The plot thickens – Playtech acquisitions delayed by two regulators

Just when you think that the Plus500 Fiasco storyline and the acquisition antics of Playtech could be put to bed, lo and behold, not one, but two regulatory bodies summoned up the courage to block, at least on a temporary basis, the outwardly aggressive machinations of Teddy Sagi, the Israeli billionaire and precocious founder of Playtech. Are we ready to give our courageous regulators a pat on the back? Are they really looking out for the public interest or is this just another sideshow, full of sound and fury, but signifying nothing?

You can almost imagine the witches from Macbeth, stirring the pot while chanting incantations worthy of the moment. Since when has anyone of any substance stood in the way of Teddy Sagi or at least required him to veer off his intended course? Is the IG Group pulling strings in the background in a not so subtle attempt at waylaying their competitor, while maneuvering in the shadows for advantage? Where is Shakespeare when we need him? This story could get very interesting, one worthy of the Bard’s iambic pentameter, with soliloquies that our grandchildren might quote word for word.

Whether a tragedy or a comedy, we have been following this caper since May, a full six months. At last look, it appeared that Sagi and Playtech would have their way with building a new “Financial Division” within the company that would absorb three new jewels — TradeFX, Ava Trade, and Plus500. Organization changes had already been announced. New executives flocked to the new venture, claiming lucrative futures to be had by all. The icing on the cake was a host of earnings announcements that spoke to ever increasing revenues and performance benchmarks to beat the band.

All was deemed good in Sagi-Land, until a few cracks began to appear in his carefully orchestrated takeover strategies. On the 18^th of September, the expected day that the Plus500 deal would have closed, Playtech admitted to its shareholders “that the regulatory process for approving the deal is taking more time than expected.” The management team knew of no substantive issues that could block the acquisition and now expected “the proposed acquisition should be completed by the end of November 2015,” although the group was still hopeful of an October close.

Which regulatory body was taking its time? No names were cited. The Financial Conduct Authority (FCA) would surely have to approve. Potential anti-competitive ramifications have never been discussed in the press, leading to suspicions that other government authorities might be concerned. As for approvals already obtained, the Cyprus Securities and Exchange Commission (CySEC) had previously voted in the affirmative, along with a majority of Plus500 stockholders.

As for the Ava Trade deal, no one suspected any issues, but, suddenly in October, the Central Bank of Ireland (CBI) relayed its opposition to the merger. Playtech’s response: “Having taken legal advice, the Company intends to formally challenge the decision.”

How did we get to this juncture in this six-month process?

For the benefit of those that somehow missed each exciting scene of this London Stock Exchange drama, here is a brief recap to bring you up to the same page as of today:

1)     Plus500, a leading provider of Contracts for Difference (CFD’s) and darling of the London Stock Exchange, was tiptoeing through the tulips during the early part of 2015. Its stock price was soaring to record levels after its 2013 IPO. Its client base was expanding nicely, and profits were rolling in like clockwork, until the 18^th of May.

2)     The FCA suddenly froze the accounts of Plus500 and blocked any new account solicitations for failing to meet a deadline to accumulate current Anti-Money Laundering (AML) documentation for the majority of its customers.

3)     When the management of Plus500 informed its shareholders of the problem, the market was cruel in doling out its punishment. After falling and then briefly recovering, the stock price settled at a level that equated to a paper loss of some $650 million for its shareholder base.

4)     Teddy Sagi and Playtech, “the world’s largest online gaming software supplier traded on the London Stock Exchange Main Market,” stepped in at this point, saw a bargain that could not be ignored, and convinced the management team at Plus500 to accept a $702 million takeover bid.

5)     Odey Asset Management, a local hedge fund that was the largest individual shareholder with roughly a 25% stake in the company, objected vehemently in the press that the offer was far too opportunistic and should be raised.

6)     Approvals for the merger were forthcoming from shareholders and from CySEC. If the FCA followed suit, then the deal might close in September, unless another “White Knight” appeared or disgruntled shareholders tried the litigation route to slow down the process.

7)     Playtech had already acquired TradeFX, the owner and operator of Markets.com, back in May and also had an option they could exercise to acquire Ava Trade for $105 million. Plus500 would complete the trio of new acquisitions and form a new “Financial Division” within Playtech, a reorganization that had slowly been leaked to the press to confirm the ultimate objective of “making the company the biggest acquirer of new business in the industry in 2015.”

These seven steps preceded what can only be described as revitalized excitement that the Playtech story is not over and done with. The irony is that this revitalization of sorts has come from the same group of people that started the ball rolling in the first place, namely the regulatory establishment. Very little has been leaked from either the FCA or the CBI, other than a letter to Playtech from the CBI notifying them officially that they would oppose the Ava Trade merger deal.

The re-formed Playtech would be a monolith for sure, but the IG Group (IG) is a worthy competitor in this space, has been around much longer, and has a larger market cap to boot. Industry speculation has been that IG was behind the Plus500 fall from grace, but that Sagi’s aggressive actions set them back on their heels. No lawsuits have been filed, but some kind of competitive response from IG has been expected. For the time being, they have only hired away a cadre of Plus500 executives.

What has been the Playtech strategy regarding both Plus500 and Ava Trade?

Playtech has not tried to hide their overall ambitions. Mor Weizer, Chief Executive Officer of Playtech, has commented on both acquisitions in the press. With respect to Plus500, Weizer said, “Having recently completed the acquisition of TradeFX, the opportunity to acquire Plus500 will prove transformational for our ambitions to expand Playtech’s wider offering. As an immediately earnings enhancing acquisition, the combination of the two businesses is compelling, enabling us to apply our market-leading products and services to the enlarged financial trading business as we continue to execute our growth strategy for the Group.”

Weizer was equally effusive when he commented on the Ava Trade transaction: “The acquisition of the Ava Group is another important milestone in Playtech’s strategy to expand and enhance its overall technology offering through multiple vertical markets. Since the recent earnings-enhancing acquisition of TradeFX and the creation of our financials division we have sought further opportunities to broaden our reach into this vertical. The Ava Group is a well recognised and established online CFD broker with multiple regulatory licences and a strong customer base with insignificant geographical overlap with the TradeFX Group.”

What are the ramifications of these regulatory delays and opposition?

Gambling businesses are highly lucrative, despite heavy regulatory oversight and constant streams of abuse from consumer advocacy groups. Profit margins are well above other industry averages, without any sign of declining to shift the odds away from the House. Competition usually works to the benefit of the users of any products and services in a marketplace. Could regulators be worried that too much consolidation could worsen the current situation in the gambling industry? Surely, someone would have raised this issue during their due diligence and raised an objection. Such an objection would easily explain delays at the FCA and opposition from the CBI.

Are these regulatory actions related or connected in some way? Analysts can only speculate at this time. Nick Batram, an analyst with Peel Hunt, stated that, “News that the Central Bank of Ireland has opposed the Group’s acquisition of Ava Trade is undoubtedly a setback. The questions are, whether this is just a temporary issue and isolated to Ava or whether there is a read across to Plus500? Given the scale of Playtech’s ambitions in financials, this uncertainty is not conducive to share price out-performance until there is some clarity.”

Canaccord Genuity Limited has provided financial advice to Playtech regarding its acquisition of both Plus500 and Ava Trade. Its opinion is that, “There is no direct read-through to the £460m acquisition of Plus500 deal, where there have been some delays to regulatory clearance – it is still awaiting approval by the FCA, although the Cyprus regulatory, CySec, has given clearance. But this announcement will clearly raise some concerns over the potential for the FCA to block the Plus500 deal.”

Concluding Remarks

For the short term, it appears that Teddy Sagi and his cohorts at Playtech may have to learn a few lessons about patience, pride, and humility. The “Rich” in this story may eventually get “Richer”, but at least a few stolid regulators would like to see them bend a knee in full public view. Opposition to the Ava Trade deal could bleed over to halt the Plus500 merger, as well, but the jury is still out on that judgment call. If the CBI wilts along with the FCA, then Playtech could have its way by the end of November.

In the meantime, we wait to see if another shoe will drop in this multi-faceted tale, or we could look back to Macbeth for insights into how this tragedy might play out. According to the witches, “Fair is foul, and foul is fair.” In today’s parlance, that might read, “It is what it is.” Lastly, Lady Macbeth’s insightful rebuke may ring true: “’Tis safer to be that which we destroy than by destruction dwell in doubtful joy.” Will Teddy Sagi dwell in joy after he gets what he wants? The jury is still out on that one, too, but I doubt if his type will lose any sleep over it, whichever way the dominoes ultimately fall. Stay tuned!

Chris Lee

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