A LOT has been written about the art of negotiation, but sometimes you don’t need a textbook. Waving a letter promising $3bn from one of the most powerful firms on Wall Street is usually a sure-fire way to get what you want. This was a lesson David Baazov was quick to grasp.
Baazov, an Israeli-born Canadian who sold his first business before he was old enough to buy a drink in a bar, had spent a decade building up a gambling technology company. No matter how big the business got, however, it seemed that a partnership deal with Pokerstars, the world’s biggest internet poker operator, was always beyond his grasp.
The site’s owners, chief executive Mark Scheinberg and his family, had built a money machine and did not want the help of a minnow from Montreal.
They were even less interested when Baazov suggested that he buy their company instead. “They brushed it off — ‘How can you buy us?’ ” said Baazov.
It was a fair point. Despite legal problems that had left the company locked out of America, Pokerstars was still a colossus. From its Isle of Man base it had attracted more than 85m players and amassed sales of more than $1bn.
Baazov was undaunted. If he could pull it off, he would have the world’s biggest gambling company. Everyone has a price, he figured, and he had an ace up his sleeve.
Through a previous deal, the 33-year-old entrepreneur already knew Blackstone, the influential American investment house that has backed everything from Hilton hotels to Crocs shoes. Asking these masters of the universe to help finance a takeover of Pokerstars was audacious nonetheless, but the buyout firm sensed an opportunity. Here was a chance to take Pokerstars back into America.
Just before Christmas, Blackstone happily wrote a commitment letter for $3bn, allowing Baazov to make a fresh approach to the Scheinbergs. This time, the family did not dismiss him. Instead they invited him to the Isle of Man to work through the finer points of a deal.
Last month Baazov finally nailed it. His Toronto-listed company, Amaya, announced it would pay $4.9bn (£2.8bn) for Pokerstars. The minnow had swallowed the whale.
Blackstone may have opened the way for the negotiations, but several other blue-chip lenders were also crucial to the deal. Deutsche Bank, Macquarie and Barclays all chipped in to help persuade the Scheinbergs to sell.
David Baazov has turned himself into the biggest online player with the acquisition of PokerstarsBaazov plays down the idea that they are all there because of the money to be made by taking Pokerstars back to America. “We have five main growth initiatives and America is No 4 on the list,” he said.
But it is also too tantalising an opportunity to ignore. Analysts believe that Amaya’s capture of Pokerstars could reshape the online gambling landscape, kick-starting a market that has so far been slow to take off.
The deal is perhaps the most seismic event in the industry since America clamped down on internet gambling in 2006, with legislation outlawing financial transactions related to online betting.
Most operators pulled out of the US, including London- listed Party Gaming and 888, even though doing so drove a huge hole through their business plans. Pokerstars, however, continued to operate there, arguing that poker was a game of skill rather than chance, and so was not covered by the new law.
The authorities saw things differently. On April 15, 2011, a day known in the industry as Black Friday, the US Department of Justice launched civil actions against Pokerstars and other gaming sites and criminal actions against leading figures. They included Isai Scheinberg, Mark’s father, for whom a criminal indictment remains outstanding. He denies any wrongdoing.
The Pokerstars site ceased operating in America and concentrated instead on a host of other markets. Today, it is estimated to account for more than half of all online poker played worldwide.
In 2012 it paid $547m to settle the cases against it, without admitting any wrongdoing. By then, however, America had had a change of heart. The Department of Justice ruled that online gambling was not illegal and left it up to individual states to decide whether to license internet gambling. Some, such as New Jersey and Nevada, home to the casino resorts of Atlantic City and Las Vegas, were quick to embrace the change. Several others, including California, may also approve online gambling.
While the likes of Party Gaming and 888 have now re-entered the American market, largely through partnerships with casino operators such as Caesars Entertainment, Pokerstars has so far been kept on the sidelines. In December, its licence application for New Jersey was suspended for two years, and Nevada has said companies that operated in America after the 2006 ban cannot apply for a licence for five years. California is considering legalising online gambling with a similar restriction, which could keep Pokerstars out of potentially the most lucrative market in America.
Despite such problems, Pokerstars remains well liked by customers. A majority of members of the Poker Players Alliance want the brand in America. It is, in the words of the 888 boss Brian Mattingley, the industry’s 800lb gorilla and would stimulate the entire market if unleashed again.
Which is why the idea of Baazov buying the business seemed both sensible and outlandish. Or, as he puts it: “Was I persistent? No question.”
He moved to Canada as a baby with his Georgian parents, and started his first business at 16 with a $300 loan from his mother. The direct-mail marketing operation distributed coupons for pizza delivery firms and dry cleaners. After just four months, he sold it for $12,000. “I gave most of the money to my parents,” he said.
After a move into computing and consumer electronics, a business he sold at the ripe old age of 23, Baazov decided the future lay in online gambling. His interest had been piqued by watching live poker on tele–vision. “My first reaction was, who watches poker on TV, but I was surprised at how entertaining it was. Poker was having tremendous growth, so I focused on getting into it. I started Amaya on that principle.”
He grew the company through acquisitions, starting with modest deals to buy the software developers Chartwell Technology and Cryptologic.
Baazov was keen to ensure Amaya supplied bricks-and- mortar gambling operators as well as those in the virtual world. He secured a deal to buy a gaming machine supplier called Cadillac Jack and lined up GSO Capital Partners, the credit arm of Blackstone, to provide the finance.
The Blackstone team liked what they saw. “I had given them a forecast of what I thought the business could do after the transaction. Typically, they think, here’s a chief exec who says he will grow the company by X and they usually discount the prediction by 95%. When I was giving them my updates after the deal, there was less than 2% variance from what I had said.”
The performance of Cadillac Jack and Baazov’s business nous were strong enough for Blackstone to support the Canadian’s loftier ambitions.
The bet could soon pay off. Although the deal has not formally gone through yet — Amaya shareholders are due to vote on it at the end of this month, with completion scheduled for September — regulators in New Jersey are already making positive noises about awarding Pokerstars a licence. The takeover clears away the most contentious problems hanging over the company, such as Isai Scheinberg’s indictment.
David Rebuck, director of New Jersey’s Division of Gaming Enforcement, said he was “encouraged” by the news of the deal. A fresh attempt to secure a licence is believed to be in the works.
Investors in London could be beneficiaries of the deal. As The Sunday Times revealed last week, Baazov is likely to seek a secondary stock market listing for Amaya on this side of the Atlantic or in New York.
He refused to give an inkling of which city would get the nod — Baazov knows the value of maintaining a poker face.