Emmett Investment Management, a money manager focusing on mid- and small-cap stocks, penned a letter to PlayAGS (NYSE: AGS) investors on Tuesday telling them they should oppose the $1.1 billion takeover offer floated on May 9 by Brightstar Capital Partners.
The board of the Las Vegas-based slot machine approved the go-private bid from the private equity firm and if shareholders do the same, the transaction could close in the second half of this year. Brightstarβs offer values PlayAGS at $12.50, or a 40% premium to where the stock closed on May 8. PlayAGS shares are up 33.3 over the past week but have yet to ascend to $12.50.
In its letter to investors, Emmett questioned the timing of the offer becoming public, noting it arrived just a day before the target released impressive first-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) results.
The Brightstar transaction was announced just hours before the release of AGSβs transformational first quarter results,β wrote Emmett CIO and founder Alexander Rohr. βThe Companyβs first quarter results reinforce our optimistic view of AGSβs prospects, as organic adjusted EBITDA grew 21%, far outpacing the industry. Business mix is also improving at AGS: adjusted EBITDA from the Companyβs interactive segment, to which the market assigns the highest multiple, increased almost 9x year-over-year and almost 50% sequentially.β
New York-based Emmett owns approximately 1.5% of PlayAGS outstanding equity.
Emmett Says Takeover Bid Overshadowed PlayAGS Earnings
Itβs not uncommon for some investors to oppose acquisitions and there are recent examples of professional market participants resisting gaming industry takeovers.
Rohr noted that if investors had adequate time to absorb PlayAGSβ strong first-quarter numbers, the stock might be trading above the $11.40 area at which resides today. Rather, the Brightstar take-private bid overshadowed those results.
βIf market participants had been given the opportunity to digest first quarter results absent Brightstarβs bid, we believe AGS shares would be trading well above the current market price of $11.40,β wrote the Emmett chief investment officer. βAny reasonable forecast of AGSβs 2024 adjusted EBITDA increased by ~15%, which on a constant enterprise value/EBITDA multipleβarguably conservative given improving mixβwould imply a share price higher than $11.40.β
Rohr went on to write that PlayAGS investors are essentially being asked to accept a bid βthat offers effectively zeroβor negativeβpremium.β He added that the companyβs first-quarter numbers donβt reflect the potential upcoming benefit to the company via possible disruption in the industry caused by the pending merger of International Game Technologyβs (NYSE: IGT) global games unit with Everi Holdings (NYSE: EVRI). He said that transaction could actually help PlayAGS add market share, and that probably isnβt accounted for in the Brightstar offer.
Emmett Not Opposed to PlayAGS Selling, Sees Scant Value In Brightstar Bid
Rohr said his firm isnβt averse to PlayAGS being acquired, but he believes the Brightstar offer isnβt adequate compensation for investors given the progress the target has made and its potential to build on that over the long term. Rohr also outlined a scenario in which PlayAGS could create significant value for shareholders without the takeover.
We believe AGS would have a bright future as a standalone public company, with at least $225 million in 2026 adjusted EBITDA clearly achievable. Even on a multiple of 7x adjusted EBITDA β a significant discount to slower-growing peer Light and Wonderβs 9x NTM multiple β AGS shares would trade at $24.70, nearly 100% higher than Brightstarβs bid,β he opined.
Rohr didnβt mention other potential suitors for PlayAGS and some analysts have noted the target is unlikely to be the subject of a bidding war.
