Emmett Investment Management Opposes PlayAGS's Proposed Take-Private Transaction with Brightstar Capital Partners

Rhea-AI Summary

Emmett Investment Management, owning 1.5% of PlayAGS (NYSE: AGS) stock, opposes the take-private transaction with Brightstar Capital Partners, deeming it undervalued. They cite AGS's Q1 results showcasing a 21% growth in adjusted EBITDA, improved business segments, and potential future benefits from the IGT/Everi merger. Emmett highlights that the $12.50 per share bid undervalues the company, arguing AGS could achieve a $24.70 share price as a standalone entity. They advocate AGS shareholders vote against the proposal.

Positive

• PlayAGS's adjusted EBITDA grew 21% in Q1, outpacing industry standards.
• The business mix is improving, with the interactive segment's adjusted EBITDA increasing almost 9x YoY and 50% sequentially.
• AGS expects significant market share gains due to the upcoming IGT and Everi merger.
• AGS's new mechanical reel product is set to release in the second half of 2024.
• AGS could achieve $225 million in 2026 adjusted EBITDA as a standalone company.
• Emmett values AGS shares at $24.70, nearly 100% higher than Brightstar's bid of $12.50.

Negative

• Brightstar's $12.50 per share bid is considered undervalued by Emmett.
• The proposed deal's enterprise value of $1.1 billion translates to a share price of $13.40, higher than the offered $12.50.
• Stockholders are being asked to sell at a relatively low multiple of 4.8x NTM adjusted EBITDA.
• AGS traded at a higher multiple of 7x adjusted EBITDA in 2019, despite inferior performance metrics.
• The Q1 results' impact on share price wasn't fully appreciated due to the timing of Brightstar's bid.

Insights

Financial Analyst

The key concern raised by Emmett Investment Management is the significant undervaluation of PlayAGS in the proposed take-private transaction by Brightstar Capital Partners. This is especially relevant given AGS's recent exceptional financial performance. The company's organic adjusted EBITDA grew by 21%, significantly outpacing industry norms. Additionally, the interactive segment saw a nearly nine-fold increase year-over-year in adjusted EBITDA, indicating robust growth potential. The undervaluation is evident when comparing the $12.50 per share bid to a more justified value based on recent earnings and the current market price of $11.40. Given a reasonable forecast of AGS's 2024 adjusted EBITDA increased by 15% and considering a constant EV/EBITDA multiple, the share price should be higher than $11.40, implying that the Brightstar offer does not adequately reflect the company's value. The market's lack of awareness of AGS's recent performance due to the absence of an earnings press release further compounds this disparity. Lastly, the discrepancy between the deal's enterprise value of approximately $1.1 billion and the actual enterprise value at Brightstar's bid price underlines the undervaluation.

Market Research Analyst

From a market perspective, the timing of Brightstar's bid just before AGS's first quarter results release is strategic but raises red flags. The bid seems to undermine the actual market value of AGS by capitalizing on the lack of public knowledge about the company's strong quarterly performance. This tactic prevents the stock from appreciating based on its true value, which would likely happen if investors had full access to the financial results. Additionally, the potential market disruption from the upcoming IGT and Everi merger, which is expected to benefit AGS, has not been factored into the offer. AGS's new product launch in the mechanical reel market is a significant opportunity that could increase market share and revenue, further enhancing its valuation. By approving the Brightstar bid, shareholders would miss out on the potential upside from these forthcoming developments. The modest organic growth assumptions and the relatively low multiple of well below 4.8x NTM adjusted EBITDA in the bid do not align with AGS's current growth trajectory and market potential.

Releases Open Letter to AGS Stockholders Outlining Intention to Vote AGAINST Inadequate Proposal

NEW YORK, May 14, 2024 /PRNewswire/ -- Emmett Investment Management LP ("Emmett"), an investment manager focused on small and mid-cap equities across developed markets and owner of approximately 1.5% of the outstanding stock of PlayAGS, Inc. (NYSE: AGS)("AGS" or the "Company"), today released an open letter to AGS stockholders outlining its intention to vote AGAINST the Company's inadequate proposed take-private transaction with Brightstar Capital Partners, which it believes significantly undervalues the Company. 

The full text of the letter follows: 

May 14, 2024

Dear Fellow Stockholders,

Emmett Investment Management LP (together with its affiliates, "Emmett" or "we") currently owns approximately 1.5% of the outstanding stock of PlayAGS, Inc. ("AGS" or the "Company"), making us one of the Company's largest active stockholders. We have great respect for the Company, its management team, and operational strategy. We enjoyed visiting the Company's headquarters in early April and came away impressed by the increased scale and depth of the current product offering, with over 60 unique game titles produced in 2023, relative to just 30 in 2019.

We feel compelled to share with you our concerns about AGS's recently announced take-private transaction with Brightstar Capital Partners ("Brightstar"). We do not believe the take-private transaction is in the best interest of stockholders, and we intend to vote against the transaction.

The Brightstar transaction was announced just hours before the release of AGS's transformational first quarter results. The Company's first quarter results reinforce our optimistic view of AGS's prospects, as organic adjusted EBITDA grew 21%, far outpacing the industry. Business mix is also improving at AGS: adjusted EBITDA from the Company's interactive segment, to which the market assigns the highest multiple, increased almost 9x year-over-year and almost 50% sequentially.

If market participants had been given the opportunity to digest first quarter results absent Brightstar's bid, we believe AGS shares would be trading well above the current market price of $11.40. Any reasonable forecast of AGS's 2024 adjusted EBITDA increased by ~15%, which on a constant EV/EBITDA multiple—arguably conservative given improving mix—would imply a share price higher than $11.40.

It appears that AGS stockholders are being asked to accept a bid from Brightstar that offers effectively zero—or negative—premium. We are concerned that many investors may not even be aware of AGS's exceptional recent operating performance since the Company did not issue an earnings press release, as is its normal practice. It is clear to any reasonable market participant that a $12.50 take-private bid for AGS would be practicable only if announced before AGS could trade freely after the release of first quarter results. In other words, the only way for this take-private bid to have been remotely palatable to stockholders was if stockholders did not fully appreciate the impact of the first quarter results.

It is also worth noting the slight gap between the deal's stated enterprise value of "approximately $1.1 billion," and the actual fully diluted enterprise value calculable from Brightstar's $12.50 per share bid—$1.06 billion. An enterprise value of $1.1 billion, by contrast, would translate to an AGS share price of $13.40.

Brightstar's offer is unattractive for yet another reason: First quarter AGS results did not reflect any of the benefit the Company stands to receive from market disruption related to the upcoming merger of IGT and Everi. As AGS touted in its March Investor Presentation, the IGT/EVRI merger will likely accelerate AGS's market share gains, particularly in the mechanical reel segment of the market. AGS currently has zero market share in mechanical reel, but a best-in-class, brand new product set to be released in the second half of 2024. IGT and EVRI together have greater than 50% market share in this segment. But when the two companies consolidate, operators will likely begin systematically reducing the number of IGT/EVRI units on their casino floors at the very moment AGS's mechanical reel product is slated to enter the market.  Under Brightstar's proposed deal, stockholders will be deprived of this significant upside.

Given the AGS/Brightstar deal will close only in the second half of 2025 and AGS is meaningfully cash generative, stockholders are being asked to forward sell their AGS shares for what will likely be a multiple of well below 4.8x NTM adjusted EBITDA, assuming only modest organic growth. We do not understand why any shareholder would be excited to sell an excellent, growing business at this relatively low multiple and a flat share price relative to 2019. Recall that in 2019, AGS traded at a multiple of 7x adjusted EBITDA, despite inferior mix and operating momentum; today, stockholders are being asked to sell their AGS shares for a materially lower multiple when the business mix and operating momentum have both improved.

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—a significant discount to slower-growing peer Light and Wonder's 9x NTM multiple—AGS shares would trade at $24.70, nearly 100% higher than Brightstar's bid.

We do not oppose a take-private offer per se, but Brightstar's offer fails to reward stockholders for the strong performance AGS has already demonstrated and fails to account for the Company's significant potential.

Respectfully,

Alexander Rohr
Founder and CIO
Emmett Investment Management LP

About Emmett Investment Management

Emmett in an investment manager based in New York City, founded by Alexander Rohr in 2018. Emmett invests in small and mid-cap equities across developed markets.

The views expressed are those of the authors and Emmett Investment Management LP as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned nor a recommendation on how or if to vote, and should be construed only as an expression of how Emmett Investment Management LP currently intends to vote. This material is for informational purposes and should not be construed as a research report.

Investor Contact: 
info@emmettpartners.com 

Media Contacts
Taylor Ingraham
ASC Advisors
(203) 992-1230
tingraham@ascadvisors.com 

 

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SOURCE Emmett Investment Management

FAQ

Why does Emmett Investment Management oppose the take-private transaction with Brightstar?

Emmett believes the $12.50 per share bid undervalues PlayAGS, citing recent strong financial performance and future growth potential.

What were the key financial highlights of AGS's first quarter results?

AGS's Q1 results showed a 21% growth in adjusted EBITDA, with the interactive segment's adjusted EBITDA increasing almost 9x year-over-year.

How does the IGT and Everi merger impact PlayAGS?

The merger is expected to disrupt the market, potentially leading to significant market share gains for AGS, particularly in the mechanical reel segment.

What is the valuation discrepancy noted by Emmett regarding Brightstar's bid?

Emmett notes a discrepancy between the deal's stated enterprise value of $1.1 billion and the actual calculable value from the $12.50 per share bid, which is $1.06 billion.

What is Emmett's valuation of AGS shares as a standalone company?

Emmett believes AGS shares could trade at $24.70, nearly 100% higher than Brightstar's bid, based on achievable 2026 adjusted EBITDA.