Emmett Investment Management Opposes PlayAGS's Proposed Take-Private Transaction with Brightstar Capital Partners

Releases Open Letter to AGS Stockholders Outlining Intention to Vote AGAINST Inadequate Proposal

NEW YORK, May 14, 2024 /PRNewswire/ -- Emmett Investment Management LP ("Emmett"), an investment manager focused on small and mid-cap equities across developed markets and owner of approximately 1.5% of the outstanding stock of PlayAGS, Inc. (NYSE: AGS)("AGS" or the "Company"), today released an open letter to AGS stockholders outlining its intention to vote AGAINST the Company's inadequate proposed take-private transaction with Brightstar Capital Partners, which it believes significantly undervalues the Company. 

The full text of the letter follows: 

May 14, 2024

Dear Fellow Stockholders,

Emmett Investment Management LP (together with its affiliates, "Emmett" or "we") currently owns approximately 1.5% of the outstanding stock of PlayAGS, Inc. ("AGS" or the "Company"), making us one of the Company's largest active stockholders. We have great respect for the Company, its management team, and operational strategy. We enjoyed visiting the Company's headquarters in early April and came away impressed by the increased scale and depth of the current product offering, with over 60 unique game titles produced in 2023, relative to just 30 in 2019.

We feel compelled to share with you our concerns about AGS's recently announced take-private transaction with Brightstar Capital Partners ("Brightstar"). We do not believe the take-private transaction is in the best interest of stockholders, and we intend to vote against the transaction.

The Brightstar transaction was announced just hours before the release of AGS's transformational first quarter results. The Company's first quarter results reinforce our optimistic view of AGS's prospects, as organic adjusted EBITDA grew 21%, far outpacing the industry. Business mix is also improving at AGS: adjusted EBITDA from the Company's interactive segment, to which the market assigns the highest multiple, increased almost 9x year-over-year and almost 50% sequentially.

If market participants had been given the opportunity to digest first quarter results absent Brightstar's bid, we believe AGS shares would be trading well above the current market price of $11.40. Any reasonable forecast of AGS's 2024 adjusted EBITDA increased by ~15%, which on a constant EV/EBITDA multiple—arguably conservative given improving mix—would imply a share price higher than $11.40.

It appears that AGS stockholders are being asked to accept a bid from Brightstar that offers effectively zero—or negative—premium. We are concerned that many investors may not even be aware of AGS's exceptional recent operating performance since the Company did not issue an earnings press release, as is its normal practice. It is clear to any reasonable market participant that a $12.50 take-private bid for AGS would be practicable only if announced before AGS could trade freely after the release of first quarter results. In other words, the only way for this take-private bid to have been remotely palatable to stockholders was if stockholders did not fully appreciate the impact of the first quarter results.

It is also worth noting the slight gap between the deal's stated enterprise value of "approximately $1.1 billion," and the actual fully diluted enterprise value calculable from Brightstar's $12.50 per share bid—$1.06 billion. An enterprise value of $1.1 billion, by contrast, would translate to an AGS share price of $13.40.

Brightstar's offer is unattractive for yet another reason: First quarter AGS results did not reflect any of the benefit the Company stands to receive from market disruption related to the upcoming merger of IGT and Everi. As AGS touted in its March Investor Presentation, the IGT/EVRI merger will likely accelerate AGS's market share gains, particularly in the mechanical reel segment of the market. AGS currently has zero market share in mechanical reel, but a best-in-class, brand new product set to be released in the second half of 2024. IGT and EVRI together have greater than 50% market share in this segment. But when the two companies consolidate, operators will likely begin systematically reducing the number of IGT/EVRI units on their casino floors at the very moment AGS's mechanical reel product is slated to enter the market.  Under Brightstar's proposed deal, stockholders will be deprived of this significant upside.

Given the AGS/Brightstar deal will close only in the second half of 2025 and AGS is meaningfully cash generative, stockholders are being asked to forward sell their AGS shares for what will likely be a multiple of well below 4.8x NTM adjusted EBITDA, assuming only modest organic growth. We do not understand why any shareholder would be excited to sell an excellent, growing business at this relatively low multiple and a flat share price relative to 2019. Recall that in 2019, AGS traded at a multiple of 7x adjusted EBITDA, despite inferior mix and operating momentum; today, stockholders are being asked to sell their AGS shares for a materially lower multiple when the business mix and operating momentum have both improved.

We believe AGS would have a bright future as a standalone public company, with at least $225 million in 2026 adjusted EBITDA clearly achievable. Even on a multiple of 7x adjusted EBITDA—a significant discount to slower-growing peer Light and Wonder's 9x NTM multiple—AGS shares would trade at $24.70, nearly 100% higher than Brightstar's bid.

We do not oppose a take-private offer per se, but Brightstar's offer fails to reward stockholders for the strong performance AGS has already demonstrated and fails to account for the Company's significant potential.

Respectfully,

Alexander Rohr
Founder and CIO
Emmett Investment Management LP

About Emmett Investment Management

Emmett in an investment manager based in New York City, founded by Alexander Rohr in 2018. Emmett invests in small and mid-cap equities across developed markets.

The views expressed are those of the authors and Emmett Investment Management LP as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned nor a recommendation on how or if to vote, and should be construed only as an expression of how Emmett Investment Management LP currently intends to vote. This material is for informational purposes and should not be construed as a research report.

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SOURCE Emmett Investment Management