GAN Part 3: SEGA SAMMY PRICE DROP TODAY (Quick Pitch/Update)
The odds are looking very favorable now
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For support on the claims I make in this post, a detailed analysis is in my former post:
GAN Part 2: Post-Acquisition Offer Analysis (Part 2 more important than Part 1. Read this first.)
GAN Part 1: A Quick Overview of GAN Pre-Acquisition
$GAN dropped from a post-acquisition high of $1.75 to a low of $1.51 (at the time of me writing this article. If it drops more, your odds improve). Sega Sammy's offer is $1.97/share
At a downside price of $0.90/share, the market went from pricing the probability of the deal going through at 80% to now 57%. (Feel free to discuss in the comment section what downside price you are using and why?)
I do not think this is the case:
1) CEO is a very motivated seller. Brought on to practically sell the business. Comp package gives him $500k when he successfully sells the business. Also, $500k when he gets “terminated without cause.” If Sega buys GAN, they are very likely going to terminate the interim CEO. The faster the CEO sells the business, the faster he makes a $1 million bonus.
2) Board agrees with the acquisition
3) SegaSammy is a very motivated buyer, with 340mm USD of net cash on their balance sheet, hoping to invest 100 billion yen from now until 2026 to expand in the gaming segment.
4) Say on March 31, 2024, shareholders disagree; Segasammy has enough cash to raise their bid to $2.50-$3.00/per share for example, which takes the acquisition EV from 90mm to 110–130mm roughly. They are fully capable of doing this.
5) Some may think GAN and Sega have no synergies. I disagree for the following reasons:
The problem with GAN was creating original content that could differ from what their competitors or clients could develop in-house. This resulted in a lower take-rate in the new round of agreement negotiations.
SEGA’s biggest IP title is Sonic the Hedgehog. SEGA has an expansive IP portfolio to choose from. They also recently purchased ROVIO which owns Angry Birds and other mobile games.
SEGA has the ability to create highly differentiated iGaming games with its IP Portfolio of characters and games.
Not to mention, SEGA isn’t new to this. SEGA sells Pachislot and Pachinko machines, which are essentially Japanese slot machines. SEGA currently sells the best-selling Smart Pachislot on the market. The Hokuto No Ken Smart Pachislot.
So do I think this acquisition will fail 42% of the time? No!
You may be wondering; even if the shareholders approve, we still need regulatory approval. Sure, let’s analyze that as well:
Antitrust and Competition Laws:
Examination of potential antitrust issues to prevent the creation of a monopoly or anti-competitive market behavior.
Evaluation of the impact on competition in the relevant markets, especially in the entertainment, gaming, and resort industries.
Analysis:
GAN is losing money. Not that competitive to begin with. SEGA is taking a risk by trying to revive GAN; there is no indication that a monopoly will be formed if SEGA acquires GAN.
SEGA entry into the market could inspire other companies with an IP portfolio to enter the iGaming market. This would increase the content quality as a whole to consumers and consumers would benefit from being entertained with better games
National Security Concerns:
Assessment of any national security implications arising from the acquisition, particularly if it involves critical infrastructure or technology.
Analysis:
Nothing GAN does is a national security threat. Relations with the US and Japan aren’t bad. If this were a Chinese company, then I’d agree; this would be risky.
Market Share and Dominance:
Analysis of the combined market share of GAN Limited and Sega Sammy in the relevant sectors.
Consideration of the potential dominance of the merged entity in the entertainment and gaming markets.
Analysis
SEGA is completely new to the iGaming world so they have 0% US iGaming market share. GAN is a small fry in the iGaming market. Market share doesn’t increase if an acquisition is approved. They just have a better ability to gain market share when combined is all.
I do not believe they will dominate the market. SEGA needs to still figure out how to blend its IP portfolio into iGaming games. This has not been figured out yet.
Consumer Impact:
Evaluation of how the acquisition might affect consumers, including potential changes in service quality, pricing, and consumer choice.
Assessment of any negative impact on customers or stakeholders.
Analysis:
As I mentioned earlier, quality and consumer choice improve as SEGA has the capacity to provide higher-quality iGaming content
I don’t see any negative consumer impact.
Financial Stability and Viability:
Scrutiny of the financial stability and viability of the merged entity.
Assessment of whether the acquisition might lead to financial distress or instability.
Analysis:
SEGA has lots of cash and more cash than debt. They are investing 100 billion yen in the next 3 years. GAN will be very financially stable.
Compliance with Gaming Regulations:
Examination of compliance with gaming regulations and laws, ensuring that the merged entity adheres to all applicable rules in the jurisdictions where it operates.
Consideration of any potential impact on responsible gaming practices.
Analysis:
GAN is already in compliance with gaming regulations in each state it operates in
Data Protection and Privacy:
Assessment of how the acquisition might affect the handling and protection of customer data.
Compliance with data protection and privacy laws, ensuring that the merged entity respects user privacy.
GAN and Sega, as separate entities, to the best of my knowledge, have not had security breaches and have years of experience handling customer data.
Employee Welfare and Labor Laws:
Consideration of the impact on employees, including potential job losses or changes in employment terms.
Compliance with labor laws and regulations to protect employee rights.
Analysis:
Given that SEGA has teams across the US, Europe, and Asia, I suspect part of GAN’s workforce will be terminated, including the CEO.
Approval from Gaming Authorities:
Obtaining approval from relevant gaming authorities that oversee the operations of both GAN Limited and Sega Sammy.
Compliance with regulatory requirements specific to the gaming and entertainment industries.
Analysis:
Uncontrollable. Based on the above points already mentioned. I don’t see SEGA being in violation of any of the above.
Legal and Regulatory Disclosures:
Fulfillment of all legal and regulatory disclosure requirements related to the acquisition.
Transparency in providing necessary information to regulatory bodies overseeing the approval process.
Analysis:
Not an issue. SEGA is already very transparent in their Japanese filings.
In summary, based on the above, I believe it is more likely that the acquisition of GAN by SEGA will be approved by regulatory authorities.
I believe we are being given extremely generous odds if we only need the deal to go through 57% of the time. I also don’t see risks that add up to the deal not finalizing 43% of the time.
Disclosure: I currently hold no position in GAN, Gan Ltd.
GAN Part 4B: Decision Tree Analysis (Factoring Chilean Operation Risk)
*You should read Part 4B before Part 4A. Part 4A was my original decision tree analysis, but I have since factored in Chilean Operation Risk.
GAN Part 4A: Decision Tree Analysis
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Part 4 factoring in regulatory risk in Chile here: https://open.substack.com/pub/continuouscompounding/p/gan-part-4b-factoring-chilean-operation?r=28rmoq&utm_campaign=post&utm_medium=web