We’d love to tell you the full story but it’s a mouthful to say. For those of you who are interested, you can learn more via the links provided at the end of this article. Here we will focus on how Playtech’s management may have cooked the financial data and covered up important facts to prevent shareholders from understanding the true value of Finalto.
Revenue data makes no sense
Finalto is a technology-based division in the contract for differences (CFD) and financial trading industry which operates on both a B2B and B2C basis. The B2B business segment generally accounts for circa 70% of its total revenue. Trading volume is a key performance indicator (KPI) for both segments, especially for the B2B segment, where the trading volumes combined almost have a linear relationship with the total revenue.
Source: A reliable informant
The total trading volume remained largely consistent throughout 2020 and even saw a slight increase in the second half as can be seen from the table above. Strangely, Finalto’s total revenue dramatically decreased from USD96.1 million in 1H 2020 to USD40.3 million in 2H FY2020 while its adjusted EBITDA significantly reduced from USD58.2 million to USD5.6 million over the same period.
According to the circular in relation to the ongoing disposal, the decrease trend continued into 2021. For the first four months of FY2021, Finalto generated an adjusted EBITDA of -€299,782 in aggregate and €6,796,928 over the twelve-month period ended April 2021. It apparently implied that the business was deteriorating, even worse than 2H FY2020. However, one with a discerning eye can tell that something was wrong as the total revenue unnaturally slumped despite an increase in trading volumes.
Inappropriate data is used to justify the low exit valuation
The circular also tried to mislead shareholders into thinking the USD210 million offer was a good deal by focusing on the 24x FY2019 adjusted EBITDA multiple and the 23x adjusted EBITDA multiple for the trailing twelve months (TTM) ended April 2021.
It is important to note that the high multiple for FY2019 is due to Finalto’s rare underperformance during the year, when it was adversely affected by tightened rules on the CFDs and binary options like its many other peers. In fact, Finalto has been one of the most consistent and profitable units of Playtech. In 2020, its revenue soared 80% and adjusted EBITDA skyrocketed 623% year on year. Hence, the enterprise valuation based on financial data from FY2019 is misleading and inappropriate.
Source: Playtech’s financial report
The same goes for the TTM adjusted EBITDA multiple. The high valuation is unconvincing considering that the financial data in 2H FY2020 has been cooked. It is evident that Playtech is selling Finalto way too cheap if you look at the FY2018 and FY2020 adjusted EBITDA multiples, which are just 6x and 3x. (The latter should be even lower when real data is used.)
Other irregularities you should know about
Playtech’s management has never disclosed KPI data such as the growing trading volume to shareholders, making it impossible for them to detect irregularities in the 2H FY2020 financial performance in time. Distrustful of the management, we have looked into the financial reports of Finalto Trading Limited, a B2B subsidiary of the Finalto Group, and found that there was a provision for bad debts of $9.8 million in 2019. Yet this figure has never been mentioned in any of Playtech’s annual reports.
This further indicates the possibility of data manipulation.
Top management's credibility becomes questionable
It is deeply disappointing and incredibly shocking that some upper management members have ganged up to sell off a valuable asset of the company without just cause. What’s more ridiculous is that the disposal of Finalto, which was originally intended for ‘simplifying business operations’, ended up solely for the purpose of benefiting and pleasing its former owner Sagi as well as his former subordinates, who are the current management of the financial division.
One last thing. Perhaps it would be wiser for the Board to review its M&A strategy and reconsider whether it is the right time and right price to dispose of Finalto as the business had an impairment of tangible and intangible assets of EUR90 million and EUR221 million in 2019 and 2020.
Read more:
Playtech investor Jason Ader wants founder Teddy Sagi fired
The Story Behind Playtech’s Sale of Finalto
Why Selling Finalto May Be A Disastrously Wrong Decision On Playtech’s Part
