AGS/Inspire Deal Would Be Accretive, Boost Free Cash Flow, Says Analyst

Posted on: August 15, 2022, 04:41h. 

Last updated on: August 15, 2022, 05:20h.

Shares of gaming device maker AGS (NYSE:AGS) jumped 7.78% today on more than double the average daily volume. That’s as market participants digested news of the company rebuffing a $10 per share takeover bid, reportedly from Inspired Entertainment (NASDAQ:INSE).

AGS stock
AGS slot machines pictured in an investor presentation. The stock rallied again today on takeover news. (Image: AGS)

AGS revealed it was rejecting the bid last Friday in a Form 8-K filing with the Securities and Exchange Commission (SEC). While the target has yet to confirm Inspired is in fact the suitor, it notes it’s in ongoing discussions with a third party. That stoked optimism that a deal could eventually be reached, likely explaining today’s rally in the shares.

On the back of today’s rally, AGS stock is up a staggering 49.11% over the past week, and a scorching 78% over the past month. Monday’s close at $8.10 represents the stock’s first settlement above $8 since late February.

Even with those bullish statistics, if AGS were to eventually accept a $10 a share offer, that implies the stock could rally nearly 25% from current levels.

Analysts Bullish on AGS/Inspired Marriage

While much of Wall Street’s attention is on AGS as the target in this transaction, analysts see benefits in the proposed deal for Inspired, too.

Based on our merger math, we believe this transaction can be highly accretive, where a $10 all-cash deal would boost INSE’s FCF/share by 75%. Even under a revised bid that values AGS higher and includes an equity component, we believe this deal can still drive value while keeping leverage below 4.5x,” wrote Roth Capital analyst Edward Engel in a note to clients today.

The current offer on the table for AGS is $10 per share in cash, which the target clearly feels is too low. Hence the rejection. There is a sense among analysts that valuing AGS at $370 million, as does the current proposal, is somewhat of a discount, despite representing a 66% premium to the stock’s Aug. 11 closing price — the day prior to the offer becoming public.

Inspired previously signaled a willingness for dealmaking. But management says that will be in prudent fashion, and the company won’t overpay simply to make an acquisition.

Other Benefits

Inspired is a supplier of video gaming terminals (VGT) and software, so there are potential cost-reducing opportunities in combining with AGS.

“We believe this deal is capable of delivering over $25M in cost synergies, which takes into account public company costs and prior supplier transactions of similar scale, where cost synergies ranged from $30-50 million,” adds Engel.

For Inspired, much of the allure in making a run at AGS comes from geographic diversification. The suitor relies on the UK for 70% of sales while just three states — Oklahoma, Texas and Washington — combine for 45% of AGS revenue.

As Engel notes, the larger scale offered by the two companies combining could broaden the investor base.