6/18/2014 What the PokerStars / Amaya Deal Means for US Online Poker

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For $4.9bn: Answers,
Implications and Speculation
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Home / International / PokerStars / PokerStars Bought by Amaya For $4.9bn: Answers, Implications and Speculation
PokerStars Bought by Amaya For $4.9bn: Answers,
Implications and Speculation
By Chris Grove on June 13, 2014 07:50 PDT @OPreport
Contents [show]
In news that has upended the global balance of power in the online gambling
industry, Amaya Gaming has reached a deal to purchase the Rational
Group, parent company of PokerStars and Full Tilt Poker.
Read the email from PokerStars CEO Mark Scheinberg announcing the sale to employees here.
Details of the purchase valued at $4.9bn were made available by a statement issued by
Amaya on June 12th. Additional details are available via a presentation Amaya gave the following
morning, which you can review here (free signup required).
In this article, Im going to answer some of the questions surrounding the deal and outline
some possible implications stemming from Amayas proposed acquisition of Rational.
Inside the deal
How long has the deal been in the works?
David Baazov, CEO of Amaya, said that he approached Rational almost a year ago about
forming a combined company.
In an email to PokerStars employees, Mark Scheinberg said there had been more than six months
of negotiations between the parties.
Thats an interesting timeline, as it basically places the start of negotiation within days of the
public announcement by the DGE that the agency was suspending PokerStars license application.
The implication is clear: Suspension in New Jersey was the proverbial straw that broke the camels
back, tilting the internal scales at PokerStars in favor of a sale.
When will the deal close?
Both parties have indicated that the deal is expected to close by the end of September 2014.
Baazov said the deal will require some regulatory approvals, primarily some select European
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jurisdictions, but indicated that he doesnt expect any issues.
What does Amaya get in the deal?
Amaya acquires the Rational Group and everything that entails, including:
PokerStars.
Full Tilt Poker.
A number of live tournament poker events, including the European Poker Tour,
PokerStars Caribbean Adventure, Latin American Poker Tour and the Asia Pacific
Poker Tour, along with branded poker rooms.
A wide array of media, content and programming.
What about PYR Software?
PYR Software, the Isai Scheinberg-founded company understood to be the tech development arm
of Rational, was not mentioned in the official release or presentation by Amaya. WickedChops is
reporting that PYR is, in fact, part of the sale.
Not announced anywhere yet, but PokerStars/Isais PYR Software is part of the
sale, according to sources. PYR is basically the development and support system
for PokerStars. Read more about it here and here.
How is Amaya paying for the deal?
The deal is an all-cash purchase. Per a slide from Amayas presentation, the financing breakdown
goes like this:
$1.642 billion of equity in the form of $1bn in convertible preferred shares and
$642mm of common equity.
$2.9bn of committed debt, including $2.1bn in senior secured credit facilities and
$800mm in a second lien term loan.
Remainder is cash and cash equivalents.
More details about the financing structure are available in the press release.
The cost of the financing was not released, and Baazov declined to offer any details on the cost
during the call announcing the deal.
Bloomberg claims that Mark Scheinberg owns 75% of Rational.
Who faces the biggest threat from this deal?
If the purchase smooths the entry of the PokerStars and Full Tilt brands into the regulated U.S.
market and that is a big if competing operators and competing B2B suppliers have the most to
fear from the newly-expanded Amaya.
The stock of bwin.party has dropped some 10% since the news broke. 888 saw a similar dip
following the announcement.
The return of the exiled poker giant, wrote FitchRatings in a research note, would inhibit the
online poker ambitions of big US based operators such as Caesars Entertainment, Boyd Gaming
and Station Casinos.
Thats true. But its also true that licensed casinos will be the gatekeepers to online gambling in
most states. And therein lies an opportunity for at least one land-based casino operator.
Could this lead to a PokerStars / Caesars partnership?
The deal results in two bridges between PokerStars / Full Tilt Poker and Caesars that werent
there before:
Amaya is a platform and content supplier to Caesars New Jersey online casino.
Thats a close relationship that goes beyond Amaya simply licensing a few slot
titles to Caesars.
Of the groups facilitating financing for the deal, Macquarie Capital, Deutsche
Bank and The Blackstone Group are also financial partners of Caesars.
A few other points to consider:
Caesars has indicated in the past that their poker platform relationship with 888 has
a shelf life. And its not clear that the company is pleased with how the platform has
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performed to date.
Its also an open question how long Caesars and 888 can continue cooperating
as B2B partners while competing as B2C operators.
A major software upgrade would likely propel WSOP.com to the top of the New
Jersey market and strengthen WSOPs hold on Nevada perhaps weakening
Ultimate to the point of near-failure.
If the deal closes, Amaya will own 3 online poker platforms: Ongame, Full Tilt Poker
and PokerStars. That will provide them with the flexibility to work with multiple
partners simultaneously.
The dispute between PokerStars and Caesars was in many ways a deeply personal
one. Removing some of the personalities involved could rapidly improve the
relationship.
Caesars has been allegedly willing to deal with PokerStars in the past if the
terms were favorable.
Caesars needs regulated online gambling to do well, and quickly.
PokerStars has an established partnership arrangement with Atlantic City casino Resorts that
might complicate any PokerStars-related dealings between Caesars and Amaya. Thats where the
flexibility of having both the PokerStars and Full Tilt Poker platforms could come into play.
A partnership between Caesars and PokerStars / FTP isnt a fait accompli. But its certainly far
more possible now than it was before Amayas planned purchase of PokerStars was announced.
Will this deal allow the PokerStars brand / software to enter
New Jersey?
Id say yes assuming the divestiture of Mark and Isai Scheinberg is as total and clean as the
announcement suggests it will be.
DGE director David Rebuck provided the following statement to John Brennan at NorthJersey.com:
The Division is aware that current New Jersey authorized Internet gaming
provider, Amaya Gaming Group, is acquiring the assets of PokerStars.
Regulatory integrity is always paramount to the Division and we will review all
aspects of this acquisition to ensure compliance with our high regulatory
standards. We are also encouraged by this development and the expanded
opportunities it might provide for New Jerseys Internet gaming industry.
When the DGE announced the decision to suspend PokerStars NJ application in December, they
also laid out the roadmap for Stars return. Key excerpt:
The Divisions determination is based primarily on the unresolved federal
indictment against Isai Scheinberg for the alleged violation of federal gambling
statutes, namely, the Illegal Gambling Business Act and the Unlawful Internet
Gambling Enforcement Act (UIGEA), and the involvement of certain PokerStars
executives with Internet gaming operations in the United State following the
enactment of UIGEA.
As this deal sees all previous owners of PokerStars including Isai Scheinberg exit the company
in the transition, it would appear to satisfy the DGEs call for divestiture by Scheinberg and certain
PokerStars executives.
David Rebuck, head of the DGE, has previously referred to the decision to suspend PokerStars
license application as a tough one and that the PokerStars product was better than anything
weve tested elsewhere in comments to GamblingCompliance.com.
That all sounds good, as far as it goes. But PokerStars competition will no doubt apply whatever
pressure they reasonably can to delay the rooms entry. And, as former Nevada Gaming Control
chief Mark Lipparelli told Gigse.com, the fine details of the deal structure will matter to most US
regulators.
Amaya is a licensed content and platform provider in New Jerseys iGaming market. Baazov said
that PokerStars would be able to be operating in NJ within a short time following DGE approval.
Will PokerStars and Resorts maintain their New Jersey deal post-sale?
No word yet from Resorts, although its difficult to imagine them walking away now after sticking by
PokerStars through the tough times.
As for Amaya, they seem intent on continuing with the deal. A slide from their presentation
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outlining the sale notes that the [e]xisting Rational Group partnership with Resorts Casino Hotel
would allow launch of online poker operations in New Jersey within weeks if and when regulatory
approval obtained.
What impact would PokerStars have on the NJ market?
The New Jersey online poker market is currently down roughly 50% from the markets peak in
January. The entry of PokerStars would ignite significant interest in the short-term and push the
market back to, and perhaps even beyond, that peak.
The site would immediately be a contender for the top traffic spot.
But PokerStars cannot change the facts on the ground in New Jersey. They cannot expand the
population of the state. And their immediate impact on issues such as payment processing will
likely be minimal.
Ultimately, PokerStars will reinvigorate the New Jersey market in the short term and expand the
market in the long term. But a large chunk of their traffic, likely the majority, will be siphoned off
from other rooms. This reality could result in the closure or merger of existing rooms, and will
certainly discourage additional rooms from entering the market.
Would NJ players be able to play against international players on PokerStars?
Not as things currently stand.
The player pool for PokerStars NJ or Full Tilt Poker NJ would be limited to individuals located within
the state. There would be no interaction with players on the international PokerStars / Full Tilt
Poker platforms.
Theres certainly some potential in the long run for that sort of player pooling, but its difficult to
see the pieces coming together until a few years (at a minimum) pass. State-based player sharing
will be the first step toward international player pools, and even those agreements are still in the
hypothetical stage at this point.
What about California?
Trickier business there.
Amaya believes that the purchase will expedite the entry of PokerStars and Full Tilt Poker into
regulated markets in which Amaya already holds a footprint, particularly the U.S.A.
Sounds good. But proposed legislation in California excludes not only operators, but also
intellectual property such as brands and software connected to online bets taken from the US
market after December 31st, 2006.
So-called bad actor clauses with such broad scope would, at first glance, continue to block
PokerStars including the software platform from participation in the market despite todays
deal.
But theres reason for optimism as well:
If the deal does swing the relationship between Caesars and PokerStars / Amaya
from adversarial to cooperative, the bad actor clause could quickly become a paper
tiger or vanish altogether.
Amaya has existing relationships with several California tribes. For example, its
Cadillac Jack subsidiary provides Wide Area Progressive products to the California
Nations Gaming Association, which includes San Manuel and Rincon, among
dozens of other tribal nations.
John Mehaffey has offered up one potential workaround should bad actor
provisions make it into the final bill: Amaya could develop a new online poker platform
that builds on the institutional knowledge the company has just acquired.
And if New Jersey does approve PokerStars, that could make it tougher for bad actor proponents
to justify their position, a fact not lost on California Gaming Control Commissioner Richard
Schuetz, who told Gigse.com that:
Dave Rebuck and his team at the New Jersey Division of Gaming Enforcement
(DGE) will be one of the first to evaluate this contemplated new entity. This is
one of the finest regulatory agencies in the world, with sophisticated
investigatory assets and a strong commitment to maintaining a positive image
for the industry.
One would have to think that their view would be a powerful voice in how
this new entity fits within the US regulatory model.
Above emphasis mine.
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We wont have to wait long to find out. The window for California online poker in this session closes
at the end of August.
Will PokerStars and its partners continue to fight bad actor clauses?
Its unclear what impact, if any, the purchase will have on PokerStars proposed partnership with
the Morongo Tribe and California cardrooms the Bike, Commerce and Hawaiian Gardens and
the coalitions anti-bad actor clause advocacy.
The coalition may well remain intact as a commercial enterprise. But it seems inevitable that
PokerStars focus will be consumed by planning and executing the sale and that new owner Amaya
will be more interested in building bridges rather than burning them.
That suggests well see a softening of the public rhetoric over this issue from the corner of
PokerStars and its California partners.
And other states like Pennsylvania, Illinois and New York?
The same analysis from California applies equally here.
If Caesars decides that PokerStars is no longer an enemy post-sale, then well see a relaxing of
bad actor approaches as bills move forward in those (and other) states.
A settlement between Isai Scheinberg and the DoJ would also help remove bad actor clauses from
the legislative lexicon going forward.
Does this deal accelerate US online poker regulation?
Again, we return to the issue of what relationship Caesars will have with the new owners of
PokerStars. If all parties are speaking with one voice, the process becomes an easier one.
But ultimately disagreements between PokerStars and Caesars are not the only, nor the primary,
roadblock to online gambling regulation in the United States. A host of other issues and opponents
populate that line ahead of the issues between the two, and those issues and opponents will
remain regardless of this deal.
So, short answer: Yes, but just a little.
How much was PokerStars making?
From the press release:
In calendar years 2012 and 2013, Oldford Group recorded revenues of $976
million and $1.1 billion, respectively, and adjusted EBITDA of $342 million and
$420 million, respectively. Its cash flow from operations in 2012 and 2013 was
$267 million and $317 million, respectively.
A slide from Baazovs presentation offers some additional information:
The release offers no further level of detail.
The lions share of the that most certainly came from PokerStars, although contributions of Full Tilt
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Poker to the revenue were likely material. Estimating the income from tours is trickier.
What changes for PokerStars and Full Tilt Poker players?
Not much, at least not in the short-term with one major caveat (more on that below).
Much of the current teams at Stars / FTP are expected to be maintained. Per the statement:
Rational Groups executive management team will be retained and online poker
services provided by PokerStars and Full Tilt Poker will be unaffected by the
Transaction, with players continuing to enjoy uninterrupted access to their
gaming experience.
A letter sent by PokerStars to Isle of Man authorities reinforced the point:
As you know, PokerStars is a consumer facing business which means there is
little or no overlap between the two companies that would lead to job
losses. The stated intention of Amaya is business as usual and to leave things
unchanged as much as possible. I can therefore confirm there are no planned
redundancies. On the contrary, the clear intention of the acquisition is to take
PokerStars on to even greater heights with plans for launches of new products
and expansion into new territories, particularly in the US should more states
introduce applicable legislation. Such plans will likely lead to growth and job
opportunities for the talent that exists in the local market in addition to
providing likely increased revenues through direct and indirect taxation.
Read the letter here.
One major caveat
There are some questions about Amayas continued presence in the Canadian market and other
so-called grey jurisdictions that lack a clear regulatory scheme for online gambling.
Some regulated operators have exited the Canadian market in recent months (and others have
left only to quickly return). Read more about the Canadian legal context for online poker at
PokerFuse.
As a publicly traded company, Amaya would probably face more pressure to exit such markets
than the privately-held PokerStars.
But its business as usual for PokerStars and FTP in Canada, for now at least. A PokerStars rep
on TwoPlusTwo confirmed that the sites would remain open to the Canadian market, saying We
still plan to serve all current markets, including Canada, and to work to grow the game of poker
globally.
Will Isai Scheinberg settle with the DoJ now?
Rumors that Isai Scheinberg is discussing a settlement with the DoJ have been swirling for months.
This deal could represent a step in that direction, providing ready cash for a settlement and
(arguably) a greater motivation for Isai Scheinberg to close the chapter completely.
A deal would almost certainly come with an eight or nine-figure fine attached. All parties involved
are no doubt keen to reach a resolution, as none benefit at this point from the saga now
boasting a running time over over three years dragging on.
What does Isai Scheinberg look like?
Questions about Isais appearance have become something of a running joke in the industry, as
photos of the PokerStars founder have been few and far between over the years.
But we now have an image of Mark and father Isai circa 2013:
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Links and additional reading
Related documents
Official announcement from Amaya and Rational.
Read the email from Mark Scheinberg to PokerStars employees announcing the sale.
Statement from PokerStars rep on TwoPlusTwo.
Read a letter from PokerStars to IOM officials assuring officials that PokerStars plans
to remain headquartered on the Isle of Man.
Listen to Amaya call announcing deal and view presentation (free registration
required).
Statement from the Poker Players Alliance.
Media coverage
Overview article from the Wall Street Journal.
Articles from Bloomberg here and here.
New York Times overview.
Thoughts on the deal from CalvinAyre.com.
Discussion thread on TwoPlusTwo.
Steve Ruddock surveys industry reactions over at Bluff.
Insider take over at WickedChops.
Array of reactions from industry figures via GiGse.com.
PokerStars pros Daniel Negreanu and Vanessa Selbst share their take with PokerNews:
6/18/2014 What the PokerStars / Amaya Deal Means for US Online Poker
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Upset of Cantor Topples One of
Adelsons Closest Capitol Hill
Allies
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Mark Scheinberg Sent to
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Chris Grove - Chris is the co-founder and an editor of OnlinePokerReport.com. He's
written for dozens of gambling publications and has been involved with various
aspects of the online poker industry since 2004.
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