GAN Limited (GAN) – Company Sale – Upside TBD
Current Price: $1.32
Expected Price: $3.00+
Upside: TBD
Expected timeline: 2-3 months
This idea was shared by Neil.
GAN Limited is a fallen-from-grace backend software provider for the online casino and sports betting industries with a depressed share price, ongoing strategic review, and a recently announced financing agreement that hints some kind of transaction is imminent. The new financing agreement signed on April 13 was way too generous, especially keeping in mind that GAN was close to breaching its covenants and was uncertain of meeting its financial obligations. It also included a couple of other curious tidbits.
- The new credit facility was provided not by financial or distressed debt investors, but rather by Sega Sammy, a Japanese company mainly involved in the development of video games, amusement park business, and pachinko/pachislot machines. Why would a $5bn market cap Japanese conglomerate be interested in making a distressed debt investment into a struggling US-listed nanocap? It seems that the most likely reason is the potential full buyout and more time required to perform the due diligence.
- The principal balance was expanded from $30m to $42m, which is again is rather unusual for a company close to breaching its covenants.
- The interest rate was set at only 8%, when the one-year risk-free rate stands at 5.3%. This is also lower than the previous $30m credit facility entered in Apr 2022, which had an interest rate of SOFR + 9.5% or a 14.5% equivalent today).
- On top of that, the interest on the new credit facility is payable in kind.
- Finally, the new financing agreement also “implemented a prepayment fee of 14% during the first five (5) months after the effective date of the Second Amendment, which fee is payable if a change of control transaction is signed within such five (5) month period.” This is likely the portion of the pay-off that Sega Sammy is aiming to receive (on top of potentially buying more time to perform due diligence). The 8% base interest rate would not be enough to compensate for the risks of loaning GAN Limited the funds.
- The specific period of ‘5 months’ for the prepayment fee (why not till the end of 2023? or one year anniversary of the loan?) is a strong indication of management’s confidence in the strategic review culminating shortly.
From these strange financing terms, it would seem that the strategic review is progressing well and the company just needed some additional time to carry it through to the finish line. Sega Sammy, quite likely to be one of the interested parties, agreed to provide this financial flexibility. At the same time, Sega ensured itself a juicy payoff on the loan in case it is not a winning party in the bidding processes. In a sale scenario, I expect GAN to be worth $3-$5/share.
A bit of history
GAN came public during the thick of the Covid-19 crisis in May of 2020 when anything you could do from home (in this case, online gaming) was all the rage. Previously, the Company had been listed on the AIM market in the UK, and a massive arbitrage existed between AIM listed micro-cap software companies and anything on a US exchange.
Back in May of 2020, GAN was a B2B software company that provided a comprehensive solution to its casino customers for both online real money and simulated gaming. Recall that in May of 2018, SCOTUS struck down a 1992 federal law that effectively banned commercial sports betting in most states, opening the door to legalizing a $150b + sports betting market. By the time GAN was ready for its Nasdaq IPO, Sports Betting was also a hot commodity. Draft Kings came public in December of 2019 when it merged with a SPAC, and GAN counted FanDuel as a large customer for its B2B business. It turns out that the technology to manage a robust best-in-class end-to-end player management system that can accept wagers, transfer funds, record rewards points, geolocate, etc. is not that easy of a proposition. GAN had spent nearly a decade developing its software, all of which (ex the geolocate) was proprietary. In fact, GAN even owns a patent (that they have accused MGM of infringing) that ties player’s reward activity from online gaming to the player’s rewards account at the physical property i.e., I earn “points” for playing blackjack at MGM’s online site, that I can use to buy a cheeseburger at an MGM casino.
Like many IPOs of the Covid era, GAN stumbled out to gain its footing out of the gate on both guidance and execution. They purchased an online B2C business called Coolbet in November of 2020, for the princely sum of $177m. Coolbet is a B2C operator focused on Latin America. At the time it was a bit of a head-scratcher as now we had a B2B and a B2C business. However, the real prize for GAN with Coolbet was their proprietary sports betting platform that GAN was able to integrate into its player account management (PAM) offering. Before the Coolbet deal, GAN offered Kambi and IGT sportsbooks to its US platform customers like Churchill Downs. The transaction valued Coolbet at 5.7x trailing 12-month revenues of $31 million. The market did not like or understand the deal, and GAN would fumble and miss numbers throughout all of 2022; here we are at $1.32 per share today.
For more background on the company, you can refer to these two VIC write-ups and discussions – 2017 pitch when GAN was listed UK and 2020 short pitch when GAN was trading at $24/share.
Recent developments
The story took a turn during March of this year when GAN announced that it would pursue a strategic alternatives process which includes a “range of options” to maximize shareholder value. They hired B Riley to help assist in this manner. The review was announced with 4Q results on 3/30. Since that time, several interesting events have occurred which lead one to believe management is taking quick action, but more importantly, the company could be outright sold OR perhaps either or both divisions could be sold separately. The upside from the current valuation could be north of 100% in either scenario. The actions taken thus far include:
- When the review was announced at the end of 1Q, GAN was in default on their debt which posed a significant risk, especially in today’s difficult lending environment. However, on 4/14 in their 10-K, they disclosed an amended credit facility that cured the default. And on 4/19, in a 8K, they disclosed “Sega Sammy” as the new lender. As described in the beginning of this write-up, the new debt piece had revised terms more favorably to the company, 8% annual which could be paid in kind. They also included a prepayment fee of 15% if during the first five months if there is a change of control.
- GAN significantly reduced the cost of their licensing relationship with Ainsworth by exchanging a $15M liability for an equity stake in the company.
- GAN exited the Ontario market where its B2C division, Coolbet, was not realizing a fast enough rate of return on marketing dollars spent.
What comes next?
The Sega Sammy relationship is very peculiar. Japan is legalizing casinos with licenses to be awarded and casinos to be operationally in the next few years (see link: https://www.reuters.com/markets/asia/japan-approves-osaka-site-countrys-first-casino-2023-04-14/). The strategic fit for Sega is logical. Management is on record stating the amended debt deal with them occurred very quickly, which is interesting on its own, but the prepayment feature of the new agreement raises some questions too. Did they buy themselves some time to perform due diligence? Why only 5 months? With nearly 3 months passed now, one could surmise a good probability of something happening within the next 2 months. Perhaps Sega will make a more aggressive move or perhaps the company has other acquirers in tow who could take action before or after that prepayment deadline.
The Gaming space has been active recently. In recent weeks, Fanatics made an offer to acquire PointsBet for $150m, only to see DraftKings top that offer at $195m a few weeks later, and just last night Fanatics came back over the top with a $225m bid. Aristocrat also has proposed to acquire NeoGames for $1.2bn. Deal activity is elevated and at the very least, it should support the theory that GAN can command a valuation much higher than what the market is assigning it today.
Other notable points to consider:
- It seems likely the company could restructure their B2B division to ensure a quicker path to profitability. The B2C business is solid with a strong ROI on marketing dollars spent. However, they are unlikely to do anything if they are in talks with other suitors, therefore the absence of any action might lead one to believe the strategic course is moving forward.
- The company does not have a permanent CFO. The hiring of a new external CFO would be a sign of the company planning to remain independent. I would view no change or the promotion of someone internal as a sign that possible sale is on the table. Given the recent miss in guidance despite them announcing guidance on the last day of 1Q, it seems safe to say the interim CFO may not be in good standing.
- B2C business reported nearly $90M in revenue in 2022 and they recently achieved record revenue in their largest B2C market this year.
- B2B division is rolling out their platform across Wynn properties in the US.
- Shares were weak following 1Q results likely due to the fact they missed guidance slightly but also due to a renegotiated deal with FanDuel which analysts have surmised is on less favorable terms. When asked about this topic, management said they remain in negotiations with FanDuel, the relationship is healthy, and terms could change more favorably in the future.
What could GAN be worth?
Here is one way to look at GAN’s value:
- B2B is worth 3-7x revenue. B2B is where all the proprietary technology resides. To recreate GAN’s PAM offering would be very challenging. If you are SEGA and you know that online gambling is coming to Japan, it is a rounding error to purchase GAN’s tech at today’s prices and pick up current customers like Wynn and Red Rocks. You also get exposure to the GAN suit against MGM, which is not trivial, and can probably be settled for a large number.
- B2B should be worth $150m.
- B2C is worth 1.5x revenue, or 6-8x EBITDA. B2C has strong cash flow, but participates in unregulated markets that a lot of players don’t want to participate in. There are a number of international buyers that could have an interest.
- B2C should be worth $120m+, a likely conservative look at this segment and below where they purchased it 2 years ago.
- That sums up to total value of $270m. Assuming net debt at zero and using a fully diluted share count of 50m, results in $5.40/share valuation.
Again, what are we playing for here? There is value in recent contracts, embedded tech, the B2C business (following recent write-downs) and iGaming exposure. Shares have languished out of sheer fatigue and disappointment, not to mention a very real debt problem that Sega solved.
Dermot Smurfit, the CEO of GAN, owns 2.5m shares of GAN personally. The Smurfit family is one of the most prominent and successful families in Ireland, having built multi billion-dollar businesses. Dermot is in the back half of his 40s now. He did a tremendous job of building GAN into what it is today, from its roots as a small startup. He had the vision and risk appetite to see this company through a treacherous regulatory landscape and cutthroat competitive environment. Dermot runs the show here. The stock is unlikely to go back to its Covid highs of $18-$22. Now is the time to sell the Company, take the cash and move on. If GAN sells one division (B2B or B2C) and not the whole thing, the stock could see $3 or better, $5+ isn’t out of the question given the #’s presented above.
Looking at the balance sheet now.. They have 40m in cash and 28m in debt. Is cash restricted?
No, it is not restricted.
If they have more cash than debt and the business is cash generative why did they need the sega loan to remedy the covenant breach? Couldn’t they just redeem the existing debt with cash on hand?
Thank you for the write-up! I had a closer look at the company when they signed the new credit agreement.
I hope the company gets sold rather sooner than later. I’m just not sure how much the company is worth.
Have you talked to industry insiders? Your B2B valuation seems to be very high. My understanding is this segment has no value inside of GAN, not sure how much it is for a strategic acquirer.
@ Avi, yes they have net cash. They could in theory have redeemed the debt but the company is not yet cash flow positive, thus they need capital and I believe they are more than comfortable with the debt as a means of continuing to grow.
@ Pertzz, the value of the company is certainly debatable especially the B2B side of the business as it’s currently unprofitable technology (albeit with marquee customers). I don’t agree with your comment: “My understanding is this segment has no value inside of GAN, not sure how much it is for a strategic acquirer.” That aside, this is what makes a market. The company believes their assets are worth much more than the current valuation. Management has said they will not be giving either division or the company as a whole away. Analysts (take them for what they’re worth) vary with their valuations as well, but Hallum and Northland have both written values north of $3/share and $5/share. Coolbet is easier to value as it has more direct comps and is worth much more than the current valuation alone. The B2B is more of a wildcard but given Sega’s involvement (and likely interest from others), I’m comfortable with the upside scenarios at the current valuation.
Thanks for this. Any idea on the reason behind the ~9.5% drop today? I can’t seem to find any notable developments
No reason. Stock can be volatile at times.
@Neil: I guess my comment came across as a bit negative even though I agree with you that shares are worth at least $3/sh in my opinion. Maybe closer to $4/sh for a strategic acquirer.
Thanks for the write up!
What is the reasoning behind the estimated 2 – 3 month timeline?
The indicated timeline mostly relies on the terms of the new financing agreement. This was signed in April and had a specified period of ‘5 months’ for the prepayment fee in case of a change of control.
I would add analyst commentary at the onset of the announcement indicated a view the process would be quick. The Northland analyst even went as far as to say it would be completed by the 1Q earnings announcement (ultimately wrong but an aggressive perspective without reason to say so). That opinion combined with the elevated M&A activity in the space (which only picked up after they announced strategic alts) points to the probability of something in the near term.
BetMGM with a profitable Q, ahead of schedule. May bode well for other operators. https://www.morningstar.com/stocks/mgm-resorts-betmgm-winning-revenue-profits-sports-betting-igaming-market
CEO selling $178K on 4/24 not a red flag? Timeline would be 4/14 new credit line, 4/19 would be annoucement of creditor and next trading week CEO sells?
I don’t see that sale, Safiyy. I only see the CEO selling shares on 4/10 after about 87k RSUs vested on that date, and he proceeds to sell less than half of that, which is worth roughly $45k. This is his compensation, so it seems alright to cash in on some of the vested RSUs. Moreover, this is a very small part of his overall stake, which is about 1.8 million shares, so he only sold less than 2% of his holdings. Does not seem concerning to me.
Form 4: https://www.bamsec.com/filing/149315223011785?cik=1799332
I got some shares in this, but if CEO didn’t offload his shares at $10+, when there was plenty of liquidity to do so, why would he sell now at $3-5? I can imagine he would take a reputation hit from this, IPO at $25 and then 3 years later sell out for a fraction of that.
Unless the prospects of the business are hopeless as a standalone company, or he is completely bored with running this, he will probably get to $3-5 in a couple of years with growth and assuming they can hit 15% ebitda margins without selling out.
According to today’s call apparently the started to receive some “indications of interest”:
“As an update on our strategic initiatives, we have received indications of interest from prospective bidders interested in acquiring all or part of our business. A special committee of our Board of Directors, comprised of non-executive directors, is evaluating those alternatives. The indications of interest are non-binding; no definitive agreements for a strategic transaction have been reached at this time. There is no assurance that a transaction will take place, and no timetable for completion of any transaction.”
Could be a deal soon based on Q2 commentary just released and no conference call:
“As an update on our strategic initiatives, we have received indications of interest from prospective bidders interested in acquiring all or part of our business. A special committee of our Board of Directors, comprised of non-executive directors, is evaluating those alternatives. The indications of interest are non-binding; no definitive agreements for a strategic transaction have been reached at this time. There is no assurance that a transaction will take place, and no timetable for completion of any transaction.”
Conference Call Details
“Due to circumstances related to the strategic review, GAN will not host a conference call to discuss its quarterly financial results for the quarter ended June 30, 2023.”
Agreed. They did a call last Q, but not one this time. What is different? IMO that likely means they’ve been advised not to… and likely because if you’re in the latter stages of negotiating, silence is the safest move to make. We shall see.
these 2Q numbers are just horrendous – large revenue declines; negative EBITDA; cash burn absent a favorable move in W/C. I have no idea how to value this and i would agree the Sega Sammy angle is interesting. but the idea that anyone is forced to pay a premium for this suite of ‘assets’ is very tenuous. this business would have been a going concern without the content + debt restructuring deal and may still get there in time given the state of the underlying business. maybe you get lucky and squeeze a premium out of a sale here given the low absolute size of the entity but it is a very tricky proposition, in my view.
Is this something you’ve been looking at for a while or just dove in today? Curious.
ive followed this company for many years
Any concern around the continued decline in B2B revenue (slightly below $10m this quarter)? The revenue mix is shifting toward B2C, which it sounds like everyone agrees will get a lower multiple than B2B. Should we reduce our assumed value accordingly?
Agree that all signs point toward a likely sale in the next few months.
https://twitter.com/typicalcapital/status/1689308747154305024?s=20
Thoughts?
Looks like today’s crash is due to: https://sbcamericas.com/2023/08/11/wynnbet-closure-review-sportsbook/
WynnBet, which GAN services, is exiting 8 out of 12 US state markets
Any idea how much this will impact cash flow going forward?
Onwards from this, any perspectives on how this will impact the outcome of the strategic review? Unless I’m mistaken, the loss of any WynnBet associated revenues shouldn’t really change the strategic rationale / value at all for Sega Sammy?
A lot of revenue to suddenly disappear though? They would either have to rapidly fire a lot of people and close shop or be sold. Can’t imagine that will help get a good price here so I sold last week.
I agree with @Hillside, I don’t think the partial loss of Wynn changes anything. In fact, for those in the camp that do believe it’s a negative, wouldn’t that make management more inclined to sell? Clock is ticking on the 5 months. We have a few more weeks. I’m expecting positive news in the next month.
i have no position long or short, but have commented as to why i think this is actually a very risky trade and despite the apparent attractions of the Sega Sammy set up (the logic of which i do like), one to avoid.
neil, what do you think this business is fundamentally worth, on a standalone basis, if Sega Sammy walks and/or no one else wants to buy it? surely that is a reasonably possible outcome at this stage (or indeed earlier) as this review has been going on since last year at this point. given the reported results/Wynn news i think its fair to say only an irrational buyer (like Sega Sammy) would think B2B is worth anything. Coolbet certainly has some value (the acquired customers, etc) but a fraction of what they paid for it and remember this business is still somewhat levered (understanding that a lot of cash on the B/S is earmarked for ongoing burn or restructuring needs if it cant be sold).
frankly I dont think its a stretch to say this is a going concern if the business cant be sold – indeed that was the warning in the accounts, or close enough, at YE – and that means, even with 2-3x upside if Sega Sammy somehow comes through, this needs to be sized very small if played at all.
You mean “this is *not a going concern if the business can’t be sold”?
sorry one final thought: this reminds me a little bit of the ATTO saga (co up for sale for an extended period; management continually saying bidders were interested/close; lots of fundamental deterioration during the bid process; levered balance sheet) and ultimately when the thing couldnt get sold it filed. GAN is not as levered as ATTO so that is a clear difference; but I would argue many of the other strokes are the same. just a thought.
I’ve explained my perspective in the above comments. No change to what has been said previously. B2B is undoubtedly the harder piece to value. It’s a tech asset without the scale of B2C. We shall see.
@puppy, you seem to be approaching this with a negative bias and have a long history with the company. I prefer to look at the facts and believe their recent comments point to a positive outcome. As a reminder, “We have received indications of interest from prospective bidders interested in acquiring all or part of our business.” +++ “The Company continues to work toward a swift resolution to its strategic review process and remains pleased with both the status of negotiations and the options available to maximize shareholder value.” I would not have included either of those statements in a PR if I did not think things were moving towards some type of transaction in the near term.
And to your last point, the 5 month prepayment window for Sega has been a notable piece of the thesis for months. I don’t believe the process has dragged on. In fact, had I been asked in April, I would have said the most likely timeframe is towards the end of the window or right after.
@puppy – a main difference between the ATTO situation and this is the fact that a logical buyer provided emergency financing to keep the company afloat, so their claims of having buyers lined up seem at least somewhat more credible.
That being said, sale processes are hard to handicap, plenty of things can go wrong. I agree that this may have going concern risk if a sale doesn’t go through. Do we think the Smurfits would let this file BK? A take-under post broken process by the family may be a more likely downside scenario (albeit at a value below today’s price…)
This is a small sized bet, no question, but I’m not sure the risk-reward is that unfavorable given the potential (emphasis on potential) value of B2B. If they get $100m for B2B and $75m for B2B that’s still a double from where it trades today. A deal to just get your money back seems like a very low bar for a buyer to clear if a motivated buyer doesn’t come through with a premium.
In a negotiation, the Smurfits can credibly claim that will just finance it for the next X years until they can sell for a desired price (we don’t want that, but a credible threat to walk away may help extract a better price). I’m not familar with the ATTO process, but that may be another difference.
It feels like someone at Sega Sammy had to really vouch for this deal to get this financing approved, so seems unlikely that they would walk unless there is a serious issue uncovered in dd. Japanese conglomerates are notoriously slow buyers of assets, so the delay isn’t that suprising.
Just my read of the setup. Lots of uncertainty, not an asset you’d want to own for 5+ years (unlike LFCR, which is a similar situation), size accordingly.
‘a logical buyer provided emergency financing’ – sorry, but let’s be clear: Sega Sammy is not a ‘logical buyer.’ they have no online gaming business at all. they have no online/B2B tech stack, nor any kind of B2C exposure. they are no doubt considering a greenfield acquisition here to get into the game, but there is (to my read) zero synergy for them in buying the GAN assets (they make pachinko games and content; computer games; and have an equity stake in a physical casino in Korea). this would be a new business line for them in its entirety.
no doubt neil makes some good points and this may well work out well (and ill be the first to give him an attaboy when he makes a killing getting this right) but Sega Sammy is a left-field miracle buyer, given credence only by their willingness to underwrite a 5 month grace period to look at the books – during which time GAN reported two horrendous quarters and Wynn left the building. would it really be that surprising if the newbie buyer just got cold feet and walked?
for what its worth, neil, you have still not attempted to value what standalone GAN is worth absent a deal. i stand by my claim that that analysis is missing here and is a crucial piece of the equation given the going concern risks involved.
lets see how it goes.
Thoughts on time her? The “5 month” window is close to expiring.
I have the same question regarding the 5 month window.
*bump*
Nothing to add at the moment. Prepayment penalty on the debt lapsed, so anything can happen now without penalty. Clock is ticking.
After some deliberations I have decided to remove GAN from active ideas and close it on SSI tracking portfolio.
The 5-month window, during which Sega Sammy would have received a large prepayment fee in case of a change of control transaction, has recently passed without any announcements from the company. I considered this to be the strongest catalyst, that suggested the strategic review might result in a prompt sale of the company. This catalyst is no longer in play. While the strategic review is still ongoing and a transaction could possibly be announced any day, I think the investment case has gotten far weaker. Without the 5-month window for the loan prepayment bonus, Sega Sammy’s agenda here is not really clear and might not benefit minority equity shareholders. There is also a risk that the initially contemplated potential acquirers (including Sega Sammy) have gotten cold feet given GAN’s weak quarterly results and the loss of majority of WynnBet’s revenues.
Marking 10% loss on GAN position.
FWIW, as the author of the idea, I disagree with closing the special sit. Co reported one month ago at the time stating: “The Company continues to work toward a swift resolution to its strategic review process and remains pleased with both the status of negotiations and the options available to maximize shareholder value. The Company hopes to be in a position to offer a definitive update in the near term.:
If there are bidders other than Sega, which seems likely given their recent press release, those bidders would likely want the prepayment window to expire. That being said, at the current valuation, the risk reward is asymmetric again in favor of the upside on a deal happening and the timing, to me, is favorable for an event in the near term. Nothing has changed re the initial thesis.
And lastly, there was no likely material impact on the Wynn news to GAN. Wynn left states where they had no market share, thus the take rate to GAN was likely immaterial. It perhaps changes the opportunity longer term but it does not signal a negative impact on earnings in the near term.
Thanks for pushback – I agree, that based on communication from the company, some kind of announcement seems imminent and the stock could be a double from here next week. I hope it plays out exactly that way and I will be counting all the $ I could have made on this case.
I have closed the idea on my side purely to avoid thesis drift. In my eyes the strange 5 month pre-payment clause was the key part of investment case. As it has passed without any fruits, I am far less intrigued by the setup.
On September 25, 2023, GAN Limited (the “Company”) accepted the resignation of Dermot Smurfit, as the Company’s Chief Executive Officer and as a director of the Company and its operating subsidiaries. The Company and Mr. Smurfit are evaluating a consulting arrangement for Mr. Smurfit, who remains a substantial stockholder in the Company.
Effective September 26, 2023, the Company has appointed Seamus McGill, its current Chairman of the Board, to Interim Chief Executive Officer. Mr. McGill, age 72, has served on the Board of Directors of the Company since 2014. Mr. McGill has 25 years’ experience in the gaming and technology industries and most recently was President of JOINGO, a mobile software company in San Jose, California from December 2013 to October 2015. Prior to JOINGO, Mr. McGill spent five years at Aristocrat Technologies Limited as Chief Operating Officer. Prior to Aristocrat, Mr. McGill was President of Cyberview Technology, Inc. and orchestrated its sale to International Game Technology plc. Mr. McGill held senior positions at WMS Gaming Inc. and oversaw the global growth of that company. He started his career in gaming with Mikohn Gaming Corporation.
hard to see how it doesnt get sold now. smurfit resigned; no successor named; interim only; no attempt to hire another successor. on the other hand the language re the ongoing process is not as tight as you would like it to be (they were careful to still use ‘indications of interest’ instead of something more definite).
this could still very well be a take under, but given the much better odds here at 1.1 and with a sale seeming a foregone conclusion – why else would smurfit jump ship, now, in this fashion – i jumped aboard this morning. lets get it over the line neil!
The ask here is most definitely lower post Dermot’s resignation.
If you’re one of the parties that has lobbed in an LOI, you lower your bid here right? The bid was likely opportunistic anyway…no one’s been chomping at the bit to buy the whole company.
Craig Hallum out with a note this afternoon…
“We have had a cautious view towards GAN shares for a while (a few notes – 3/26/2021 downgrade, 8/10/2023 most recent note) given industry headwinds and company-specific challenges. While operations remain challenged, we believe the risk/reward in shares is attractive for the first time in many years. We haven’t seen eye to eye with former CEO Dermot Smurfit for a while, and we don’t think we are alone, so his resignation should be positive for customer relationships and make an asset/company sale much easier. With the strategic review starting on 3/30/23 and ongoing, we think the company could sell its B2C segment (Coolbet) for more than the entire company’s EV today, but we believe (and agree) that a sale of the entire company is the preferred option if possible, albeit more difficult given different strategic buyers for B2B vs B2C assets. We think there is 50%+ upside over the next 3-6 months, are maintaining our $2.50 price target and also our Hold rating (given structural industry and company challenges”
So they claim 50% upside from $1.27 to $2.5, which is a double, but ok. And they still maintain it as a hold? These analysts man.
on youtube at the Nevada Gaming Control Board channel, there is a meeting today.
I believe GAN presented for approval of a Nevada gaming license. The meeting is currently ongoing and live on the youtube channel but GAN has finished their portion, so you can rewind and see and hear the GAN representatives/officers talk about GAN
Here is the link with the timestamp: https://www.youtube.com/live/snO00WG1xzo?si=QtZLRahDWpkBH2KF&t=2867
Here is the agenda for that meeting — looks like they are applying for licensure as well as a bunch of what I presume are related items: https://gaming.nv.gov/modules/showdocument.aspx?documentid=20159
One of the members of the gaming board asked them what their relationship with Sega was. They said it was difficult to do in a public forum because they are currently in the middle of a strategic review but they are currently in talks with them. (That was at the 1:03:12 mark.)
Would they be applying for these licenses if they were about to get bought? I’m not confident in reading these situations.
GAN – The company was recommended for a conditional 2-year gaming license in the state of Nevada, despite a recent change in management. Full approval on Oct. 19th would give GAN the go-ahead to replace the current sports betting platform at Red Rock Resorts. Ryan Sigdahl says that this is a positive for the B2B business, given it has had significant delays in launch, and should help the company structure itself better for a sale. Sigdahl rates shares a HOLD.
Interesting to note that the CEO was in Japan 3 weeks ago talking to Sega, and is still in discussions.
What is the source on that? Positive if true. Which CEO? Smurfitt or the new guy?
I believe it was stated in the Nevada Gaming Comm above. There were many interesting comments during the back and forth which lasts 30+ minutes.
Hey Neil, yes I thought it was very worthwhile to listen to the back and forth between the gaming commission and the GAN officers. It made me feel more positive about the prospects for this company (whether sold or not).
What were your impressions?
thanks
GAN back on the Nevada Gaming Control channel on Youtube now
GAN received their Nevada license. https://capedge.com/news/benzinga/35349820/gan-receives-regulatory
any insights into the price action?
https://www.law.com/2023/10/31/clo-sues-for-wrongful-termination-says-company-broke-sec-rules-maligned-minorities/
I’m able to get past the paywall by clicking through this X post: https://twitter.com/lawdotcom/status/1719453232198533492
Here’s the article:
– Michael Arouh was chief legal officer of Gan from February 2020 until his firing in December 2021.
– He filed a federal suit last week alleging wrongful termination, securities law violations and a toxic culture.
– A Gan spokesman called the allegations distorted and said the company will vigorously defend itself.
The former chief legal officer of Gan Ltd. accuses the online casino and sports betting software company of wrongfully terminating him and of fostering an environment where abhorrent behavior and breaches of securities laws were common.
Michael Arouh, in an 85-page federal lawsuit filed Oct. 24 in the Central District of California, alleges that the Irvine, California-based public company dismissed him ”for cause” in December 2021 under false pretenses.
Arouh alleges that while conjuring up performance complaints to justify his ouster, the company actually removed him because he objected to the company’s workplace culture—which he called hostile to ethnic and racial minorities—and because of his ”insistence on following his legal duties and his unwillingness to bend the law for defendants.”
Arouh says he also created tensions by objecting when Dermot Smurfit, who was CEO before resigning last month, appeared to do work on company time on a special purpose acquisition company unrelated to his Gan duties.
In addition, Arouh that he refused to approve a $1 million loan to Smurfit because it was not consistent with his legal duty.
The suit includes examples of slights he says he witnessed toward Chinese people, Japanese people, Iranian people, Black people, women, Jewish people and old people.
For example, according to the suit, “Gan’s leadership bragged that a Gan director was the ‘perfect director’ because she is a Black woman who satisfies diversity requirements but ‘she doesn’t look Black.’”
Smurfit and Seamus McGill, who succeeded Smurfit as CEO, did not respond to requests for comment. In a statement to Law.com, a Gan spokesperson said the company had not yet received the lawsuit but was aware of the allegations.
“In our opinion, the picture of our company painted in his complaint is distorted and bears no resemblance to the day-to-day professionalism of our employees and leadership. As such, we will vigorously defend against the allegations at the appropriate time and forum,” the statement said.
Arouh joined Gan in February in 2020 after operating his own law firm and, before that, working as an associate at Cadwalader Wickersham & Taft and at Battle Fowler.
In the suit, he says Gan claimed it fired him for not obtaining his license from Pennsylvania gaming regulators and for not paying taxes related to that process.
Arouh countered that he did file for the license on a timely basis and did pay the required taxes. Nevertheless, Gan’s false characterization of his firing as “for cause” and subsequent comments about his dismissal have prevented him from finding another legal chief job, “given the scrutiny that such positions entail,” the suit says.
“In short, Gan has caused Arouh to be blackballed from the gaming industry,” the suit alleges.
Arouh also contends the company defamed him in April 2022 by “knowingly” circulating false statements that he had violated Securities and Exchange Commission by filing late a form that disclosed restricted stock grants he had received.
Rather, in his lawsuit Arouh accuses Gan of numerous SEC violations. For example, he alleges Smurfit committed insider trading by selling shares of company stock just prior to the departure of another top executive, avoiding $104,705 in losses as the shares tumbled 22% in the aftermath.
Additionally, Arouh alleges company officials delayed reporting that executive’s departure in a timely manner.
During the period described in the suit, Gan was struggling mightily. The company, which went public at $8.50 per share in May 2020, has disappointed investors with continuing large losses and slower-than-expected growth. Shares now trade for less than $1.
Arouh alleges numerous other SEC violations, including occasions where the company claimed to have secured contracts or negotiated exclusive agreements when it had not actually done so.
Beyond SEC compliance matters, Arouh said the the company culture was deeply troubling.
For example, he alleged executives circulated a video they deemed as “humorous” that exploited negative stereotypes of Asians, complete with mocking accents. Arouh, who is Jewish, said customers who attempted to negotiate a lower price were referred to as “Jewing it down.”
“Arouh objected to and refused to engage in a hostile work environment at Gan,” the complaint states.
In the suit, Arouh says he submitted whistleblower complaints about goings-on at the company. The SEC runs a whistleblower program, but it isn’t clear whether the agency was the recipient of his complaints.
Yikes…
My takeaway from the article is mostly to raise some skepticism of what management says about the status of bidders, etc.
But keeping in mind that disgruntled ex-employees aren’t credible sources of info.
Anyone have a different take?
https://www.release.tdnet.info/inbs/ek/140120231108581924.pdf
https://finance.yahoo.com/news/gan-announces-definitive-agreement-acquired-023000681.html
Definitive agreement announced
sold for a $1.97, 120% premium to last price https://investors.gan.com/websites/gan/English/2110/news-detail.html?airportNewsID=13079c79-e7e4-4a48-a3f1-44b6071dd423.
sad I decided to get rid of my shares some time ago
Neil, congratulations! Your thesis was spot on. With hindsight, I have chickened out too early.
Thank you for sharing this pitch.
Great result, Neil. Unfortunately I averaged in early at ~$1.70.. but very happy to have recovered from the recent trading.
All as planned Neil, kind of, but great call. Congrats.
Curious how much was the net effect of Sega missing the 5mo window? So odd to pass but I’m sure there were very obvious reasons.
congrats Neil – you nailed it. despite my earlier misgivings, and giving you a hard time – you were right, and for the right reasons. your analysis of the buyer and its specific attachment to these assets (for reasons I do not understand!) was bang on. i hope you made a bundle on this, well done!
Thanks all! Always nice when a thesis plays out to plan. This one took longer than expected and the price was not quite what we thought, but still a positive outcome; hopefully for all here as well.
A couple of thoughts – It’s a long closing period, not expectyed to close until late 2024. Also, at $1.97 there seems to be a large spread still at 13%. I will sell mine today at a very tiny profit, monitor the price and look to buy again sometime next year for $1.50-$1.60
Yea could be interesting. My position is so small that I am just gonna wait it out and see what happens
As I’m typing this, the spread has interestingly already widened significantly intraday to over 20+%. For those who are patient, might be a nice play.
Hit send before completing my thoughts – I think that realistically the most significant hurdle will be the gaming regulatory approvals.
Does anyone have insight into how to handicap 1) the weird CLO lawsuit and 2) the regulatory approvals (the key issue being the gaming licenses)?
Any news here? Price seems to be cratering
Not seeing any news. Assuming this is just profit taking given the size of the pop it had on definitive docs.
Seems a bit excessive for the profit taking dynamics only, but maybe? Some people on Twitter are saying gaming license approvals might take much longer than expected with the timeline extending to 2025. I guess there’s not a lot of people willing to hold a merger arb for that long, especially given the other risks involved (regulatory, huge downside, etc.) and the fact that ex-CEO, who is supposed to understand this case very well, just keeps dumping stock and has sold almost all of his stake already. It might be unrelated and maybe he just wants to cuts the ties ASAP, but I guess it doesn’t add any confidence for the market.
I sold my shares at the day of the M&A announcement, bought back a small position yesterday. Have been missing seeing this pos dropping every day in my account ever since
There are a lot of salty people who got in at much higher prices. And this is a small cap. So I think they are angrily selling their shares, not caring about waiting for a year to get a 20-30% return when they can try their hand in some other stock that promises 200% upside.
I think ‘profit taking’ and ‘salty people’ are weak explanations for a gigantic 35% spread in a ~$100m merger. Add to that the fact that the former CEO is dumping as well – consider me suspicious.
Read the merger agreement and look for language pertaining to Chile where Coolbet operates. Also look at what is happening in Chile around online gambling. There is deal risk around this and that is likely what the market is pricing in.
I don’t speak legalese, but this implies Chile would need to make online gambling illegal right?
“Chilean Operations. The National Congress of Chile has not enacted any Applicable Law or issued any Order that has the effect of making the Company’s operation of online gaming illegal in Chile and is not reasonably capable of being overturned, cured or otherwise remedied on or before the End Date.”
And when I read this:
https://www.vixio.com/insights/gc-chiles-online-gambling-bill-better-late-never
I don’t get the impression that would make Coolbet’s Chile operations illegal. Merely regulated.
Did some more digging:
https://g3newswire.com/chile-online-bill-will-block-operators-who-have-been-present-in-the-market/
“According to article 13 of the bill: “The Superintendency will reject applications for an operating license when any of the following circumstances occur: having operated a betting platform without the proper operating license, or without the certification that authorizes it to operate in accordance with this law, or advertised or offered its services in Chile in the last 12 months prior to the request.””
This was before the merger was signed though. I was tempted to get back in, but now I will stay on sidelines until there is more clarity.
Coolbet meets all these criteria for rejection. It even sponsors a football team called Colo-Colo (“It will also mean that online betting sites which have a presence in Chilean football will be banned as well as any operators that have sponsored “people, entities and/or events that take place in the national territory.”)
It could be a response to this lawsuit that seems like a turf war between some established licensed competitors seeking to exclude online betting sites:
https://g3newswire.com/chile-legal-battle-continues-over-online-gambling/#
what about Chile matters in this? Revenue and assets in chile are “0”
my mistake
LatAm is a biz they dont separate out how much is Chile vs not
Coolbet based in Chile
From latest 10-Q, revenues from Chile represented 28.4% of total consolidated revenue in Q3 2023… pretty significant.
Read this interesting sensitivity analysis: https://continuouscompounding.substack.com/p/gan-part-4-decision-tree-analysis
Been reading the information on coolbet. It seems clear they would be affected. However this issue was known prior to the offer? Not sure how to take it.
Yeah that is a headscratcher for me as well. I thought Sega would be mainly interested in B2B tech. So why let this transaction fail on a potentially pretty uncertain regulatory situation on B2C side in Chile. Maybe they have better info and think it is unlikely to pass?
Based on this writer’s research, it seems they have condition H to prevent potential headaches if the Chile situation gets too complex or expensive. Depending on the severity, either they get minimal fines, have enough fines/fees to warrant a lower renegotiated bid, or walk away. If operations are illegal but fines/fees are very low, Sega has the option to waive condition H: https://continuouscompounding.substack.com/p/gan-part-4b-factoring-chilean-operation
vote on the proposed merger on 2-13-24
Anyone playing this $1.97 vs 1.56, or 26% spread?
https://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20240110:nBwQqf10a&default-theme=true
Is there a quorum as to how many people need to vote or just a percentage of voting parties?
A simple majority is needed to get this done.
Your vote is important, regardless of the number of ordinary shares you own. At the special general meeting, the presence of two or more persons representing in the aggregate, in person or by proxy, in excess of 50% of the total issued ordinary shares as of the record date throughout the meeting will form a quorum for the transaction of business. Assuming a quorum is present, the merger proposal cannot be approved (and the merger cannot be completed) without the affirmative vote (in person or by proxy) of a simple majority of votes cast by holders of ordinary shares present (in person or by proxy) at the special general meeting. Our ordinary shares are entitled to one vote per share.
https://www.bamsec.com/filing/149315224001777?cik=1799332
What are the risks here and what is the approximate timeline?
See the discussion above, but basically, the timeline is quite prolonged (late 2024) with the main risk being regulatory gaming licenses/approvals.
GAN declined a bit worse than -4% today (3/1/2024). Is anyone aware of news/reasons GAN could’ve declined?…I didn’t see that GAN or Sega Sammy released anything today.
DT (or anyone else) – This seems highly likely to close, correct?…does anyone have a probability or handicapped how much regulatory (or funding risk) risk of this deal not going through to closure? Thanks.
The spread stands at just over 30%. I’m not sure about labeling this as “highly likely to close” because spreads so wide (almost) always exist for a reason and in this case it reflects substantial regulatory uncertainty. See the discussion above for more details. The situation is rather well-followed as well.
Price keeps dropping. What gives?
I haven’t seen any news from either side. That might as well be the reason for the stock slowly drifting downward, it’s been a while since the last update.
https://www.businesswire.com/news/home/20240627063362/en/GAN-Announces-CFIUS-Clearance-for-SEGA-SAMMY-Merger
“On October 9, 2024, GAN Limited issued a press release announcing clearance from the Nevada Gaming Commission for the proposed merger of GAN …”
I guess this removes a lot of the remaining risk.
Spread is close to 8%
Are we still expecting a close of the deal by year end?
My understanding is Chile risk remains. Continuous Compounding had US approval at 90% so I think the remaining spread (which is very large when annualised) is reflecting that. Licensed operators are now suing telecoms for simply hosting unlicensed operators so seems like this is no clearer to resolution?
https://sbcnews.co.uk/retail/2024/07/22/polla-chilena-chile-block/
Big drop today high volume. Any news? Thought this was closing in march?
Looks like extension
Merger extended till May 31 (from February 7) due to regulatory review.
“The parties continue to respond to regulatory requests. This process takes time, but we are making great progress and working with SEGA SAMMY in anticipation of a successful closing.”
Shares have mostly recovered from the drop you mentioned, with seemingly no news. Spread now stands at around 8%
Management is very optimistic about closing the merger within the next 1.5 months (i.e., 2025Q2).
“We are nearing the conclusion of the regulatory requirements to close our merger with Sega Sammy, which we expect to be successfully completed in the second quarter of 2025.”
“The merger has been approved by GAN shareholders at a special general meeting of its shareholders, has received clearance from the Committee on Foreign Investment in the U.S. (CFIUS) and received approval from several gaming regulatory agencies including the Nevada Gaming Commission. The closing of the merger remains subject to remaining regulatory requirements and other customary closing conditions and anticipates the closing of the Merger will occur in the second quarter of 2025.”