Playtech is rich, but Plus500 deal is off

UK regulators have scuppered Playtech's planned acquisition of Plus500. The internet gambling technology firm had agreed to pay 400p a share, or £460 million, for the Israeli CFD broker, but it's become clear that steps being taken to appease the Financial Conduct Authority (FCA) will not be enough. It means there's no way the deal will get rubber-stamped before the 31 December deadline.

When the deal was struck in June, both parties expected to tie things up in a matter of a few months. They didn't, and Plus500 had the right to terminate the agreement if the deal did not complete by New Year.

Luckily for Playtech, it will not incur any penalties, but there are other costs to consider - and this failure does not bode well, either for Playtech's growth plans or for acquisitions elsewhere.

Indeed, the company has already admitted that its $105 million (£69.4 million) acquisition of online CFD broker Ava Trade is also at risk. Playtech, which paid a $5 million non-refundable deposit, is currently appealing against Central Bank of Ireland (CBI) opposition, which triggered a termination right for the sellers of Ava Trade. They haven't exercised that right yet, but they may do.

Playtech's share price slumped as much as 12% Monday morning, sucked below the 780p level at which it raised £227 million from a placing in June. That money was supposed to fund the purchase of Plus500 and Ava Trade. And the 9.9% stake in Plus500 is also now worth a few million less than it was when the bulk of that stake was bought on 18 June.

There are no immediate plans for the holding, and Playtech chiefs say they are in the process of evaluating options with regards to its massive cash pile. But they've got to get that money working for them, and a big acquisition is a must. Profits at its financial trading division will now be less than anticipated in the "near to medium term", and a deal will provide a much-needed lift.

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The problem here is that Plus500 was seen as a major catalyst for Playtech's share price. It didn’t matter that Plus500 was still reeling from a scathing blog written by US hedge fund Cable Car Capital. Claims attacking accounting policies and its business model were rejected, although regulatory scrutiny did delay new account openings and new trades, and caused customer accounts to be frozen.

Of course, Playtech can still do deals - it got the TradeFX acquisition through earlier this year - but analysts had already factored Plus500 and Ava into forecasts. Strip out the anticipated contribution for 2015 and Canaccord Genuity's cash profit estimate falls from €256.5 million (£180 million) to €245.1 million, giving earnings per share of 60.2 euro cents (42.3p).

For 2016, the impact is more significant. Expectations for cash profit fall from €390.8 million to €290.4 million, giving EPS of 68.8 cents (48.3p), down 24% on previous forecasts.

However, analyst Simon Davies reckons Playtech will end 2015 with €995 million of net cash, available to spend on value-accretive deals or returns of cash to shareholders.

At 779p, Playtech shares trade on over 18 times EPS estimates for 2015, dropping to 16 times in 2016. However, strip out that £699 million of net cash - about one-third of the company's value - and that drops to 13.3 times. It's 11.2 times next year based on cash forecasts of over £1 billion for 2016.

"We think this looks attractive, given structural growth opportunities," says Davies. "We reduce our target price from 1,065p to 1,000p to reflect the downgrades."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.