Shares of Amaya Inc., owner of the PokerStars online gaming website, tumbled the most in two months as expectations faded that any purchase of the Canadian company would come with a big stock premium.
Amaya fell as much as 6 per cent, the most since Aug. 12 on an intraday basis, and was down 3.3 per cent to $22.45 at 11:42 a.m. in Toronto. Shares of the Pointe-Claire, Quebec-based company had jumped 8.2 per cent on Oct. 7, after Amaya and U.K. bookmaker William Hill Plc announced they were in talks for an all-share merger of equals. Canadian markets were closed Oct. 10 for the Thanksgiving holiday.
While the two companies would form the largest global gaming business with potential for cross-selling between sports and poker, Maher Yaghi, analyst at Desjardins Capital Markets, said the stretched balance sheet of such a union would limit the upside of a potential deal for Amaya shareholders.
"Given the high leverage of the combined company, we think it will be difficult to pay a big premium to Amaya shareholders unless significant synergies can be generated from the merger," he said in a note to clients Tuesday.
In order to pay a 15 percent premium for Amaya shares, the combined company would need to achieve about $100 million in cost synergies to maintain a 3.5 times leverage ratio, he said. The company currently carries C$3.3 billion in total debt, according to data compiled by Bloomberg.
The size of the acquisition and Amaya's high debt levels will make it hard for private equity investors to outbid William Hill "given the difficulty in generating cost synergies above what William Hill can achieve," Yaghi said.
E-mail messages sent to Eric Hollreiser, a spokesman for Amaya, weren't immediately returned.
Analysts at Dundee Capital Markets and Cormark Securities Inc. are more positive on the deal, seeing value in the cross-promotional nature of the two businesses, which target different demographics. Analysts at both firms have a buy rating for Amaya with a $26 price target.
"Given William Hill's recent increased focus on its online segment which has experienced some challenges and Amaya's slow start in in sports betting, we see considerable merits as to why both boards are taking this tie-up into consideration," Dundee's Eyal Ofir said in a note.
Mr. Yaghi rates Amaya neutral with a $23 price target. The stock overall has four buys, two holds and no sells among analysts, with a consensus 12-month price target of $26.83. This implies about a 21-per-cent upside from current levels, according to data compiled by Bloomberg.
"Until a deal is announced, we remain hesitant to change our valuation on Amaya given the low growth rate of the underlying PokerStars assets and the firm's high leverage," Mr. Yaghi said.