ago by puppyeh, whose comprehensive write-up (and incredibly well-timed thesis) describes the business in detail.  No need to rehash that here.  This write-up will focus on elements that have been in place over the past three years that have led to a collapse in the stock price, as well as their recent resolution, which has led to the current favorable setup.  Again, this is an illiquid small-cap (~$100k/day), effectively uncovered by the street, with no fintwit following and a shareholder base that has been put through the wringer.  It also trades on the Toronto stock exchange despite reporting financials in Euros (although has recently listed on the NasdaqGS, as well.  Size accordingly.

History

In short, BRAG is a leading supplier to online casino, sports betting, and lottery operators.  BRAG provides online casino content and technology products that include a player account management (PAM) platform with payments, compliance and CRM functionality, and fully managed operational and marketing services.

In the aftermath of the online gambling mania of 2021, BRAG’s stock has collapsed and languished even while the business has performed reasonably well.  Indeed, over the past five years revenue has CAGR’d at 32% and Ebitda at 76%, yet the stock is currently lower than it was when puppyeh wrote it up in late 2020!

There have been good reasons for this.

1.       BRAG has suffered from enormous customer concentration risk.  Dutch gaming operator, BetCity, has historically comprised ~40% of BRAG’s revenue, and with a contract that has been set to expire early next year, as well as Entain’s 2022 acquisition of BetCity, investors have been worried that BRAG might lose this business, or at the very least find itself in a terrible negotiating position when the contract expired.

2.       In 2022, BRAG announced a bizarre financing arrangement with The Lind Partners to help fund their growth initiatives.  A convertible note brought in ~$8m for BRAG, but came with a floating conversion price equal to a 12.5% discount to the five-day VWAP immediately prior to each conversion.  The Lind Partners could convert a maximum of up to 5% of the note’s value every month ($400k).  The note was only 2-year paper and the Lind Partners had no interest in long-term equity ownership, so in order to turn a profit, they simply had to convert their note into shares and then sell them on the open market for a price more than 12.5% below the five-day VWAP.   As you can imagine, this led to a perpetual and brutal technical overhang on an already illiquid stock.

3.       Finally, Matevz Mazij, the company’s largest shareholder with over 20% of the shares, historically had no relationship with the street and appeared able to block any potential transaction, leaving many to doubt the ultimate salability of the business.

Simply put, solidly improving business fundamentals and a dirt cheap valuation were still not enough to overlook these three issues, and the stock has significantly underperformed its peer group as a result.  However, in May of last year things began changing quickly. 

Last year’s annual meeting saw a flurry of activity.  I suspect a group of unhappy shareholders was making waves behind the scenes.  In the lead up to the meeting, the board announced the nomination of three new members to replace three of its existing members.  The new members were stronger, more experienced professionals.  In a telling sign of shareholder discontent, over 20% of the register voted against the reelection of the existing CEO at the meeting a month later.  Two months after that, the newly reconstituted board fired the CEO and installed Matevz Mazij, the company’s single largest shareholder as CEO.  The reason given was simple:

(from the press release)

“Mr. Mazij, Bragg’s largest shareholder and the founder of Oryx Gaming…takes over as CEO for Yaniv Sherman, who stepped down. The change was made following a thorough evaluation by the Board and to ensure the optimal alignment of the best interests of the company and its stakeholders.”

Two months later, BRAG announced the extension of their contract through 2025 with their largest customer, BetCity, concurrently with their Q3 earnings.  While not a perfect solution, the customer concentration is clear to improve significantly, with revenue from BetCity already at 27% of total in Q3 2024 down from 38% in the prior year quarter. 

Then, with the release of the following quarter’s earnings in March of this year, the CEO announced the formation of a special committee to explore strategic alternatives.

Where are we today?

Since the announcement of the strategic review, a number of small details point to continued progress toward a transaction of some kind.  The CFO left to pursue other career opportunities almost immediately following the announcement of the strategic review and has since been replaced by a finance professional on an “interim” basis.  The Chief Strategy Officer and IR contact has also left.  Finally, despite declaring no intention to provide any updates on the process until it’s complete, management has continued to describe themselves as “pleased” and “encouraged” with how it’s going. 

Just four days ago, BRAG’s CEO (and largest shareholder) spoke on the NEXT.io podcast and had the following to say:

“We believe there is value this company has that is relevant to the strategics in this industry and that we can effectively unlock this value through an M&A process.  There’s a lot going on.”

“I think we could be a very attractive target for a number of different B2C operators but also a number of different land-based B2B companies, as well as online B2B companies, whether that is a sportsbook looking to venture into an iGames space or a content provider that wants to acquire an aggregation or a content delivery platform and optimize the margins in that respect.  So there are a number of different angles that could be explored and that are being explored.”

I recommend listening to the actual podcast.  The single largest shareholder sounds singularly focused on getting the company sold and his tone suggests confidence in a value-enhancing transaction of some kind.

Possible Deal Value

Fortunately, the industry has seen a flurry of deal activity over the past two years, so we have a number of comparable transactions to analyze:

What stands out about the transactions above, particularly among the smaller ones sized similarly to BRAG, are the mid-teens Ebitda multiples at which these deals are being struck.  While these are pre-synergy multiples, BRAG’s paltry mid-teens Ebitda margin compared with the 30%+ margins of the other similarly sized targets suggest ample cost and revenue synergies for the right buyer.

Evolution AB recently announced its acquisition of similarly sub-scale Galaxy Gaming for 10x Ebitda, and Galaxy’s healthy 42% Ebitda margins presumably imply fewer available synergies.  Applying this bottom-of-the-list multiple to BRAG’s currently guided standalone Ebitda of $17mm yields a value well north of $10/share, or 55% above the current quote.

It’s worth noting that the past two quarters have seen a slowing in growth, and that it’s become clear that the terms of the BetCity contract extension were not particularly favorable for BRAG.  Fortunately, I don’t think any of that matters at this point.  If anything, the past two quarters have served to highlight the need to tuck this asset into a larger organization that can help it scale and operate more efficiently.  The tone and posturing of the CEO together with the increasing consolidation in the space and the multiples at which companies are transacting provides sufficient asymmetry at current prices.  Mgmt seems laser focused specifically on a full sale of the business and a price of anything less than 50% above today’s levels would represent a new low for the industry, just when activity appears to be heating up.

Catalyst

Deal announcement