Virtual Gaming Worlds launches $251m buyback, no sign of IPO
Michael BaileyRich List co-editorMar 21, 2023 – 11.24pmVirtual Gaming Worlds, the online social gaming juggernaut that made founder Laurence Escalante a triple-billionaire, has offered shareholders a buyback as the prospect of liquidity through a public listing appears no closer.
The unlisted public company, which made a pre-tax profit of $249 million in the six months ended December 31 from sites including Chumba Casino and LuckyLand Slots, on Tuesday told investors that, subject to regulatory relief, it would offer to buy back up to 7 per cent of its nearly 666 million shares on issue for $5.50 each.
Laurence Escalante, founder of Virtual Gaming Worlds, which will launch a $251 million share buyback.
This implies a $3.7 billion valuation for VGW, although at just over eight times fiscal 2022 earnings it arguably undervalues the business. General video gaming company EA Games is currently trading at 30 times, while VGW’s direct social gaming competitor SciPlay is fetching 19 times.
The buyback will represent a maximum cost to VGW of $251 million, and for the first time it will allow debt on to its balance sheet to help finance the buyback. It has reached agreement with funders in the US, where most of its customers live, for a $US150 million, 30-month facility.
Mr Escalante, the 41-year-old former financial planner who founded VGW in 2010, has agreed to participate in the buyback on a basis proportional to its take-up by other shareholders, most of whom are his own directors and employees. If other shareholders take their full 7 per cent entitlement, Mr Escalante will sell up to 3 per cent or 4,138,288 of his shares into the buyback, increasing his voting power from 65.4 per cent to 69.5 per cent.
In Tuesday’s note to investors, Mr Escalante emphasised the buyback as an opportunity for shareholders to “dispose of some or all of their shareholding without brokerage or other charges”.
In 2021, VGW opened a share scheme for its workers, who now number 1250, including contractors, but their only opportunity to trade has been through the relatively illiquid PrimaryMarkets unlisted shares platform.
Mr Escalante has been talking about a public listing in the US since at least 2021 as well, but no progress on that front was shared in the latest note.
A regulatory threat to VGW’s investor appeal materialised last year, when a class action lawsuit was lodged against it in Kentucky. The lead plaintiff, Amy Jo Armstead, said she lost more than $US7000 playing Chumba Casino and LuckyLand Slots, and that the games violated Kentucky’s laws against games of chance.
VGW has long used a sweepstakes model to comply with US laws banning gambling on the internet in most states.
Working with US lawyers, VGW devised a system where customers buy virtual gold coins that allow them to play their games but have no value outside them.
However, buyers of most gold coin packages get bonus “sweeps coins”, which can also be used to play the games, and are redeemable for cash in most of the US and Canada.
Under US contests and sweepstakes law, the “sweeps coins” are in effect a trade promotion for the sale of the virtual gold coins, and therefore legal.
However, Ms Armstead’s lawyers argued she was lured in by an initial offer of free “gold coins”, but then had to purchase coins with real money to keep playing. This monetary loss, they argued, fell foul of Kentucky’s anti-gaming regulations.
VGW denied any wrongdoing but agreed to a settlement to keep the matter unlitigated. While its products remain available in Kentucky, it will pay $US11.75 million to claimants, who can include anyone in the state that spent more than $US5 on a VGW site between 2017 and 2022.
The court-approved settlement also saw VGW agree to address video game behaviour disorders among Kentuckian players, including providing them problem gaming information, providing for voluntary self-exclusion, and ensuring that players who ran out of free virtual coins could continue playing its games without waiting an “unreasonable” amount of time.
VGW declined to comment on whether any more class actions against it were on foot.
The risk that has long hung over VGW, which trades in the US via a Maltese gaming licence, is that changes to American sweepstakes law, or individual state laws, could disrupt its business model.
For now, however, that business model continues to churn out profits.
Alongside the share buyback announcement, VGW said its revenue for the six months ended December 31 rose 43 per cent to $2.2 billion from the year-earlier period.
However, the pre-tax profit of $249 million was down 19 per cent, explained in part by the post-pandemic normalisation that has hit most online businesses, but also by a big climb in marketing spend to $174 million, from $84 million in the previous corresponding period.
A noted car fanatic, Mr Escalante this month signed VGW up to a sponsorship of the Ferrari Formula 1 Racing Team, making it the first Australian company to get its name on an F1 car.
VGW also announced a 10 cents per share dividend, adding $66 million to a payout pile that now tops $690 million since 2020-21.
