Upfront note- investing in bankrupt equities is very risky. There is a significant risk of losing all of your money. Please do your own research.I’d like to thank a reader for pointing out Gametech (GMTCQ, Financial), a bankrupt equity with huge potential upside. In many ways, it reminds me of Arctic Glacier (AGUNF, Financial), in that the companies huge debt burden and tiny equity slice create significant risk but also present huge potential upside.
Anyway, Gametech produces bingo systems and video lottery machines. Their problems that lead them into bankruptcy stem from two things.
However, you can review all that yourself, and I encourage you to do so.
I think there are five key points that makes the company interesting.
At their last balance sheet, the company had $16m in net debt and 11.84m shares outstanding. Due to their declining financial position, the entire loan came due on June 30th. The bank they had been working with sold the loan to a competitor on June 27, and the competitor than refused to modify the loan when it came due June 30.
The next stuff is going to come from their first day filing, which was emailed to me and I can’t find an online link to, so you’ll have to look for yourself. After the competitor bought the loan, the competitor presented them with a 38 page merger agreement (see page 8 of the first day motion). Then, on page 10 of the first day motion, the company mentions that they are currently in discussions with another party for a merger that would create more value than their competitors proposed merger.
So you have a company with leading market share and two competitors interested in buying them. One holds their loan, and one is actively in merger talks. Given Gametech’s huge SG&A costs ($13.5m in their last full fiscal year), the value of potential synergies between them and a competitor could potentially be huge. And the upside if the company can reach it’s 2005-2006 level is huge.
In other words, given the upside potential from a merger, I think there’s a potential for a pretty big bid to come in. And the equity would thus have “nuisance” value.
For example, if you assume an acquirer could realize merger synergies of 10% of SG&A, that would be an extra $1.35M in ebit increase just to Gametech- completely ignoring the value of SG&A cuts on the acquirers side. That’s basically $10m of value realization right there, ignoring the value of Gametech as a standalone business!!!!
So it doesn’t take much to see a potential bidding war starting. And any increase in bids can cause a pretty quick increase in equity value given how levered the company is and how much a stub the equity currently is. Each $1m increase in bid equates to another 8 cents or so in equity recovery value, so it doesn’t take much to go from a bid valuing the equity at nothing ($16m, the face value of debt) to a bid valuing the company at almost $0.34 per share (a $20m bid).
Finally, consider this. It seems acquisitions in the space are generally done at ~1x revenue. Gametech acquired there VLT busienss for almost 1.5x revenue. 1x revenue would represent an EV bid of $30m, which doesn’t seem unreasonable at all given the potential synergies and upside. If that were to happen, you’re looking at a recovery value over $1.18 per share.
Is that likely to happen? I’m, of course, not sure- I’m by no means an expert in the field, and the company does mention in their filings that they’d like to emerge a standalone company.
But I think there’s a decent chance of a bidding war, and a recovery close to $1 per share given everything mentioned above doesn’t seem completely out of this world. With huge potential upside and limited downside, I think it’s worth the risk for a small piece of my portfolio.
Disclosure: long AGUNF and GMTCQ
Anyway, Gametech produces bingo systems and video lottery machines. Their problems that lead them into bankruptcy stem from two things.
- A 2006 acquisition of their video lottery machine that significantly levered the company up
- The economic crisis which subsequently lead to a huge drop off in their bingo division.
However, you can review all that yourself, and I encourage you to do so.
I think there are five key points that makes the company interesting.
- The company has huge SG&A costs
- There’s already been significant interest in acquiring the company in bankruptcy
- The company has been cash flow / ebitda positive even throughout this huge decline
- There is absolutely huge upside if the company can do the type of revenue it was doing in the mid 2000s
- Given the huge leverage, a company could make a significant bid on the equity and it would still represent only a fraction of the purchase price.
At their last balance sheet, the company had $16m in net debt and 11.84m shares outstanding. Due to their declining financial position, the entire loan came due on June 30th. The bank they had been working with sold the loan to a competitor on June 27, and the competitor than refused to modify the loan when it came due June 30.
The next stuff is going to come from their first day filing, which was emailed to me and I can’t find an online link to, so you’ll have to look for yourself. After the competitor bought the loan, the competitor presented them with a 38 page merger agreement (see page 8 of the first day motion). Then, on page 10 of the first day motion, the company mentions that they are currently in discussions with another party for a merger that would create more value than their competitors proposed merger.
So you have a company with leading market share and two competitors interested in buying them. One holds their loan, and one is actively in merger talks. Given Gametech’s huge SG&A costs ($13.5m in their last full fiscal year), the value of potential synergies between them and a competitor could potentially be huge. And the upside if the company can reach it’s 2005-2006 level is huge.
In other words, given the upside potential from a merger, I think there’s a potential for a pretty big bid to come in. And the equity would thus have “nuisance” value.
For example, if you assume an acquirer could realize merger synergies of 10% of SG&A, that would be an extra $1.35M in ebit increase just to Gametech- completely ignoring the value of SG&A cuts on the acquirers side. That’s basically $10m of value realization right there, ignoring the value of Gametech as a standalone business!!!!
So it doesn’t take much to see a potential bidding war starting. And any increase in bids can cause a pretty quick increase in equity value given how levered the company is and how much a stub the equity currently is. Each $1m increase in bid equates to another 8 cents or so in equity recovery value, so it doesn’t take much to go from a bid valuing the equity at nothing ($16m, the face value of debt) to a bid valuing the company at almost $0.34 per share (a $20m bid).
Finally, consider this. It seems acquisitions in the space are generally done at ~1x revenue. Gametech acquired there VLT busienss for almost 1.5x revenue. 1x revenue would represent an EV bid of $30m, which doesn’t seem unreasonable at all given the potential synergies and upside. If that were to happen, you’re looking at a recovery value over $1.18 per share.
Is that likely to happen? I’m, of course, not sure- I’m by no means an expert in the field, and the company does mention in their filings that they’d like to emerge a standalone company.
But I think there’s a decent chance of a bidding war, and a recovery close to $1 per share given everything mentioned above doesn’t seem completely out of this world. With huge potential upside and limited downside, I think it’s worth the risk for a small piece of my portfolio.
Disclosure: long AGUNF and GMTCQ
