AGS Soars on Reported Inspired Entertainment Takeover Bid

Posted on: August 12, 2022, 04:18h. 

Last updated on: August 16, 2022, 05:34h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Device manufacturer AGS (NYSE:AGS) was easily one of Friday’s top-performing gaming stocks, surging 25.25% on volume that was about eight times the daily average. That came on reports Inspired Entertainment (NASDAQ:INSE) is moving to acquire the Las Vegas-based slot machine maker.

AGS Inspired
The Nasdaq market site, listing venue for Inspired Entertainment. The company is rumored to be offering $10 a share for AGS. (Image: Percepted)

Unidentified sources familiar with the matter told Reuters Inspired offered $10 a share in cash for AGS, valuing the target at $370 million. If made and accepted, that offer implies shares of the target have much further to rise. AGS stock closed today at $7.51 — its highest closing price since March — after trading as high as $8.40.

The target’s market capitalization is $231.42 million as of the close of US markets today. Neither company commented on the matter. But analysts see a takeover of AGS by Inspired as credible.

In our view, a potential combination of the two companies would have merit, and we believe increase INSE’s overall valuation multiple, content depth, and North America cash flow mix,” said B. Riley analyst David Bain in a note to clients today.

He rates AGS a “buy” with a $14 price target and acknowledges the 66% premium to AGS’s Thursday closing price Inspired is rumored to be offering is “healthy.”

Inspired Offer for AGS ‘Unique Proposal’

In the gaming industry, the bulk of consolidation activity over the last several years centered around land-based casino operators and sports wagering.

Conversely, mergers and acquisitions activity among slot machine makers is rare. That’s because gaming floor managers like diversification. Additionally, gaming device makers are often viewed as unappealing targets for private equity suitors. Still, analysts see merit in Inspired potentially buying AGS.

“However, the proposed transaction is unique in that product-wise overlap between the two companies is effectively zero. Within land-based gaming, INSE offers a server-based model focused on distributed venues, with the current land-based slot revenue profile predominately coming from Europe,” noted Stifel analyst Jeffrey Stantial in a report released earlier Friday.

Inspired is viewed as a play on the digital gaming boom, It’s also seen as part of the potential growth of the North American online lottery market, which some analysts estimate could eventually surpass $11 billion in value.

With AGS, “INSE would be getting their hands on a steadily improving supplier with significant runway to continue taking share in premium leased and Class III markets. We also note the removal of the Apollo ownership likely yields additional addressable markets,” adds Stantial.

Some AGS Investors may not Be Pleased

It remains to be seen if reports are accurate that Inspired is moving on AGS, if another suitor gets involved and if Inspired lifts its offer — Stantial notes that $10 a share is low.

What is clear is that some long-term AGS investors may find Inspired’s offer less than inspiring. AGS went public at $16 a share, and traded as high as $32 in 2018. For its part, Inspired made clear it is mulling acquisition opportunities. But it won’t overpay simply to get a deal done.

“We’re not going to pay a crazy price for anything,” CFO Steward Baker said on the company’s second-quarter earnings conference call. “And we insist on there being immediate and visible synergies. So we’re going to allocate capital to M&A, but only if it makes the kind of sense that we’re used to doing.”