Analysis: Amaya plunged into uncertain times

EGR NA looks at what impact CEO David Baazov’s insider trading charges could have on the wider business

News that Amaya CEO David Baazov had been hit with five insider trading charges by the financial regulator in Quebec was enough to wipe 20% off the operator’s share price by the time markets closed yesterday. [private]

Baazov responded quickly to the accusations, saying they were false and that he would “vigorously contest” the charges. Amaya, meanwhile, said he had the “full support” of its board of directors and that it expected its chief exec to be “fully exonerated” in due course.

The charges include aiding with trades while in possession of privileged information, influencing or attempting to influence the market price of Amaya stock, and communicating privileged information, and relate to Amaya’s $4.9bn acquisition of PokerStars in 2014.

If found guilty, Baazov faces a hefty fine and/or a lengthy jail term. Baazov remains innocent until proven guilty, but with a long court case likely, what impact will this have on Amaya in the meantime?

Adam Krejcik from Eilers & Krejcik Gaming said the allegations are “deeply troubling” for a company that is already feeling the pressure. Amaya’s share price tumbled when the firm slashed its FY15 guidance in November last year, and it fell even further when a Kentucky court attempted to impose an $870m fine on the firm for unlawfully taking bets from players in the state.

End of the takeover bid? 

Amaya’s share price rebounded upon news Baazov was plotting a CAD$21 per share buyout of the gaming giant. An official bid, however, now seems very unlikely. “Prior to this news there was deep scepticism among the investment community that a deal could actually get done, following these insider trading charges we believe the chances are even more remote,” Krejcik says.

History has shown Baazov should not be written off lightly, and he remains bullish on his chances of getting the deal done. While Baazov admits when he made his approach to the board of directors in February he was unaware of the charges, he is still determined to put forward an offer. “I am still committed to working with my investor group and the Board to consummate a successful transaction, which I believe is in the best interests of shareholders,” he said.

Sweeping changes 

But a Baazov-led takeover may not be in the best interest of shareholders, suggests Krejcik, who said one scenario that has not been discussed yet it the possibility of sweeping managerial changes at Amaya – including the resignation of Baazov – if a formal offer does not materialize. “While this may have seemed far-fetched a year ago it could now be in the best interest of the company’s long-term shareholders”, he added.

Blackstone and Blackrock – two of the main financiers behind Amaya’s PokerStars acquisition – hold a 31% stake in Amaya on a fully diluted basis and could try and buy-out Baazov’s 12% stake. They could then look to bring in their own management team, or perhaps launch their own takeover bid. “Regardless, we believe some type of drastic changes will likely need to occur in the next few months in order to regain investor confidence,” Krejcik said.

New Jersey keeping a watching brief 

The charges could not come at a worse time for Amaya, which relaunched PokerStars into the US market in New Jersey at the start of the week. The Division of Gaming Enforcement’s investigation into Amaya and its PokerStars and Full Tilt brands was its most complex and thorough in the regulator’s history. But while PokerStars was given the green light to start offering games to players, the firm is currently operating on a temporary license.

DGE spokeswoman Kerry Langan said the regulator was “closely monitoring” the insider trading charges. “The Division’s licensing investigation is not yet fully completed. Therefore, Amaya is conducting business in New Jersey on a transactional waiver. As the Division investigation proceeds, we will address this matter with Amaya, the AMF (the financial regulator in Quebec that brought the charges against Baazov) and other licensing jurisdictions,” she added.

Krejcik, however, believes the charges are unlikely to immediately impact PokerStars business in New Jersey, and says the DGE would have been aware of the on-going investigation by the AMF when it awarded Amaya a transactional waiver back in October last year. That said, he does believe that if the charges stick, it could negatively impact PokerStars’ ability to continue operating in the Garden State.

A turbulent period

 The charges against Baazov round off a turbulent period for the operator. Post-acquisition, Baazov was lauded for pulling off an incredible deal to buy Rational Group against the odds. But in recent months, things have started to unravel and Baazov and Amaya find themselves fighting fires on several fronts. Its FY15 results were a mixed bag – decreases in poker revenue offset by casino and sports betting.

Due to the ongoing takeover talks with Baazov and his team of investors, Amaya didn’t publish FY16 guidance, so it’s hard to get a steer on which way the wider business is heading. If the firm can successfully challenge the Kentucky fine and Baazov can shake off the AMF charges, opportunities to rebuild and drive growth are aplenty. If not, and the AMF charges are upheld, it would appear to be odds on for a changing of the guard at Amaya.