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Amaya Inc.: Can Investors Keep Ignoring the Looming Storm Clouds?

I’ll come right out and say it. I’m bullish on Amaya Inc. (TSX:AYA).

It all started with the acquisition of Oldford Group, first announced in June 2014. With one US$4.9 billion swoop, Amaya went from being a small player in the online poker space to the biggest after acquiring PokerStars and Full Tilt Poker, the largest and fourth-largest online poker platforms. PokerStars is the real jewel of the deal; websites dedicated to following the industry estimate its market share is over 60%.

The poker platforms also give Amaya another opportunity. In Europe, the company’s main market, sports betting is the big draw, along with online casino games. PokerStars has the platform and millions of customers who have already demonstrated they enjoy gambling. It’s only natural it expands into these other offerings.

The company has already done a test run in Spain, which returned pretty good results. It stole a market share in the double digits just by offering an optional download to existing players. Plus, the margins for alternative games are higher. Remember, poker revenue is just a small percentage of every hand. The house doesn’t actually win.

One thing that concerned me after the big acquisition was the amount of debt the company took on. At the end of the year, long-term debt stood at a staggering $3.5 billion, along with more than a million convertible preferred shares.

But management is responding. Amaya has sold off more than $500 million worth of assets during the first quarter, streamlining the business to focus on online poker. Those sales and the $425 million worth of cash on the balance sheet will go a long way towards paying back some of that debt.

Besides, unlike many other businesses, the world of online poker needs very little in capital spending. As long as there’s enough server power and a team of people working on the software, there isn’t much need for additional investments.

These are all good things. So, what’s the problem?

The investigation

Back in December the company made headlines in a way no publicly traded company wants—securities regulators paid it a visit.

At the time, management was quick to dismiss the visit by Autorité des marchés financiers (AMF) as much ado about nothing. Nobody at the company was formally charged with anything and nothing was seized. It was more of a courtesy visit.

But as time has gone on, things are starting to look more suspicious. The investigation has expanded to include hundreds of people, including employees of Amaya’s lead financial advisor and employees of Manulife Securities. Additionally, according to a recent Globe and Mail article, another person of interest to the investigation is a close friend to Amaya’s CEO, David Baazov.

Additionally, news released yesterday said that AMF won the right in a Quebec court to seize computer storage devices of three unidentified Amaya employees. Again, there’s nothing concrete on anyone from the company, but this investigation is not going away.

At the same time, I’m not sure how big of a threat it is. Back in early June, right before the big acquisition was announced, rumours were flying everywhere. Amaya’s stock was even halted one day, based on so many investors clamoring to buy it. It’s obvious that something got leaked, but this investigation might get so complicated that it’ll be impossible to tell from who.

The AMF situation is a huge overhang on this stock. There’s a lot to like about Amaya’s underlying poker business, but news on the investigation will weigh heavily on shares over the next few months. I’d recommend that investors wait until it’s over with, but a favourable result will likely send shares soaring, taking away possible returns. If you’re bullish, now is probably the best time to buy, but just keep in mind the risks.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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