888 a logical buy for PTEC?

Time for some totally random speculation.

Interesting recent statements for PTEC:

 Playtech is increasingly consolidating its position as the supplier of choice for technology and services for the worldwide online gaming industry ... The Board has determined that due to exceptional joint venture and near term acquisition opportunities currently under discussion in certain key markets, it will defer a decision over the interim dividend until the final results for 2011, in order to retain maximum flexibility.

 There are 3 interesting major shareholders in 888: E Shaked Shares Trust, O Shaked Shares Trust, and Ben-Titzak Family Shares Trust; "The Israelis". Together, they hold a combined value of £57.9m, out of a market cap of £106m (55%).

888 has been a fiasco lately. Maybe a shakeup would be something that the Israelis would welcome, and PTEC might be able to do that with a purchase (at the right price).

There's some other interesting angles to consider. 888 has a market cap of £105m, and net cash of £37m. That would give it an EV of £68m. Well, PTEC has net cash of £56m, so a buy would look within reach. Also, 888 has an EV/EBITDA of 3.92, compared to PTEC of 7.33 (according to SharelockHolmes). So PTEC might view it as value-enhancing.

Compare that with, say, BPTY, which has a market cap of £1bn, net cash of £180m, and EV/EBITDA of 13.52. BPTY is too big (although in the world of finance, that doesn't necessarily stop anybody) and probably too expensive to be interest to PTEC relative to 888.

I'm not saying it's going to happen, of course, I'm just putting down a marker so I can claim bragging rights if it does.

I was seriously considering adding 888 to sticky situations, but decided against it. Their ROE doesn't seem especially high. The Earnings Yield looks good, but given the instability of the earnings, it's difficult to determine if the return will be exceptionally high, or only mediocre. I like the restructuring angle, but I have doubts about the competency of the board. To buy a company, and then basically write it off a year later as a mistake is a great cause for concern. Also, my sticky sits already has a gaming company in it.

It's an interesting setup, and I have a feeling that the odds are good. I am keen to keep an eye on this one to see how this one plays out. I'm not brave enough to commit, though.

888 notes

Some notes about what people have been saying about 888:

• the fact good news can't lift it means when the market weakens yet again which it will, 888 will head lower.
• has no major city interest
• Excellent results, 888 are slowly but surely repairing the numerious mistakes that crook Levy made. 
• The cost of trying to keep up with the big boy is astonishing, and will be repeated in every new market that opens. Future taxation changes and potential US liabilities make anybody staying here very brave. I was out earlier this month, and far happier for it. Profit, or realistic future profit, are everything. Increased figures purely through other sites closing because they were operating illegaly aren't any great achievement. The board certainly shouldn't take any credit for it. Invest in a quality board elsewhere and reap the benefits, in my view. 
• I am patient and believe the share price will double in 12months / would be extremely surpised not to see a firm offer at around 80p before this 12months is out anyway. Likely will be from BPTY, Playtech or Caesers, but we will see. If you take Ladbrokes debacle away and put the share price at 45p during that crazy 6months 888 are down but not much more than many many other shares, including BPTY that have lost far more value.
• I don't see why they [Playtech] wouldn't go for 888, as obviously the Ladbrokes offer was too low. 888 has great technology and has the fastest growing traffic numbers over the last year.

Gigi Levy received a settlement of $3.9m from 888 following his resignation as CEO in April 2011, although he has stayed on an a non-exec director.  (FT article). His board seat is crucial in preventing an immediate payment to the vendors of Wink Bingo. (Telegraph). Daniel Stewart sees a risk of the UK imposing a remote gambling tax, which could be as high as 35% of EBITDA on 2013, and hence is a seller of the stock.

For the half-year just ended, 888 had an EBITDA of $20m. With depreciation of $7.1m. That gives it an EBIT $12.9m for the half year, which annualises to $25m, or about £15m. This gives 888 an unleveraged earnings yield of 22% (15 / (105 mkt cap - 38 net cash)). That's very high. Let's say the gaming tax takes effect, and that 888 can now only earn 65% of that. That gives it a yield of  14% (0.65 x 22).