Merger Arb: 15% Upside
This idea was shared by Jeremy from Pluto Equity Research.
Galaxy Gaming, Inc. (GLXZ on OTC) (“Galaxy”) develops and sells casino gaming tables and other gaming technologies.
Evolution AB, a Swedish gaming company, has agreed to acquire Galaxy for $3.20 per share in cash (14.7% spread), contingent on shareholder vote and regulatory approval. Shareholder vote is scheduled for November 12, 2024 (today). Management has guided for the deal to close by “mid-2025”.
We expect a favourable shareholder vote today. Holding to close will earn a >20% IRR (26.4% assuming June 30, 2025 close).
- The deal is not contingent on financing. Evolution has ~$7.5bn Swedish Krona (~$700mm USD) on hand.
- Directors and executives, who own 18.1% of shares eligible to vote, are recommending in favour of the merger and have stated their intention to vote as such.
- Minimal regulatory risk. This is not a headline making deal. We find it improbable that gaming regulators or other agencies would attempt to block it.
- Galaxy trades well below all-time highs (> $5.00) and pre-announcement prices were below $2.00. Given this, we suspect most shareholders are bag holders and will happily take a quick out.
We suspect the spread exists over Galaxy’s tiny capitalization (currently ~$69mm) and OTC listing.
We are long GLXZ.
Background & context
Evolution has been a major customer of Galaxy for several years. Martin Carlesund, Evolution’s CEO, approached Galaxy in April of 2023 to discuss a transaction. Galaxy reverted to Evolution indicating further interest in May ’23. Evolution submitted a non-binding indication of interest to acquire Galaxy at $2.19, to which Galaxy declined. Evolution made a follow-up offer in April ’24 at $2.62, which was also declined. Galaxy countered with $3.50 in May. Evolution reverted with a final offer of $3.20 (100% premium to prior day’s close), to which Galaxy accepted. Galaxy was not actively seeking to sell prior to discussion with Evolution, and no other buyers were formally engaged. Galaxy concluded that the universe of potential acquirers is quite limited and Evolution’s offer would be the highest and most certain. The transaction was publicly announced on July 18, 2024.
We believe it is quite probable that shareholders will vote in favour of the transaction. Directors own 18.1%. Cannell Capital, the next largest shareholder, owns 5.9% of shares eligible to vote (filed February 13, ’24). We believe Cannell’s average cost is well below $3.20, given Galaxy traded below $2.00 in January and February ’24 (barring the unlikely scenario that Cannell had been accumulating when Galaxy traded last above $3.20 which was before 2023. Cannell manages ~$852 million, per May ’24 Form ADV, implying Galaxy is a sub 5% position at cost. We don’t think Cannell will fuss or vote against the deal.
Management has guided for a mid-2025 close (initial outside date is July 18, 2025, one year from announcement). Galaxy’s acquisition is regulated by the Nevada Gaming Commission via the Nevada Gaming Control Act. This does not occur to us as unusually long, given the bureaucracy involved. Background checks and gaming license approvals can take 8+ months. Galaxy is comped against two yet-to-close transactions: Everi Holdings (announced February ’24), and Play AGS (announced May ’24). Everi is expected to close in Q3 ’25 and Play AGS in 2H ’25 (both over one year).
We find it unlikely that material issues could arise in the next eight-or-so months to derail Evolution’s commitment. Liquidity isn’t an issue: cash from ops is usually positive on a quarterly basis, Galaxy has $19.3mm cash, and the term loan doesn’t mature until 2026 ($57mm). Barring 2020, Galaxy has generated positive cash from operations and grown revenue every year of the last ten years. Galaxy is geared at 2.3x ’25 adj. EBITDA ($35mm net debt / $15.3mm ’25 AEBITDA per deal proxy).
Risks
- Left-tail risk is high magnitude (however improbable). Downside risk to pre-announcement price $1.41 is ~50%;
- GLXZ spreads are ~$0.10 and lot sizes are low single digit thousands;
- Politics are fickle. The Nevada Gaming Commission could delay or take issue.
- Activist shareholders have targeted Galaxy in the past. An activist could step in and advocate against the deal or for a higher price (for better or worse) which Evolution probably wouldn’t agree to (based on their rejection of Galaxy’s $3.50 ask).
Size accordingly.
Disclosure
We own a long position in the common stock of Galaxy Gaming, Inc. (GLXZ).
This is not investment advice. Do your own due diligence.
Listened in on the vote call earlier this morning. Deal approved. Price has barely moved. As of writing Ask is $2.80 per OTC Markets. Replay of call not available until 24 hours after.
If Everi Holdings (announced February ’24) is targeting Q3 ’25 close, for GLXZ (announced July ’24, five months behind Everi) should we target Q4 ’25 close instead of management’s guidance of “Mid 2025”?
Delaying the expected close by 6 months will reduce IRR from 26% to a more reasonable 15%.
Hi Snowball,
Perhaps yes, for the sake of conservatism. Everi is also a much larger entity (operationally and by licenses) – probably a factor in that timeline.
I’d be curious if anyone has talked to the Company and/or Evolution about the regulatory approvals necessary.
Normal rule of thumb is termination fees are ~ 3% of equity value. If GLXY were to terminate the merger, the fee would be $2.6m/$85m which is ~ 3%.
However, if Evolution terminates the merger because of regulatory issues, the hefty termination fees are $5.2m/$85m or ~ 6%. You normally see 6% type parent termination fees when the regulatory issues may be difficult and the company demands more insurance in the form of a higher termination fee.
“Additionally, Parent may be required to pay us a termination fee of $5,234,678 under specified circumstances (the “Parent Termination Fee”), including, under specified circumstances, due to the failure to obtain certain gaming regulatory approvals.”
“Right to a Parent Termination Fee. The Board considered the fact that Parent would be required to pay Galaxy a termination fee equal to $5,234,678.00, representing 6% of the transaction equity value, under specified circumstances, including due to the failure to obtain certain gaming regulatory approvals.”
Evolution is certainly a very large player in the Online Gaming B2B space, buying in a supplier of games.
Hi Aviva,
I haven’t spoken to either management team. I reviewed the Nevada Gaming Commission’s Control Act. Primary concerns appear to be background checks on upper mgmt, directors, execs. You are correct, the Nevada GC is cautious of extensive vertical integration.
I’ll reach out to management.
For reference, the Control Act: https://gaming.nv.gov/uploadedFiles/gamingnvgov/content/regs/AllRegulations.pdf
See pg 52 4.100 Preliminary finding of suitability
Most regulatory hoops appear to be “suitability” related.
And from another doc: “The Commission can require any or all of a privately-held business entity’s lenders, holders of evidence of indebtedness, underwriters, key executives, agents or employees, as applicable, to be licensed or found suitable (Nevada Gaming Commission Regulations 15.530-3, 15A.160 and 15B.160).”
Publicly traded entities are scrutinized on voting control: “Each
officer, director and employee of a PTC that the Commission determines is or is to become actively and directly engaged in the administration or supervision of, or is to have any other significant involvement with, the gaming activities of the corporation or any of its affiliated or intermediary companies, must be found suitable and may be required to be licensed by the Commission (NRS 463.637(1); Nevada Gaming Commission Regulations 16.410(1) and 16.415(1))”
Bureaucracy at work here.
“A PTC [publicly traded company] cannot acquire control of a licensee or an affiliated company, and a person cannot acquire control of a PTC, without the prior approval of the Commission (Nevada Gaming Commission Regulation 16.200)”
One thing potentially helping here is that the GLXZ Chairman Mark Lipparelli is plugged into Nevada politics and the gaming scene:
– EVP at Bally’s from 2003-2007.
– President/EVP at Shuffle Master (2001-2003).
– Nevada Gaming Control Board Member from 2009-2010, then Chairman from 2011-2012.
– Nevada Senate in 2014.
He’s very connected with people in Nevada, based on conversations with people there (pre-acquisition). He has a lot of GLXZ stock and spent a long time making this EVO deal happen. I suspect after the activist campaign and such he’s probably ready to cash out at a nice premium and be done with GLXZ. And he should know what levers to pull to make sure the deal goes through.
My fear was perhaps less Nevada and more that EVO is present in so many jurisdictions throughout the world–i.e., the combined probability that concerns over vertical integration (GLXZ currently provides its products to EVO competitors) gums up the deal in one of those jurisdictions.
Topline Capital management has increased its exposure from around 5% to just under 9%
https://www.bamsec.com/filing/119312521031029?cik=13156
https://www.bamsec.com/filing/95017025016837?cik=13156
Spread has widened to around 18% likely due to market selloff. Topline Capital management has reduced its position to around 5% (a bit strange as they had increased it from 5% to 9% just 2 months ago).
https://www.bamsec.com/filing/95017025052660?cik=13156
GLXZ and EVO’s products and services are available in so many jurisdictions globally. Do they have to get approvals from all/most/many of them, in addition to Nevada?
As of latest Q1 results, closing is still expected in H2 2025. Spread stands at just below 14%
That is an enticing spread, given +/- 6 months to a close. Any major known obstacles beyond those already chronicled, which seem fairly unlikely. I read recent filing and company seems to be doing comparatively well. Is refi of Fortress debt a worrisome signal?
I don’t think the refinancing is a negative signal. The debt was going to be repaid by the buyer anyway, so the refinancing simply reduced the outstanding balance (saving the buyer money) and lowered GLXZ’s interest payment burden until closing (saving the buyer more money).
GLXZ is nearing the expected close date. I’m comfortable holding, even if it delays. So far we haven’t seen any evidence that it will be blocked. That being said, our ability to sus out foreign regulators is limited / weak and we could get curveballed.
Still asymmetric though and the IRR is > 800% (ish).
I think closing by end of 2025 is more realistic. But still very high IRR (36%) if the deal closes by mid Dec.
I was talking with Evolution IR a few weeks ago, and he still said the expected closing is Q3 2025.
I guess we will get some update tomorrow from Evolution’s Q2 report and call.
The last time in writing and in public (in both Evolution and GLXZ’s Q1 interim reports), “Closing is expected in the second half of 2025”.
I am wondering whether in Sweden they have something similar to Reg FD in the US, or maybe the acquisition is too small ($80m) to be considered material to Evolution , or maybe they have also updated the expected closing date to Q3 in some public disclosures?
“CEO Martin Carlesund and CFO Joakim Andersson will present the report and answer questions on Thursday 17 July 2025 at 09:00 am CEST via a telephone conference. The presentation will be in English and can also be followed online.”
The Q2 interim report continues to state that “Closing is expected in the second half of 2025”. Any color from the call?
Quotes below, but sounded positive.
“We’re also progressing well with the Galaxy acquisition, and we expect to close the transaction during the second half of 2025.”
“That was really helpful. Secondly, on just the Galaxy acquisition expected to close here in H2. Do you see any sort of regulatory hurdles in conjunction with that? I’m thinking specifically about how maybe U.S. regulators view online versus land-based casinos.”
“I think that they actually view it exactly the same. Usually, online or land-based is just 2 different parts of the same license. So where we have a license, we already have a license, it doesn’t matter really if it’s online or land-based to that extent. There is a lot of states, a lot of licenses, a lot of administration, lots of information, and it’s progressing well. We’re actually doing well. But it also depends on the timelines and the meetings in the regulators when they have those meetings and what we’re supposed to do. So we’re doing well, and we look forward to being able to close it in the second half.”
Are they also waiting for approvals from any regulators outside US?
“Galaxy is comped against two yet-to-close transactions: Everi Holdings (announced February ’24), and Play AGS (announced May ’24). Everi is expected to close in Q3 ’25 and Play AGS in 2H ’25 (both over one year).”
For whatever its worth (maybe not much), both of these closed in the last couple of weeks.
What sort of risks could still play out? By my calc the gross spread is still ~11.50% ($3.20 offer v. $2.87 ask), and it sounds like deal closure is less than one quarter away. I must be missing something…
Regulatory approvals are still pending. There’s some risk they won’t be granted and that is what the spread represents.
Initial Outside Date was automatically extended to October 18. Language around closing remains the same.
“Galaxy and Evolution continue to be actively engaged with gaming regulators to secure the approvals required to satisfy the Gaming Approval Closing Condition, and the parties expect the closing to occur in the second half of 2025, subject to satisfaction of all closing conditions.”
Stock now at $2.99 – someone hear something with it tightening?
Some approval-related risks were outlined in this story:
In the US, Evolution’s deal to buy brick-and-mortar casino table game maker Galaxy Gaming is pending approval by regulators in every state where Galaxy has a license. Some state regulators have rules restricting companies’ operations in international markets where gambling is illegal.
New Jersey’s gaming watchdog stipulates that companies operating in black markets, which it defines as countries where government authorities enforce laws prohibiting online gaming, won’t meet the licensing condition of establishing “good character, honesty and integrity.”
https://www.bloomberg.com/news/articles/2025-08-13/evolution-games-ran-in-banned-markets-execs-say-in-secret-tapes
“The New Jersey Division of Gaming Enforcement investigated the claims but closed the investigation without taking any action in February 2024, according to Evolution. The company said the regulator found no evidence that it “sanctioned, promoted, permitted, or otherwise materially benefitted” from providing its content to any prohibited jurisdictions.
The New Jersey regulator told Bloomberg it didn’t release a public statement about its findings at the time. The court accepted the gaming regulator’s decision, saying the report “lacked veracity” and ordering the law firm to disclose its client’s identity. Since then, the law firm disclosed Black Cube as its client, but not the entity that commissioned Black Cube to produce the report.”
I think that the risk associated with this issue should not be underestimated. Black Cube has reportedly stepped up its efforts to defend itself and produced more evidence, and the unmasking of Playtech as the originator suggests that more dirt will be thrown around in the short term.
Playtech (PTEC) stock is still in free fall. Presumably the market’s negative reaction should deter PTEC from stepping up its campaign against Evolution?
The outside date has been extended again, now to January 18. Regulatory approval is expected in November or December, with closing anticipated before the end of the year. The spread is 15%.
Evolution CEO said:
“I’m also quite certain that you will ask us about the completion of the Galaxy gaming acquisition. We’re still awaiting some regulatory approvals, but believe me, we will be able to, but we believe we’ll be able to close the transaction before year out. However, it’s a regulatory process. It’s not completely in our hands.”
The spread has widened quite a bit this past week after remaining pretty steady for a long time.
I saw some people referring to PTEC. So, in 2021 an unidentified party hired an Israeli intelligence firm to create a short report on EVO, alleging it operated in certain sanctioned/black markets. The report was submitted to New Jersey gambling regulators, after which EVO’s stock price dropped sharply. In response, Evolution sued the unidentified parties for defamation. Evolution has recently announced that Playtech was the previously unidentified party. PTEC stock is down more than 30% since the announcement. Given the significant decline in EVO’s stock price at the time, Evolution might potentially be claiming substantial damages from PTEC.
While this is certainly an interesting story, it appears to have no direct link to the GLXZ acquisition by EVO. While there’s a chance that gaming license regulators may now be more cautious, the gambling regulators in both New Jersey and Pennsylvania did not find any wrongdoing by Evolution. I guess GLXZ’s stock price decline might be explained by PTEC potentially bringing charges or filing a counter-suit against Evolution. Could that delay the merger closing?
Is the Nevada Gaming Commission approval the ONLY regulatory approval pending?
The companies have been secretive about which gaming regulatory approvals have already been obtained and which are still pending. The merger requires approvals in “Core Jurisdictions” and in other jurisdictions where a specific revenue threshold is exceeded, but I have not been able to find the disclosure letter that lists them.
I haven’t looked, but maybe the legal complaints in the defamation suit contain a list of the jurisdictions, because Black Cube very likely sent information to all authorities that have jurisdiction over Evolution. So maybe every US states where GLXZ has operations.
The outside date was extended to July 17, 2026. Green light from the Mississippi gaming regulators was secured in November, but approvals from two remaining jurisdictions remain outstanding. The parties reiterated commitment to the merger and noted that they expect all remaining regulatory approvals by Q1’26, with closing shortly thereafter.
Spread has tightened back to 15%.
https://www.bamsec.com/filing/119312525294602?cik=13156
Any idea what the remaining two jurisdictions are?
It’s interesting that the press release mentions this important info only in the sub-title and then not a single word in the main text elaborates it further. (“With Mississippi approval secured, only two pre-close jurisdictions remain”)
I read elsewhere that Nevada is one because it didn’t make it on the December Nevada Gaming Commission agenda. The other US state is unknown.
What do we think the odds are of the Galaxy deal still closing? Continues to trade as if someone knows something adverse in the works? Have been riding in this one for a while and still believe in it coming to a positive conclusion.
there is news out on this that they may have difficult with nevada
Do you have a link?
https://thegamingboardroom.com/2026/01/31/is-evolutions-galaxy-gaming-acquisition-in-trouble/
Could anyone please elaborate on what happened? The spread has increased again as well.
Thanks. It’s about the January 16th NGCB updated guidance. It’s a problem for Evolution but can it afford to not comply? It’s not even just about GLXZ at this point. It would have to implement a Nevada-style compliance program globally to remain in good standing in Nevada and I doubt it has any alternative. My guess is it’s doing that and it’s taking time. I’m guessing NGCB is supportive of this also, wanting a big player like EVO to be compliant and GLXZ will only be put on the agenda when it’s done.
However, NGCB also has a history of letting companies jump through the hoops only to deny them on the finish line due to character concerns (e.g. Dreamscape/John Eder a few months ago). If they think you are being compliant only to get a license but actually you’re not trustworthy they will deny you. It’s not impossible that they bring up the Black Cube stuff at the end and this is difficult to handicap.
This is in light of EVO’s management commentary from last July where everything is progressing great and it’s super optimistic, confident in being able to close the deal last year. It knew Nevada would be the hardest part and yet it expressed confidence. Repeated the year-end closing estimate on October 23 too. In hindsight this commentary was misleading.
big dump today. Dunno if that indicates something
NGCB February agenda was just published and GLXZ is not on it.
Maybe more importantly from the EVO call:
Analyst: I’ll just start with what you alluded to in Nevada. So the direct question is really if you think there is a need for further ring-fencing to complete this Galaxy acquisition. Thanks.
Martin Carlesund CEO: We are progressing with the Galaxy acquisition. The Galaxy acquisition is not large enough to affect our business model in general. So we are moving forward according to the business model that we have.
Analyst: Given the Nevada industry guidance and India being on that list as one of the 10 countries are you planning to stop operations there given your commitment to the Galaxy acquisition?
Martin Carlesund CEO: We are not planning to change the business model as of now due to the Galaxy acquisition as I said before. We will look into the policy and see what comes out of that and no decisions in that direction.
Analyst: My second question, just trying to assess, it looks like Russia is considering regulating online casino. Will you be applying for a supplier’s license there or are you planning on stopping supply into the Russian market until that legalizes given the Nevada guidance?
Martin Carlesund CEO: We are not. There is a lot of rumors and Putin says one thing or other. I would just spontaneously see it’s very difficult to apply for license there but let’s see whatever happens in the world.
Is the possibility evo won’t sacrifice more for the sake of approval making the deal fell apart?
Yes. Evolution basically said they will not impair their revenue streams to close a ~$85m bolt-on. If Nevada insists on EVO exiting gray markets as a condition for approval, EVO might walk.
Bull case scenario: Nevada could just ask EVO/GLXZ to strictly ring-fence any Nevada-based operations.
I wrote up GLXZ today for my substack since I think the risk/reward is interesting. I also reached out to both companies. I think it’s worth sending their IR departments some commentary on this. GLXZ can just give up their vegas gaming license and they can close the merger. If vegas is going to be an issue going forward for all acquirers, they still can get a benefit from the IP in all the other jurisdictions
@BKGal: sorry for saying so but this looks like a typical ‘armchair analysis’ to me. If it was really this simple, do you think Galaxy Gaming would trade where it would trade now? And that both companies wouldn’t have considered it?
GLXZ is a Nevada-based company. Evolution dropping their Nevada license wouldn’t change a thing because the NGC still has jurisdiction over the IP and licences of the Galaxy Gaming and has to find the buyer of these licences suitable. If anything EVO giving Nevada the finger would make that even more difficult.
Second, Nevada is the gambling capital of the world. How much revenue do you think Galaxy Gaming and Evolution generate in Nevada, either from casinos in Las Vegas or from online casinos with ties to Nevada? They’d lose all of that if they drop their licence, if nothing else.
Third, Nevada law is basically the gold standard for gaming companies. A large gambling company voluntarily dropping its Nevada licence is basically equivalent to Pfizer saying ‘we’re not going to interact with the FDA anymore regarding our drugs’. It’s just not going to happen. Other state and country regulators would take notice. Any other company in the industry would be looking to sever ties with you.
The deal might still close (though I think it is getting less and less likely given the NGC stance about overseas gaming and the EVO CEO basically saying they’re not going to change anything to get the deal over the line). Post deal-break GLXZ might still be attractively priced. Still an interesting situation. But EVO is never, never going to drop its Nevada license voluntarily.
If the EVO deal breaks, GLXZ should trade with a well-earned Mark Lipparelli discount. Corporate governance at this company leaves a lot to be desired. Given GLXZ’s EVO licensing deal, no one else is going to be able to buy them. Post an EVO break, the risks will continue to be on the downside…
So if the evo deal is off the table, who else realistically can acquire and not run into the same hurdle?
Trading at 12.5x earnings and maybe 10x fcf so not strenuous but if they can’t get taken out what’s the thesis here?
Weird timeline update with no real new info. Not sure why they felt the need to issue it. If you really wanted to read into it, maybe it could be taken as mildly positive?
“Galaxy and Evolution continue to be actively engaged with gaming regulators to satisfy the closing conditions related to the receipt of certain gaming regulatory approvals (the “Gaming Approval Closing Condition”). Based on the information available as of the date of this Current Report on Form 8-K, Galaxy anticipates closing of the transaction to occur prior to the Outside Date, subject to satisfaction of the Gaming Approval Closing Condition.”
https://www.bamsec.com/filing/119312526093995?cik=13156
No new updates on the merger in the latest 10-K.
“The Company and Evolution continue to be actively engaged with gaming regulators to secure the remaining regulatory approvals to satisfy the gaming approval closing condition. However, no assurance can be given that the required regulatory approvals will be obtained and, even if all such approvals are obtained, no assurance can be given to the timing of the approvals. The Company expects the closing of the Merger to occur by the Amended Outside Date of July 17, 2026, subject to satisfaction or waiver of the closing conditions (see Note 1 below).”
No now updates on the merger in the latest 10Q. Still waiting for regulatory approval, outside date extended to July 17.
Just noticed this on IR – a multi year contract extension with NetCo Ltd. Is this business as usual while we wait for the outside date in ~3 weeks, or is it preparation for a merger break?
I don’t see how that is related. It’s just a renewal of a distribution right for one of the games they offer.
Anyone seen any more news on this? Outside date for merger is today…
evolution addressed it in their call. go read the transcript. 99 percent not happening unless there is a miracle change in vegas views
Such a weird spot for the company now. Can’t really get acquired, but we all know the value if they did get acquired. Doesn’t remotely make sense as a standalone entity…
GLXZ made an update yesterday, noting that it is evaluating whether to seek another extension or terminate the agreement. The CEO’s quote does not inspire much confidence in a close:
“For two years, we have been working with Evolution towards a closing of the Merger Agreement,” said Matt Reback, President and CEO of Galaxy. “During this same time, we have also been focused on growing Galaxy by increasing the range of our table games products, expanding into new markets, deepening partnerships with new and existing customers, increasing the share of our recurring revenues, and assembling a team of the highest caliber individuals possible. We are excited about the trajectory of the company, and we look forward to a continued relationship with Evolution.”
https://www.sec.gov/Archives/edgar/data/13156/000119312526308385/d101970dex991.htm
The merger has officially been terminated by Evolution. EVO will pay a $5.2m termination fee, equal to almost 7.5% of GLXZ’s current EV.
https://www.sec.gov/Archives/edgar/data/13156/000119312526310570/d138634dex991.htm