Optimal Group OPMR
December 31, 2007 - 12:18am EST by
ThatDu04
2007 2008
Price: 4.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 104 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Gambling
  • Online gaming
  • Payment services

Description

Optimal Group

Optimal Group is a Montreal based payment processor and, after the company’s purchase of WowWee limited, a designer of personal robotic devices. The company provides payment processing services for card-present and card-not present transactions. OPMR’s business was hammered by the passage of the Unlawful Internet Gambling Act, which outlawed the company’s flourishing business processing transactions for online gambling sites (44% of 05 revs). After the passage of the UIGA, the company immediately ceased processing gambling transactions and initiated conversations with the DOJ in May 07. At the current prices, it appears that investors are being given the WowWee business for nearly nothing.


The company has 26mln shares outstanding (including shares issued during the Wowwee transaction) and company has a market cap of $104mln @ $4. As of Q3 07, the company had 114mln of cash on the balance sheet and 30mln of restricted cash. Against that cash, the company had 22mln of customer reserves, 19mln related to a seizure of assets by the DOJ for net cash of 104mln. Since the end of Q3, the company has spent 47mln in cash on the WowWee acquisition, leaving 57mln of net cash remaining, and a total enterprise value of $45mln.


OPMR Cash Walkthrough

Stated Cash

$114

+ Restricted Cash

30

- Customer Reserves

(22)

- DOJ Seizure

(19)

- WowWee Acq

(47)

Implied Cash

$56

Per Share

$2.17

Implied EV

$46




For the trailing 12 months, OPMR’s payment processing business has done 11mln of EBITA (majority of amortization from acquisitions). Unfortunately, this business has stagnated as of late, mainly due to an overhang caused by the DOJ’s investigation into the company’s gambling processing business. Placing a 4x EBITA multiple on this business, suggests 43mln of value for this segment.


Implied WowWee Value









$mln

EBITA

Mult

Value

Per Share

Payment Processing

10.9

4

43

$1.67

Cash



56

$2.17





----

Value



100

$3.84

Current Market Cap



103

$3.95

Implied WowWee Value


3

$0.11


Thus, as an investor, you appear to be paying 2mln for WowWee. WowWee is known for its innovative brand of consumer robots including the RoboSapien and the RoboRaptor. On November 7th, 2007 OPMR completed the WowWee acquisition, paying $46.5mln in cash, $10mln in shares (2.17mln shares at 4.61) and 800k warrants with a $5.56 exercise price. Here are the basic WowWee Financials for the past 2 years.


$mln

2005

2006

Sales

131

117

EBITDA

28

5


OPMR claims that WowWee suffered various execution problems (logistics, inventory etc) which pressured results in 2006 as the company outgrew their existing infrastructures and believes that they can grow revenue and EBITDA dramatically going forward. WowWee owns numerous patents for their devices and their lead designer, Mark Tilden, is considered something of a legend in the in the field of robotics devices. While I am unsure what this business is worth, I think that, at current prices, investors are getting a very cheap option that WowWee can be a success.


RISKS

Potential further DOJ liability-

Since the passage of the UIGA, the DOJ has seized 19mln of cash from OPMR and the risk exists that a further fine could follow. If the DOJ seizes a large chunk of the cash pile, then clearly a key portion of the valuation support disappears. We have tried to get comfortable with the potential further liability by looking at the DOJ/Neteller settlement wherein NLR agreed to pay $136mln. NLR was the #1 gaming payment processor and OPMR’s FirePay was the #2. The NLR Deferred Prosecution Agreement refers to two numbers (number of transactions processed and amt of profits) when discussing the fine paid by NLR. A proportional judgment based on transaction volume for OPMR would suggest $19.4mln for OPMR (of which 19.2mln has already been seized), given that OPMR was 1/7 the size of NETL. If the fine is based on profits, a proportional judgment would add an addl 5mln (above the 19mln already taken) for OPMR based on the amt of profits made. Furthermore, reading the NLR DPA suggests that OPMR may have a better case than NLR. The DPA specifically cited NLR for continuing to process gaming transactions after the passage of the UIGA from Oct 06 until Jan 07 and for not stopping until the DOJ arrested the company’s founders in January. Meanwhile, OPMR stopped processing payments as soon as the UIGA passed and approached the DOJ on its own accord and OPMR mgmt has travelled back and forth to the US multiple times this year without being arrested. If OPMR is treated similarly to NLR, then the additional liability should be minimal.


DOJ overhang continues to weaken remaining payments business-

These legal problems have hampered the remaining payment processing business as some partners and clients have been unwilling to work with a company under a DOJ investigation. Thus, the company’s remaining payment processing business has not been growing, despite the fact that the CNP (1/3 of transactions, maybe as much as 60% of GP) industry has been growing at high teens-low 20% as people continue to accelerate online purchases. The risk remains however that OPMR’s payment business continues to severely underperform the industry until the DOJ overhang is lifted.


WowWee is a disaster-

Entirely possible but I think you are getting a good price to take that risk.











Catalyst

Closure of DOJ Investigation
Strong WowWee Results
Positive payments division results
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