Len Ainsworth recently agreed to sell his 53% stake in Ainsworth Game Technology (ASX: AGI) to Austrian gaming giant Novomatic for $2.75 per share. Under section 611 item 7 of the Corporations Act, Novomatic can purchase his shares without having to mount a full takeover bid for AGI if minority shareholders approve at an upcoming extraordinary general meeting (EGM).
I’d prefer Novomatic make a full takeover bid for the company rather than gaining control for about half the cost and suggest the board persuade Novomatic to do exactly that whilst also inviting other offers for the company.
Failing that, I question whether Len Ainsworth's wife and family – who I understand own around 10% of AGI – should be allowed to vote at the EGM.
I’m not a lawyer and so I'm not an expert in corporate law. However, the Corporations Act seems to state that 'associates' are unable to vote. 'Associates' include people with whom the primary person is 'acting in concert' with regard to the company's affairs.
The independent directors are currently determining whether Len’s wife and family satisfy this definition and hence should be barred from voting.
I’d be surprised if they didn’t as Len AInsworth is 93 and it'a only natural for matters of inheritance to have been discussed as part of the sale: whilst his family’s 10% stake in the company is also quite valuable, they’ll of course be the biggest beneficiaries upon Len’s Ainsworth's passing, particularly as Len has said ‘[my wife] won’t be selling her shares’.
At the very least I suggest the spirit of the law requires his family be prevented from voting.
Good deal for Novomatic…
Novomatic is getting a good deal, and not just because it's gaining control without purchasing the remaining 47% of AGI.
Whilst AGI has stumbled in Australia in recent times, losing market share to a reinvigorated Aristocrat Leisure (ASX: ALL), it continues to grow in the Americas: foreign sales were 65% of the total in the first half of 2016.
AGI is likely to continue to gain market share in the US Class III slot machine market - helped by the imminent opening of its new Las Vegas headquarters - whilst bedding down its recent acquisition of Class II manufacturer Nova Technologies and also growing its Class II business.
Closer to home, its recently-released A600 cabinet should help it claw back ship share in Australia in coming years and a nascent online social and real money gaming business is a further growth opportunity. Online is the fastest growing segment of the gaming market and AGI’s games can be easily transferred to this area. Aristocrat has already shown how profitable online can be, earning $42m in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2015, a 147% increase on 2014 (all figures in constant currency).
With a PER of 14 (excluding any currency gains), this growth isn't priced in and Novomatic will of course benefit if my analysis is correct. However, of most benefit to it is the access AGI provides to the lucrative North American slot market as well as the smaller and more mature Australian market. Unlike AGI, which has spent years – and a great deal of money – satisfying probity checks and obtaining licences in these markets, Novomatic will gain access much more quickly once the various regulators approve the sale over the next year or so.
…but not for minorities
Moreover, despite Novomatic stating that it will maintain its stake ‘at or around’ 53%, this is not a legally binding commitment and so Novomatic can of course change its mind. Under the 'creep’ provisions of the Corporations Act, it can increase its stake by an additional 3% every six months should it so choose.
AGI also recently initiated a dividend reinvestment plan (DRP) recently which, as most shareholders are unlikely to participate, means Novomatic’s percentage ownership will gradually increase if it chooses to participate.
Under Len Ainsworth’s control and expertise, minority shareholders were protected to a great extent. As he should have, he managed the company with the long term in mind – for instance, he didn’t bother consulting major shareholders before deciding to expand overseas (probably because they'd have opposed the idea, despite its obvious merit). Along with a great deal of his wealth being tied up in AGI and a desire to prove himself against an Aristocrat that had spurned him, this meant minorities were well served by his leadership.
By contrast, as AGI will maintain ownership of its nearly 200 licences, it will most likely act as an agent for Novomatic’s products. Novomatic’s 2015 EBITDA was €647m, almost ten times AGI’s 2015 EBITDA and with Novomatic essentially earning half of the profits from sales of AGI machines but almost all profit from the sale of its machines, the incentives are obvious should a casino, say, wish to purchase 20 Novomatic machines and 20 AGI machines in a package deal.
Vote against share sale
As such, I suggest the independent directors try to persuade Novomatic to bid for the entire company or, even better, conduct a public auction. Failing that, they should determine that Len's wife and family are not allowed to vote their shares in favour of the sale.
It's in the best interests of minority investors to vote against the sale.
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Disclosure: separately managed accounts managed by Intelligent Investor own shares in AInsworth Game Technology. The author also owns shares in AInsworth Game Technology.