The Plus500 Fiasco appears to have staying power, refusing to give up the stage and to exit gracefully from public view. The drama continues. Odey Asset Management (Odey), the largest single shareholder of Plus500, has been busily upping its ownership position to over 25%, buying shares at what it deems to be bargain-basement prices. The $13 billion London hedge fund is now publicly objecting to Playtech’s takeover bid for Plus500 shares, currently pegged at £4 and roughly equivalent to $702 million.
Takeovers in the corporate domain are never easy, especially when both companies are traded on a public stock exchange. Transparency laws do force more disclosures, designed to protect shareholders from abuse. Regulatory reviews must pass muster, just one of many approvals that must take place. Anti-competition concerns must also be addressed, but, at its very core, takeovers are either friendly or hostile, depending upon whether the management of the firm to be acquired is in agreement at the outset.
The management of Plus500, in this case, has actually stated that they approve of the Playtech offer. It is interesting that this same management team, the one that Plus500 clients wanted to recently burn at the stake, also own 35% of the shares of the company. When a management team is this compliant, the immediate concern is that they may be more motivated by self-interest than by the interests of the entire shareholder pool. It is also common in these situations for the buying company to offer additional incentives that take effect after the deal is done to ensure that loyalty prevails when votes are taken. Executives, wishing to avoid accountability for apparent incompetence, may tend to look the other way when this ethical issue confronts them.
What is the current uproar about anyway?
It was only one week ago that Playtech, the world’s largest online gaming software supplier traded on the London Stock Exchange, tendered its takeover bid for Plus500. The beleaguered Binary/CFD broker had run afoul of the KYC/AML edicts of the Financial Conduct Authority (FCA). More than one half of the firm’s client accounts were frozen, a prerequisite stipulated by the FCA until existing documentation infractions could be resolved to its satisfaction.
The market did not take this news too kindly. Shares plunged 65% from a sky-high value of £7.75 before the crisis to £2.48 afterwards, before rebounding to just above 300 pence. When Playtech announced its £4 bid, it represented a 30% premium over the then current market price. The market traditionally requires a premium of this size to justify the transfer of control to another group, but, for all intents and purposes, the takeover bid was viewed as a bargain, after considering the nosebleed heights that the shares had attained two weeks before the offer.
Plus500 had become a darling of the London equity scene, having had an extremely successful IPO in 2013, followed by a constantly appreciating share price from that point forward. Revenues in 2014 doubled those for the previous year. With growth rates like these, the term “irrational exuberance” may not have been appropriate, although there were detractors in the investment world that felt the price a bit inflated. Whether justified or not, the brutal attack by the FCA sent shares off a cliff while the press had a field day.
Several financial institutions and hedge funds owned significant positions in Plus500, but when the heartache started, many began to trim back their positions. JP Morgan, as one example, cut their position back to 4.57%, but changed its mind once takeover mania began. They now own 5.3%. Odey was not sitting idly by either. As the largest individual owner of the firm, they moved quickly to gobble up more shares on the market. They have continued doing so, racking up a 25.5% share position at this writing.
Odey soon blasted Playtech’s takeover bid as “opportunistic”?
In this Shakespearian drama, the crisis in the first act moved quickly to resolution in Act Two, as Playtech became the suitor to save the day. Act Three, however, has suddenly devolved into a war of words, when Odey came out in a statement that blasted Playtech’s takeover attempt as “an opportunistic bid exploiting current regulatory issues and risks.”
The hedge fund giant was not done, but went on to say, “We understand that this cash acquisition may make sense for Plus500’s management and staff, whom we expect could be further incentivised by Playtech after the acquisition has completed. However, for independent shareholders we believe the current offer represents too great a discount compared to intrinsic valuation as a standalone entity.”
Not to be outdone in the public square, a spokesman for Playtech soon responded that, “We believe Odey Asset Management’s arguments to be weak and not categorical. Our 400p per share offer remains compelling for Plus 500 shareholders as it offers a clean cash exit at a significant premium to both the initial issue price and prevailing market value prior to our proposed offer. Playtech intends to address the challenges Plus 500 faces as a result of its rapid expansion and regulatory failings.”
The fisticuffs are now off, and the fight is on. The fighters may have withdrawn to their neutral corners at the moment, but the real issue is money. Imagine that? For Odey and other stockholders, they had been riding high with a market cap of $1.3 billion for Plus500 prior to the 15th of May. Playtech’s offer is barely 50% of that figure, so where is the missing $650 million? Was a simple paperwork debacle that management claimed would take $6 million to rectify the sole culprit? Something seems to be way off with the math, hardly an argument that is “weak and not categorical.“
Beauty is in the eye of the beholder
It is obvious that Playtech spotted a bargain here. The fact that management approved allowed Playtech analysts to have access to insider data to perform their due diligence in a week. Mor Weizer, chief executive officer of Playtech, said as much in the press when he stated, “I know it’s only a week, but within this week we basically injected all possible resources into this project. We managed to go through all relevant due diligence processes for us to feel comfortable that this is the right transaction for us. We wanted to act quickly. We see an opportunity.” You can almost see the Cheshire Cat grinning from ear to ear at his good fortune.
Plus500, however, does have its detractors. Several firms began their shorting attack ahead of the FCA’s misgivings. Word of an impending documentation infraction had reached a number of companies in the United States, i.e., Cable Car Capital, Valiant Capital Management, Ennismore Fund Management, Gotham City Research, and even the Motley Fool. The former wrote a “10-part take-down of the Israeli company”, stating that its price target was 76 pence, “the company’s stated amount of cash per share.”
Cable Car’s portfolio manager, Jacob Ma-Weaver, was especially harsh in his evaluation of Plus500 as a “bucket shot”. He added that, “Plus500 has yet to explain this restatement or reclassification of revenues in a regulatory filing. That omission alone leads me to believe trading in Plus500 shares should be suspended until the company clarifies its accounts.” Plus500 management had dismissed this last comment as specious at best. No revenues were missing. The company was only changing the way that it counted them, with the blessing of Price Waterhouse Coopers, too, their auditor.
For hedge funds that have owned a piece in Plus500 and watched the unit values for its fund rise, buffeted by the Plus500 gains that had accumulated up and until the £7.75 high watermark value, they have some explaining to do to their investors. Losing 50% on one investment may not be that hard to swallow if the cause is a temporary one that can be resolved. If Plus500 is acquired at any price, especially a low one, the potential value recovery goes by the boards. At the end of the day, swallowing a $650 million loss is one pill that can get stuck in one’s throat very easily.
Will M&A rules in the UK make things more difficult for Playtech?
The UK, and furthermore, London public stock companies, play by a different set of rules when it comes to mergers and acquisitions. In 2011, the Takeover Panel, a 35-member group of bankers, lawyers and other industry players, instituted what is euphemistically called the “Put-Up-or-Shut-Up” rule. The protocol was adopted to force acquiring companies to make a bid sooner, rather than drag a management team through months of time-consuming negotiation.
If an acquirer contacts more than six parties about a potential deal, usually necessary to arrange financing and legal matters beforehand, then the firm has 28 days to make a formal bid for its target. Originally designed to protect UK companies from overt foreign attacks, the rules have put a damper on M&A activity in general. These rules, however, pertain to hostile takeovers, those where management is opposed. Presently, Playtech has the Plus500 management team in its back pocket, but if things change, even their best-laid plans might come undone. Hostile takeovers are much more interesting, and Odey may be working hard to force such a situation to develop.
Plus500 UK Ltd and its parent are both Israeli companies. Unless things get tied up in the UK court system or regulators oppose the Playtech bid, Odey, on its own, may not be enough to block the transaction. Israeli takeover rules only require a 50.1% vote of consent from stockholders to approve a shift of control. Plus500 management has 35%, leaving a need for only 15.1% to complete the merger agreement. If you do the math, however, there is about 39.5% of the company’s shares “at play”. You can be sure that Odey has approached a major portion of that group with its arguments.
Corporate takeovers are never easy. There are far too many moving parts to ensure that everyone is treated equally and fairly. There will always be a disgruntled group that tries to scuttle any deal that it dislikes. The Plus500 deal appeared to be on greased skids last week, but now its fate is uncertain. $650 million in lost share value is significant. No amount of analytical prowess will convince the parties that have lost to go along or remove the uncertainty of this transaction in the end. After the current rhetoric subsides, Act Four will commence and lead to some form of acceptable resolution. Stay tuned!