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Gaming company Amaya got a plum deal from its underwriters when it bought online gambling company Oldford Group, says one securities lawyer.

On June 12, 2014, Amaya announced it was buying Oldford Group Limited, which owns the parent company of PokerStars and Full Tilt Poker.

The deal cost US$4.9 billion, and Canaccord Genuity underwrote the financing Amaya needed for the purchase along with Cormark Securities and Desjardins Capital Markets. Canaccord and Deutsche Bank were lead advisors.

It’s the second-largest deal in Canaccord’s history, according to regulatory filings.

Read: RCMP, AMF raid Amaya, Canaccord Genuity, Manulife

Canaccord and the other underwriters agreed to buy Amaya shares in a private placement and sell them at market.

Amaya’s common share price was pegged at $20, and its preferred shares were $24. In the 30 trading days before the deal broke, Amaya’s volume-weighted average price was $9.59. In its briefing to shareholders, the company notes the agreed-upon common share purchase price was a 108.5% premium on that average. It was also a 66.4% premium over Amaya’s $12.02 closing price on June 11, the day before the deal was announced.

The Amaya premium is big, and it’s rare, says the securities lawyer, who spoke on condition of anonymity.

“It’s more common in a bought-deal situation […] to see a discount to the market price, not a whopping premium,” says the lawyer.

Typically, underwriters discount between 2% and 10% of a stock’s trading price when setting a price for a deal. The discount reflects the fact the underwriter is taking on company stock in order to re-sell it.

“Dealers are pretty risk-averse, so I’m sure they thought this was a fair price,” says the securities lawyer. “They [would have] definitely believed the acquisition was going to be accretive for their companies, and to be good in the long term. That’s why they were willing to pay such a remarkable premium.”

The Royal Canadian Mounted Police and Autorité des Marchés Financiers raided the Montreal offices of Amaya Inc., Canaccord Genuity and Manulife Financial on Dec. 10.

RCMP Cpl. François Gagnon confirmed the raid to Advisor.ca, but said it was an AMF investigation, and the RCMP was “just providing security.”

For its part, the AMF has said it doesn’t comment on active investigations.

In a statement released Dec. 11, Amaya confirmed the investigation was “with regards to trading activities in Amaya securities surrounding the corporation’s acquisition of Oldford Group in 2014.” Spokespeople for Canaccord Genuity and Manulife also confirmed they were cooperating.

“I can assure you that Canaccord Genuity is not the subject of this investigation, nor is any member of our capital market group,” firm CEO Paul Reynolds told employees in a memo on Monday, which was obtained by the press.

“This is strictly a request for information related to individual trades in our client accounts,” he added.

There have been no allegations of wrongdoing.

Read: How to reinvigorate companies you buy, which includes Amaya as a pick

Amaya’s stock price more than doubled in the months before it said it was purchasing Oldford. On April 7, when representatives from Amaya and Oldford met to discuss the deal, Amaya’s share price was $6.40. By June 12, it was $14.40. The press release hit the wires that night, after market close.

Deal rumours were circulating among traders and in the casino trade press. Initially, it was thought that as the world’s largest online poker company, Oldford would purchase Amaya. But on May 30, Cards Chat News reported that Amaya was actually looking to buy Oldford, because the purchase would allow the company to operate in New Jersey.

“It’s certainly not unusual to see a run-up of the stock in anticipation just before the announcement of a transaction,” says the securities lawyer. “People start to get a sense of what’s coming.”

Amaya and Oldford had been in talks since December 2013. In January, they signed a letter of intent, and brought on Canaccord and other financial firms for advice. They met in the Isle of Man, where Oldford was headquartered, and in New York City that spring.

The deal was approved by Amaya’s shareholders June 30, and the deal closed August 1, two months earlier than expected.

The day after the deal, June 13, Amaya’s price was $19.95. At that point, the market would have digested the information and decided what it was worth to the company’s bottom line, says the lawyer.

Amaya reached $20.85 on June 20.

In November, Amaya beat expectations as its adjusted Q3 profit increased 10-fold to nearly $70 million, or 43 cents per share for the period ended Sept. 30. That’s compared to $6.8 million, or seven cents per share, a year earlier. Revenues were $239 million, up from $38.6 million a year earlier.

As of Thursday, Dec. 11, Amaya’s shares had gained 341% over the last year to date; they’d closed at $35.06, up $0.22.

However, some traders were skeptical about Amaya. On the 11th, the day after the raid, traders bought 310 puts on the company. The strike prices ranged from $23 to $38. The biggest batch was 110 puts at $34, with Jan. 17 maturity. The prior volume average was five puts in eight days.

At close on Dec. 12, the stock was down $6.42, or 18.31%, to $28.64.

Amaya bonds

Goodwood Funds portfolio manager Chris Currie owns Amaya bonds. He says that while its stock price might be taking a hit now, bondholders should wait for more details of the investigation before changing positions.

“Bonds are a lot less volatile; they haven’t really changed in price,” he told Advisor.ca. “It’s the wise thing to do—not to make an immediate reaction when there’s limited information.”

When any company is faced with regulatory scrutiny, Currie says, bond holders should be concerned about whether the firm will survive.

Amaya has good and growing cash flow, he says, so its ability to raise capital and meet its bond obligations shouldn’t be affected by the recent developments.

The other players

Canaccord Genuity Group reported revenue of $236 million for the quarter ended Sept. 30, an increase of 29% from the same period last year. Its adjusted net income rose 208%. Its diluted earnings per common share was $0.17, compared to $0.03 the year prior.

Read: Stay the course with Manulife, Canaccord

As of Sept. 30, Manulife, either directly or through its funds, owns at least 839,745 shares of Amaya.

In November, Manulife Financial’s net income for the three months ended Sept. 30 was $1.1 billion or 57 cents per share, up from $1.034 billion or 54 cents per share in the third quarter of 2013.

On Dec. 12, Manulife Financial’s shares closed $21.07, down 59 cents or 2.72%. Canaccord Genuity closed at $6.16, down $1.17 or 15.96%.

Originally published on Advisor.ca

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