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Capital Markets

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Categorized | Capital Markets

Ask corporate tourists tricky questions

Posted on September 23, 2016


The investment tourist is a much maligned section of humanity. They turn up in an unfamiliar market, do whatever their guide says, overpay for the first thing they recognise, then scarper home at any sign of trouble.

Corporate tourists, however, are something else entirely. A company which decides to list its shares overseas should be approached more like a salesman offering a free lunch and the chance to hear a presentation about a timeshare opportunity. Start with a question: don’t they have perfectly good capital markets where you come from?

    For instance, Canadian group Intertain plans to move its listing from Toronto to London next month, advised by Credit Suisse and Canaccord Genuity, where it will be reborn as Jackpotjoy plc.

    Owner of a UK regulated bingo website of the same name, the idea is for greater exposure to a British investor and analyst community more used to gaming companies. In time, the company’s board hopes this will lead to a more appropriate valuation of the business.

    The suggestion is local investors grant the company a value, currently about C$800m, below what the board feels it merits. Yet Canada does have listed gaming companies. Amaya, for instance, although shares in that group have suffered this year since the announcement of the country’s largest ever insider trading investigation into the former Amaya chief executive and associates, accusations they deny and have said they will vigorously contest.

    Amaya was also an early shareholder in Intertain and sold what was then a corporate shell its first business in February 2014. Dig a little further into the three deals struck by Intertain within the following year and other explanations for a less than generous valuation of the group emerge. For instance, what must rank among the worst management incentive plans ever conceived.

    Intertain’s chief executive and chief financial officer were encouraged to spend as much money as possible. When striking deals they shared 2 per cent of the purchase price in cash and phantom equity, adjusted up or down for short-term movement in the Intertain share price — between the announcement and closing of each deal.

    Details of this plan were disclosed after the fact, in an August “clarification” last year following the announcement of heavy quarterly losses, with C$29m of acquisition related fees adding to the deficit.

    The executives have since departed, but the company was left with another unusual incentive structure related to Intertain’s largest deal. It had agreed to pay the private UK group Gamesys C$800m (£425m) for the Jackpotjoy brand and customer details, but not any of the underlying technology or operations.

    Indeed, the agreement between the two companies makes clear Gamesys, which holds the UK licence to operate Jackpotjoy, retained complete discretion over the marketing, operation, development and management of the branded sites.

    Gamesys receives an annual licence fee and was also promised a substantial “earn-out”, a chunk of cash due next year based on the profitability of the business it runs for Intertain. In preparation for the UK listing, the payment has been capped at £375m, with Gamesys also receiving another £25m for agreeing not to compete with its partner until April 2019, two years longer than previously promised.

    A sterling bond issue is also anticipated to fund a £150m prepayment of part of the earn-out to Gamesys, after the UK listing.

    Intertain describes the relationship, which helps produce the best profit margins in the industry, as an outsourcing arrangement. It is one which requires careful management and oversight, given that the costs Gibraltar and London-based Gamesys attributes to its Canadian partner play a significant role in the size of the earn-out payment it can expect to receive. Intertain manages the relationship from the Bahamas.

    New chief executive Andrew McIver, a Brit who joined in June, says the company’s auditors BDO have extensive experience in assessing these sorts of matters, and will scrutinise the final earn-out calculations with great care.

    He also says that should Gamesys one day decide to end the relationship and compete, taking the UK licence with it, Jackpotjoy could move to trade under the Malta gambling licence of Vera&John, another Intertain property. Perhaps the Maltese stock market might also then have the chance to host a foreign tourist.