GAN limited

Sale of a mismanaged company?

GAN limited (GAN) is an online gambling company with a B2B segment and a B2C segment (Coolbet, acquired in 2021). It has been managed by Dermot Smurfit, or should I say mismanaged? The company, or at least a portion of it, was put up for sale earlier this year and Smurfit has been recently pushed out and replaced by a temporary CEO with no plans to appoint a new one. 

This seemed rather rushed, possibly due to the fact that culture at GAN seems quite toxic and Smurfit was possibly a contributor to that?

Now the quick and dirty, market cap is $40 million, debt is $40m and cash position is about $40m as well. But they are burning about $15-20m a year. What makes this interesting is that Coolbet with $100m in revenue and $65m in gross profit, is likely profitable and is probably worth multiples of the current market cap. And a lot of this cash burn can be reduced by competent management.

In fact the founder of Coolbet has expressed his displeasure with management in 2022 publicly and thought that Coolbet alone could be worth ~$6/share (vs $0.9 share price) if it was managed by someone competent. Anyone familiar with Warren Buffett’s philosophy on acquiring businesses would cringe at how Smurfit handled this by sidelining a very motivated and very experienced founder who was clearly interested in having a significant role at the company.

Then there is Sega Sammy a large Japanese gaming company which has made a bridge loan to GAN this year and is looking to enter the US B2B market:

"So far, only a limited number of states have lifted their bans on such casinos, but discussions are unfolding in many areas. To be able to adapt to such developments at an early stage, we are exploring entry into the B2B business, including both consumer side and platform strategies. Whichever approach we take, making further inroads into global markets has to start with building a foundation in North America, so we will actively move forward with investments with an eye toward possible acquisitions."

GAN’s B2B segment has about $40m of revenue and has had some problems recently. The Coolbet founder seemed to share the opinion that the B2B segment could be an attractive acquisition target (from the above mentioned letter):

“But in the long run I don’t think B2B business will be massive, when the consolidation continues in the market the big players will want to have their own software. That’s why GAN should be a very hot candidate for acquisition, because there is not much effective software and knowledge out there to buy.”

Clearly Coolbet is the crown jewel here. It is still showing some growth and assuming it can generate 10% EBIT margins, it could easily be worth the current EV of GAN. It was about breaking even when acquired with ⅓ the revenue it has now for $175 million in early 2021. And growing very rapidly at the time. Although GAN did clearly overpay, so don’t put too much weight in that figure.

If Coolbet is sold at a very conservative 5x EBIT, and the B2B segment is also worth some non zero amount, the stock is too cheap here with an EV of $40m. Betsson would be a logical buyer for Coolbet, or possibly Dermot? Or the disgruntled founder of Coolbet? (He has succesfully sold two companies now, so he has the funds) Betsson has 20% EBIT margins btw, and Coolbet was acquired for $175m by GAN (although they very likely overpaid, so I would not put much weight in that number).

I'm thinking that the $50 million G&A expense can be cut by say 60-70%. So I am not too worried by the current cash burn. 

Basically my bet here is that Coolbet can be salvaged and is probably worth at least $60-70 million. And then hopefully B2B is also worth some non zero amount, possibly another $10-20 million to a strategic buyer?

So for that reason I am long GAN shares at an average price of just over $1/share.

Everyone reading this post should do their own due diligence before buying or selling shares in GAN, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. And I may buy and sell shares in GAN at any time.

Edit: Made a few corrections, mislabeled co as a sports betting company when they are a online gambling company. Kind of rushed this write-up out there.