FANTINI’S FINANCE: Certainly Uncertain

Events of the past week—Amaya’s Baazov being charged with insider trading and William Hill’s responsible rules having financial repercussions—have once again demonstrated that you can’t count on anything in the gaming industry.

In this world nothing can be said to be certain, except death and taxes,”Benjamin Franklin

That famous quote surely can be applied to investing in gaming stocks—in spades.

Two examples of that uncertainty have just come on the same day:

• Amaya CEO David Baazov was charged with insider trading and the company’s stock sank 21 percent.

• William Hill reported that new rules designed to protect customers from problem gambling have slammed online gaming revenues that, combined with bad luck in sports betting, cost the stock 11 percent of its value.

Baazov and others were charged with manipulating the price of Amaya’s stock during the period in which he was arranging the $4.9 billion purchase of Rational Group and the world’s dominant online poker operation, Poker Stars.

At the time, AYA’s purchase seemed almost miraculous. A tiny Toronto-listed company had just swung a deal that transformed it overnight into a mighty international gaming company.

A stock that had long traded under C$4 a share, and as low as 95 cents, shot up to C$39.25 by November 2014.

The big questions hanging over Amaya were not about how AYA managed to achieve the purchase, but whether PokerStars could be licensed in the United States and whether Internet poker could be broadly legalized in the US, becoming a big business.

The question about licensing related to the Rational Group’s original investors and executives, several of whom were charged with illegally taken bets from Americans.

The uncertainty about the U.S. and the slow decline of online poker generally gnawed at AYA’s shares, taking them down as low as C$13.99.

Then, Baazov offered to buy out the company for $21 as share. That boosted the stock and set off speculation that someone else might make a higher bid considering the value of AYA’s global poker franchise and the opportunity to turn its huge pool of players toward online casino, sports betting and daily fantasy sports on the PokerStars network.

That boosted the stock again until it began to drift lower on doubts a deal would get done.

Then, the insider trading news hit and AYA sank to under C$15 as of this writing.

We are in no position to judge the charges against Baazov, but it does raise a question about the company’s future. Perhaps one of the major investors buys out Baazov’s stake and cuts the company free from the past in the same way AYA’s purchase of Rational Group cut PokerStars from its past.

William Hill is another matter. No out-of-the-blue miracles, but a company that has built itself from a UK betting shop into an international gaming operator over many years.

The point that WMH illustrates is that success begets its own challenges.

Usually, that challenge comes from competitors entering the space. In this case, the competitors already were there in the form of other UK betting companies that also went online to become multi-product i-gaming companies.

The issue for William Hill is familiar to American land-based casino operators—legislative risk, a term that entails regulatory risk, also.

The reality is that gaming is not a generally beloved or admired industry. No matter how many CEOs talk about entertainment and the resort experience, a lot of people focus on the gambling and consider gaming tawdry and exploitative.

As such, gaming is an easy target for legislators, especially when they draw attention to themselves by making a lot of money.

In the UK, the government imposed a 15 percent tax on online gaming revenues won from customers in the country playing on sites operated by companies licensed elsewhere, such as in Gibraltar.

That tax imposed last year has chewed into the earnings of UK online gaming operations.

Now, it turns out, regulator-imposed practices intended to protect players are hurting, too. WMH blamed player time outs, which can last for 24 hours or more, and self-exclusions for much of its earnings warning.

And legislative action might be coming as persons worried about gambling’s effects propose wager caps and other limits on gambling machines that have become staples in UK betting shops.

So, we’ll end with another famous quote: “No man’s life, liberty or property are safe while the legislature is in session.”

In other words, for investors in gaming stocks, the only thing certain is uncertainty.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.