Arbitrage Opportunity: American Wagering
American Wagering Inc. (BETM) operates with its wholly owned subsidiaries Leroy's Horse & Sports Place Inc. ("Leroy's"), Computerized Bookmaking Systems, Inc. ("CBS"), AWI Manufacturing, Inc. ("AWIM"), AWI Gaming, Inc. ("AWIG"), ExactGeo Media, LLC ("ExactGeo Media"), and Mobile Sports Fantasy, LLC dba PlayBETM ("PlayBETM"). Leroy's operates a network of 57 sportsbooks and mobile betting through the Leroy's® App©. CBS designs, produces, sells and services computerized wagering systems for the race and sports wagering industry. AWIM designs, produces, and sells self-service race and sports wagering kiosks. AWIG is the sole member of Sturgeons, LLC dba Sturgeon's Inn & Casino ("Sturgeons"), which AWIG owns and operates in Lovelock, Nevada. ExactGeo Media was recently formed to sell advertising in connection with our mobile betting capability, and PlayBETM is a contest, play-for-fun version of our mobile sports application. The current market cap is $5.8 million
About William Hill PLC
William Hill from its website is the UK's leading bookmaker and one of the most recognized and trusted brands in the gambling industry, providing gaming and betting services across multiple channels: online, on the high street, on the phone and on the move. We have been listed on the London Stock Exchange (WMH.L) since 2002 and employ over 15,000 people in the UK, Ireland, Israel and Bulgaria. Market cap of GBP $1.6 billion
On April 13, 2011 American Wagering Inc. agreed to be sold to William Hill PLC for 90 cents per share. The merger is expected to be completed in the first half of 2012. The arbitrage opportunity comes from BETM currently can be bought at 70 cents (on Sept. 20, 2011 stocks traded at that price).
When I came across this opportunity the questions that came to my mind was:
Why is it trading so low?
First I looked at the definitive agreement which can be found here.
It is a good read and it spells out the condition of the merger as follows:
Conditions to Each Party's Obligation to Affect the Merger. Each party's obligation to complete the merger is subject to the satisfaction or waiver of the following conditions:
• receipt of the stockholder approval, which occurred when the Majority Holders Consent was delivered on April 13, 2011;
• the receipt of consents and approvals required under the Nevada Gaming Control Act and the rules and regulations promulgated thereunder and applicable local gaming and liquor laws, ordinances and regulations (collectively, "Gaming Laws"), including receipt of all licenses, findings of suitability, authorizations, registrations, approvals and permits required to be obtained by Parent and/or Merger Subsidiary under the applicable Gaming Laws in order to consummate the Merger and the other transactions contemplated hereby ("Gaming Licenses"); Pending
• no applicable law or injunction enacted, entered, promulgated, enforced or issued by any governmental entity preventing consummation of the merger shall be in effect; and None
• no suit, action or proceeding by any governmental entity in any court is pending seeking to restrain or prohibit the consummation of the merger or that would cause a material adverse effect on the ability of Parent and Merger Subsidiary to consummate the merger or any of the other transactions contemplated by the merger agreement. None
The management expects the merger to close in first half of 2012, before Aug. 1, 2012 to be exact. Given it is still 2011 it seems arbitrageurs are waitin, or since it’s an OTC security there is not much interest or coverage.
Also, the completion of the acquisition rests on William Hill, and certain William Hill senior managers are required to be licensed by the Nevada Gaming Commission.
So why is it taking so long?
It is interesting for me at least to note that while gambling isn’t fattening to the pockets of a majority of gamblers, it is a highly regulated industry. In order to be licensed with the commission, a book runner has to demonstrate financial resources to cover winnings, have proper internal controls in place, file reports with the commission on a regular basis and go through a licensing process. Here is the link to the Gaming Commission licensing http://gaming.nv.gov/stats_regs.htm.
It makes sense for the delay as William Hill which does not operate in Nevada has to go through the process of getting licensed.
Is this a legitimate offer?
Going to the website of William Hill PLC and looking through their news it does turn out to be correct. William Hill PLC has been in a shopping spree in 2011, making inroads into the U.S. gambling market and, per their news release, they expect the acquisition to be completed in 2012. Also, It has a solid balance sheet and this acquisition is a drop in its huge bucket. The website is here.
What is in it for the management? How much important is it for them to get this merger done?
Looking at the most recent 10-K here are the top holders of shares in BETM:
Name Number of Shares Percentage of Outstanding Shares
Victor J. Salerno(1) 2,488,054 29.43% President, CEO, and Chairman of the Board
Judith L. Zimbelmann(2) 1,004,200 11.94% Director
Robert R. Barengo(3) 534,200 6.35% Director
W. Larry Swecker(4) 30,800 0.37% Director
Robert Kocienski(5) 872,908 9.41% COO and Principal Financial Officer
John English(6) 261,872 3.02% Sr. VP. Business Development and Public Affairs
All directors and executive officers as a group (six persons) (7) 5,192,034 54.01%
Alpine Advisors LLC/Don R. Kornstein(8) 875,000 9.72%
Given that this company is majority owned by the insiders, they seem to have a lot at stake for this to go through. It aligns shareholder and management interest, giving a margin of safety. The 10-K also has information on loans from CEO to the company, and the executives own preferred shares. This is where I think the probability of the merger going through is very high. The management’s financial well being is tied to consummating this merger.
And lastly why invest now?
The merger is expected to go through in the first half of 2012, and we are half way through September 2011. The return on this merger going through is about 29% at the current 70 cent purchase price. If you annualize, its gets to about 35% if this closes on June 2012. If trading on leverage this could be lot higher.
The likelihood of this merger being consummated is high and also presents investors who are willing to wait on an opportunity to get a slam dunk.
Message from the author
Please do your own due diligence before investing.