Deep Value Investment Opportunity

Allied Esports owns an Esports business that engages in the hosting of in-person and online events to gather around hundreds and thousands of fans and gamers into one place for competition. They previously owned World Poker Tour (WPT). They lease space in their flagship property Hyperx in Las Vegas Stripe. They own TWO 18-Wheeler Trucks, one in Germany and one in the US.

Allied Esports, as stated above, owned WPT. In 2021, they sold it for a total of $106m in cash which was added to their balance sheet. Now the corporate balance sheet stands with $94m in cash and no debt. Essentially, they are a holding company with a business with high cash burn rate. While I’m not here for the Esports business, I am here for the HoldCo which is trading below Net Current Asset Value (NCAV) or below Net Cash Value (NCV). The company previously announced their intent to sell the Op Co for cash and complete a merger or acquisition to maximize shareholder value and grow the company. With the proceeds from the sale of WPT they plan to acquire a well managed company with long term growth potential and use the remaining cash to grow the company. Now, you are protected on the downside since there is a set floor with all the cash the company has but that protection is limited as the operating company has a high cash burn rate. So the thing in question is time. How fast can the company realize a sale of the Op Co? If they sell the Op Co there will not be any more cash burn and they can peacefully look for a possible merger or acquisition that fit their description of value. If no sale is realized quickly, cash burn will continue and will remove the buying power from the holding company for the acquisition and will also dwarf your margin of safety. They can cease the esports operation but they won’t get any money from that as opposed to just selling it. Good news is, there is active discussions with interested potential buyers of the esports business. 

If they sell the business they can also utilize the Net Operating Losses provided which they have about $57m in NOLs and they can offset the gains in the new profitable division of the company and make a huge impact on earnings.

I classify this investment as a special situation, sort of the same as Rubicon Technology which shareholders were offered a Tender Offer from another company to acquire a big stake in the company. Rubicon had the same characteristics, tons of cash, trading below NCAV, and cash burning op co. It went up 66% in one day following the news. Same could happen with AESE which has a greater margin of safety since it has more cash and a larger disparity between price and actual value.