Description

This is a simple idea which won't blow your PM's socks off, but should make good, low risk money.

Aristocrat signed a merger agreement w/ NGMS on 5/15/2023 for a $29.50 takeout price.

Last week, coinciding with the terrible situation in the Middle East, NGMS stock price gapped down slightly and has dribbled more today. I believe this move is technical and doesn't reflect the probabilities of the situation.

There is currently a ~16% deal spread, translating into a ~23% to ~30% IRR to deal close. IRR could be higher or lower depending on close date, but these are based on 5/15/2024 and 7/15/2024.

Here is how I see the situation:

- The acquiror, Aristocrat, really wants this asset following its failure to get Playtech in order to build out its tech stack and expand international access/products. (Read the merger transcript for great color.) They are a A$26B company with net cash and generated A$1 billion cash last year.

- Only 30% of NGMS employees are based in Israel and its business is primarily based in US/Europe/UK. It's assets/core value prop are digital IP which should be completely moveable, plus big contracts not based in the Middle East.

- Reasonable best efforts standard, specific performance, acquiror does not have unconditional termination right. Very seller friendly.

- MAE is highly, highly unlikely as war is carved out and there is a customary disproportate impact test. 

- The drop-date date is 7/15/2024, although it can be extended by either party for 2 months.

- While there are various governmental and gaming regulatory approvals needed to close the deal, risk here appears to be minimal as management has indicated as such (and doesn't even bother to disclose the specifics) and as judged by the market at an ~8% spread pre-conflict (reflecting arb interest cost between now and close).

- There were 2 shareholder approvals that needed to happen at NGMS, the first of which has already been passed. The second is also a formality that happens after regulatory approvals are granted and they redomicile from Luxembourg to Cayman. It requires 2/3 vote, but there is a support agreement from 61% of shareholders.

- Variously, closing has been communicated as CH1 2024 (6/30/2024), within 1 year of announcement (5/15/2024) or Aristocrat's FY 2024 (9/30/2024).

I think there is a very small chance the deal breaks, unless regulatory approvals somehow drag this out past the termination date + 2 months, at which termination or recut is possible, but I believe Aristocrat still really wants this deal and would do what it takes to close.

NGMS is a good business, which you can read further about here. If the deal did break for some crazy reason, I am comfortable owning the stock (and did at pre-deal prices of $12 - $15) as it will do well with time regardless of the economy.

Price could continue to go down if war escalates or drift for no reason at all. It saw similar dislocation in late June/early July. Interest rates could worsen the payoff.

I am not a lawyer and was hoping to get a merger arb legal eagle to opine on this before I posted as well as gather some more data, but I thought better to get it out there w/ the fluid situation and revise later. Happy to discuss more in comments, and hopefully others can provide their views if there is anything misinterpreted here.

Catalyst

Deal close mid-2024