Inspired Entertainment may need to increase its takeover bid for AGS

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Posted on: August 16, 2022, 10:35 a.m.

Last update: August 16, 2022, 10:35 a.m.

It’s possible that Inspired Entertainment’s (NASDAQ:INSE) AGS (NYSE:AGS) lawsuit won’t end in a consummate deal, but it’s also plausible that the suitor is bolstering its bid for the slot machine maker.

AGS
A slide from an AGS 2019 investor presentation. An analyst says Inspired may be forced to increase its offer to buy the company. (Picture: AGS)

That’s the sentiment of Stifel analyst Jeffrey Stantial who, in a note to clients today, explores both scenarios. Although Inspired hasn’t officially confirmed that it is courting AGS, news to this effect broke last week, with the target later revealing that it had received and rejected a $10 cash buyout offer per stock.

Stantial says a variety of factors could make it difficult for Inspired to complete the deal, although AGS has confirmed it is in talks with the potential buyer.

Overall, we believe investors are skeptical of a deal, given INSE’s debt capacity, funding risks, return on investment yet to come for operational improvements of AGS and a trading history above $18/share,” the Stifel analyst wrote.

While the point on the trade above $18 is relevant, the 52-week high for AGS stock is $10.45 and it hasn’t closed above it in three years.

Regards Apollo, the offer could be increased

As Stantial points out, much of the success of the Inspired opening for AGS could come down to the price Apollo Global Management (NYSE:APO) is willing to accept.

At the end of the second quarter, the private equity giant held 8.2 million shares of the gaming equipment maker, or 22.08% of its outstanding shares. This is more than double the amount controlled by the second institutional investor, indicating that Apollo could have a significant influence in gaining or maintaining AGS’s independence. The private equity firm also controls two seats on the AGS board.

“While we agree that the odds seem to be against a potential deal, we ultimately come back to Apollo’s likely influence in the decision highlighting the relative maturity (~9 years) of the deal. investment,” adds Stantial. “Assuming INSE/AGS reach an agreement, we could see the final purchase price approaching around $13/share given the still manageable PF leverage and yield thresholds for principal shareholders of AGS.”

An offer of $13 per share has not been publicly disclosed and it would be nearly double AGS’s closing price on August 11 – the day before news of the acquisition was originally announced.

Evaluate Inspired Motivations

Inspired’s attraction to AGS is understandable. The contender doesn’t have much exposure in the US and the slot upgrade cycle could be long, potentially providing support for the AGS thesis. Additionally, many of AGS’ customers are regional and tribal casinos with a loyal customer base that may not be bothered by a recession.

Additionally, analysts note that the marriage would be accretive to Inspired’s earnings per share and increase its free cash flow. Still, there are moving parts about bringing an AGS/Inspired marriage to the altar.

“Coupled with a shareholder base that also believes in the long-term story and the dislocation of valuations, we anticipate that management’s preference is to see ongoing turnaround efforts come to fruition,” concludes Stantial. “However, we note that the position of CEO of INSE remains vacant after the departure of the founder in 2018, with responsibilities divided between the President, Chief Operating Officer, Chief Financial Officer and Chief Security Officer. This could suggest an option around AGS management joining the pro forma company.

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