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Playtech expands forex footprint by exercising option to buy AvaTrade

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Israeli billionaire, Teddy Sagi, is in the forex news space again. Playtech, “the world’s largest online gaming software supplier traded on the London Stock Exchange Main Market,” announced that its ubiquitous founder and primary owner had “agreed to buy currency trading platform Ava Trade for $105 million to expand its online trading platform.” Within the last few months, Playtech had already acquired TradeFX and had made a high-profile takeover bid for the beleaguered Plus500 franchise. Sagi’s appetite for gaming enterprises appears insatiable. What will he gobble up next?

The foreign exchange industry has taken several body blows over the past year, including rate-fixing scandals in the trading rooms of our largest banking institutions and backbreaking losses sustained by the brokerage community after the Swiss National Bank (SNB) dropped its peg to the Euro. Things were just getting back to normal after a financial crisis on the little island of Cyprus had spelled doom for many forex brokers that had set up shop there, but the shockwave from the SNB resulted in billions in losses. The general expectation of most analysts was that an industry consolidation was surely on the way, but not with such rapidity as with Playtech’s current buying spree.

The travails of Plus500 have been well documented. The firm either deliberately or unconsciously, take your pick, ran afoul of the documentation requirements of the UK’s Financial Conduct Authority (FCA). The punishment, deemed far too severe in most circles, was a freezing of faulty accounts and the solicitation of new clients until all infractions were rectified. Plus500, a publicly traded company on the London Stock Exchange, lost $650 million in market capitalization in a matter of days after the suspension news hit the press. Rectification has been slow, but it is progressing.

Seeing a bargain for what it was, Playtech, i.e., Teddy Sagi, swooped in and persuaded management to accept his takeover bid for $702 million. The deal needs regulatory and shareholder approval and is expected to close sometime in September. Odey Asset Management (Odey), a London hedge fund, is the largest individual stockholder, owning more than 25% of the shares. Odey had been quite vocal in the press that they oppose the deal as being overly opportunistic. They want more money, but they may not have the votes or the ability to persuade enough people to join their cause. No lawsuits have been filed to date, but there are many angry shareholders that may be so inclined.

Why does Playtech want to buy firms like Plus500 and Ava Trade?

Gambling businesses are extremely lucrative operations, if run effectively and with tight controls. The industry has a history of underworld ties and intrigue for good reason. Profit margins can easily exceed 50%, unheard of in most any other line of work. The potential for theft and corruption are always present, requiring a heavy hand on the tiller, so to speak. The profit margin for Plus500, according to published financial statements, is roughly 54% after taxes. Ava Trade is not a public entity, but figures released to the press regarding its buyout suggest a 35% profit level.

Playtech is paying $105 million for Ava Trade. Its reported EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for 2014 was $24.6 on a revenue base of $69.9 million. Playtech is claiming that it is paying “consideration at attractive multiple of approximately 6x adjusted 2014 EBITDA.” The key word here is “adjusted”, some $7.1 million of adjustments, if you do the math. These adjustments have to do with “jurisdictions which may be closed or discontinued in their current form” after the merger, a significant adjustment, by anyone’s measure.

The point to be made here is that Playtech is getting another bargain for some undisclosed reason. Without the terms of its option agreement, we are left to speculate. An appropriate EBITDA multiple for this profitable an enterprise would be more in the range of 7 to 8, yielding a takeover price of around $185 million. Profits for Ava Trade could be down in 2015, following the Swiss Franc Debacle, but it had announced to customers that it had weathered that storm without much harm. The other consideration is that, although profitable and growing, forex brokers have high customer attrition rates. They must address this turnover issue with aggressive marketing tactics. Competition is fierce, and regulators are clamping down hard.

Playtech, however, may have gotten lucky. When they acquired TradeFX, the owner and operator of Markets.com, back in May, they already had an option in hand to acquire Ava Trade. When the Plus500 opportunity presented itself, the puzzle pieces began to fall into place. Mor Weizer, chief executive officer of Playtech, noted at the time of its takeover bid that TradeFX and Plus500 would be combined. Today’s announcement notes that Ava Trade shares will actually be purchased by TradeFX, a subsidiary of Playtech. It may appear convoluted, but Playtech has engineered a clever strategy to dominate the forex space with a vertically integrated company that cannot be matched.

You can almost see Weizner’s tongue in his cheek when he announced, “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. We are very excited about the opportunities for the Group arising from the combination of the Trade FX Group and the Ava Group which we are confident will deliver long term value for Shareholders.”

Who is Teddy Sagi?

Teddy Sagi is a self-made Israeli billionaire. He owns a third of the Playtech shares and number of other technology and real estate development firms. He ranks #534 on the Forbe’s list of the richest men in the world, sporting a $3.5 billion net worth to support that claim. He also lives in London, and, at 43, is sometimes portrayed as one of the most eligible bachelors in town, often seen with supermodels and celebrities. The good news, however, stops there. Many object to his shady past and ties to the gambling world as proof that he “made much of his vast fortune by exploiting the poorest and most ­vulnerable people in the country.”

The “DailyMail” recently published a scathing article entitled, “Exposed: The jailbird pornographer behind Britain’s crack cocaine gambling machines.” Billionaires do tend to be a colorful lot, but Sagi seems to revel in his lifestyle without any remorse. Betting is legal in the UK, and Sagi is depicted as the kingpin behind the software that drives the betting games used by High Street bookmakers. Critics argue that Playtech has orchestrated “the fixed-odds betting terminals that have brought such misery to so many — the so-called crack cocaine of the gambling world.”

During his relationships with some of the world’s most beautiful women, Sagi has fathered two children, but marriage has not entered the picture. One quip from a newspaper back in his homeland of Israel was that he “likes risk as much as he likes the good life”, while a close associate elaborates that, “He likes to have fun. He likes the good life. He takes long holidays and likes to spend his leisure time watching football or films. He enjoys playing the piano and ping pong.”

Life was not always so kind to Mr. Saji. His parents were well off with their own travel agency and appeared in the local newspaper gossip pages for good measure. Sagi’s older stepbrother, Ronen, was convicted of murdering an investment consultant, and eleven years later, a young Sagi at 22 was arrested on suspicion of insider trading, along with seven other businessmen. He served none months in jail, and soon thereafter, he discovered the world-wide-web, noting that, “sex and betting are the most profitable businesses on the Internet.”

Following his own advice, he invested in firms that set up pornographic websites, while also developing software for the gambling industry. His two-prong strategy delivered the goods after seven years. Playtech went public with a valuation approaching $1 billion. As the Mail reported, “Still in his early 30s, Sagi had joined the ranks of the world’s super-rich,” and he never looked back. He owns a spacious home in London, as well as properties in Cyprus, Berlin, Israel and the U.S. His Bombardier luxury private jet provides a convenient way to spread his time around at each home site.

Concluding Remarks

The rich get richer, and the poor get poorer, especially in the jet-set world of Playtech’s Teddy Sagi. It appears that he has masterminded a brilliant strategy to expand his wealth in new territories, this time in the foreign exchange arena. It is rare, however, that Newton’s laws of motion do not appear in the business world when one body exerts a new influence in the market. There will be consequences. Whether the response will be equivalent and in the opposite direction remains to be seen. The IG Group is one competitor that is keenly aware of the goings on in this space, and it is a larger company than Sagi’s Playtech consortium. A war of titans would be fun.

The Plus500 merger has yet to gain regulatory approval. The FCA may not approve of such a concentration of gambling resources in one vertical entity, but the jury is still out on that issue. Gambling businesses, however, can be very lucrative and often draw the public’s scorn when they raise too high a profile about how much money is at stake. The cost on society is far greater, as well, when all things are considered. As for Ava Trade, the firm has developed a great reputation over the years. In the end, we doubt if its service and quality levels will be diminished by any of these corporate shenanigans from on high. Only time will tell.