The recent selloff in Aristocrat Leisure’s stock points to the likely failure of its GBP2.7 billion ($3.7 billion) bid for U.K.-listed Playtech in a shareholder vote next week, J.P. Morgan wrote in a note, adding the dip is a buying opportunity.
Playtech’s board has backed the combination with Aristocrat, however, it has warned it has not been able to engage with a number of “material” investors about their intentions on the vote. The bid needs 75 percent backing to go through and some media reports have said that investors, thought to be from Asia, have built a sizeable stake at a price higher than Aristocrat’s bid and may have accumulated as much as 27 percent in their favour.
J.P. Morgan puts the chance of the bid falling through at 90 percent.
However, it said it remains Overweight on the stock.
“Further digital growth and capital management opportunities are available, coupled with strong execution by management, despite a challenging cyclical environment. We believe the risk/rewards remains attractive,” the firm wrote.
Aristocrat’s stock has fallen almost 15 percent this year, underperforming its peers. The company launched its bid for Playtech to expand into real money gaming, which is a gap in its current portfolio.
J.P. Morgan maps out several possibilities for Aristocrat, including coming back with a higher bid, which would be well within its balance sheet and cash flow capacity.
There have been reports that Playtech could be broken up, which would lead to a higher realized value. This would take more time, but may benefit Aristocrat as it had already indicated it would sell some businesses. J.P. Morgan sees this as having both positives and negatives for the supplier.
The third option is to select another igaming target and management has already indicated that Playtech was not the only company it had assessed.
Playtech’s annual general meeting will be held on Feb. 2nd.
Since Aristocrat made its bid for Playtech in October, several other suitors have emerged, including a Hong Kong-based firm named as Gopher and JKO Play, which was backed by former Formula One boss Eddie Jordan. All other suitors have chosen not to proceed with firm offers, but the stake building has raised a major question mark over the outcome of the bid.