In his famous paper, ‘Investing in the unknown and unknowable’, Richard Zeckhauser opens by telling the famous story of David Ricardo made his fortune:

David Ricardo made a fortune buying bonds from the British government four days in advance of the Battle of Waterloo. He was not a military analyst, and even if he were, he had no basis to compute the odds of Napoleon’s defeat or victory, or hard-to-identify ambiguous outcomes. Thus, he was investing in the unknown and the unknowable. Still, he knew that competition was thin, that the seller was eager, and that his windfall pounds should Napoleon lose would be worth much more than the pounds he’d lose should Napoleon win. Ricardo knew a good bet when he saw it.

Is Northstar Gaming a good bet?

Northstar (TSXV: BET, OTCQB: NSBBF) operates in Ontario’s rapidly growing iGaming market and has demonstrated substantial growth metrics, albeit with significant financial challenges. With its strategic alignment with Playtech, recent $43.4 million debt financing, and improving operational metrics, Northstar presents a speculative opportunity for investors seeking high-growth potential in a nascent market. This analysis integrates valuation scenarios, strategic options, and financial updates to provide a full investment case.

Snapshot of Northstar Gaming

Northstar Gaming currently has 205.8 million shares outstanding, resulting in a market capitalization of approximately $10.3 million at a share price of $0.05. The company’s total wagers for 2024, annualized based on YTD performance, are approximately $903 million. This translates into $26.9 million in annualized revenue and a gross margin of $10.7 million, reflecting a strong 40% margin.

However, the company’s financial obligations include $48.6 million in total outstanding debt, comprised of a recent $43.4 million long-term facility from Beach Point Capital and $5.2 million in convertible debentures issued to Playtech PLC (LON: PTEC). Accounting for these liabilities, Northstar’s enterprise value is estimated at $59 million, with adjusted equity value aligning closely with the market cap at $10.3 million.

Strategic Alignment with Playtech

Playtech is a critical strategic partner for Northstar Gaming, holding approximately 25% of the company’s outstanding shares. This equity stake is complemented by $5.2 million in convertible debentures and 32.7 million warrants exercisable at $0.055 per share,as well as 14,764,229 A Warrants exercisable at $0.36, and 14,764,229 B Warrants exercisable at $0.40​.

Playtech also benefits from revenue-sharing agreements tied to its platform and marketing support, reinforcing its commitment to NorthStar’s success.

Playtech’s approach to regulated markets and its history of driving growth through partnerships highlight its alignment with Northstar’s objectives. The collaboration strengthens Northstar’s ability to expand market share and improve profitability by leveraging Playtech’s advanced technology and strategic influence.

Beach Point Capital ~ Banker, Opportunist or Both?

Beach Point Capital Management, a multi-strategy investment manager, has extensive experience in the gaming sector. With $19 billion in assets under management as of December 2024, Beach Point specializes in credit, private equity, real estate, and structured product investments. The firm focuses on identifying opportunities in high-growth industries, leveraging its expertise to provide tailored financing solutions.

Beach Point’s partnership with Northstar is interesting. The financing (43.4m) it provided is fully guaranteed by Playtech – And hence significantly de-risked for Beach Point. The interest rate they are charging is steep. However, the deal is quite beneficial to Playtech – It allows it to be repaid the short term loans (9.5m) and collect amounts due (6m?) from Northstar immediately. It also allows Northstar to get their AP cleaned up (5m?). Further, 7m is being set aside in a reserve for interest payments. So, net of all ‘clean ups’, I estimate there will be approximately 16m available as working capital.

This deal looks like it strengthens Northstar’s balance sheet, provides the necessary capital to scale operations and ideally achieve profitability. It allows Playtech to be made whole on what it is owed. It allows Birch Point to knock it out of the park in terms of interest charged. Win-Win-Win. But it comes at a cost. That debt will have to be dealt with. And another 32m warrants at a very low exercise price are in play – resulting in further dilution.

Valuation Scenarios

Base Case (Moderate Growth)

• Total Wagers: $1.2 billion.
• Revenue: $35 million.
• Gross Margin: $14 million (40%).
• Enterprise Value (EV): $105 million (3x Revenue)
• Adjusted Equity Value: $56.4 million.
• Per Share Value: $0.24 (238.5 million shares; assumes only the 32.7 million warrants are exercised in this scenario).

Upside Case (Strong Growth)

• Total Wagers: $2 billion.
• Revenue: $58 million.
• Gross Margin: $23 million (40%).
• Enterprise Value (EV): $232 million (4x Revenue)
• Adjusted Equity Value: $183.4 million.
• Per Share Value: $0.69 (All Playtech options exercised = 266.5 million shares)

Downside Case (Bankruptcy)

• Enterprise Value: $0.
• Equity Value: $0.
• Shareholder equity likely wiped out.
• Would involved regulatory, reputational, customer and operational risk

Go-Private Transaction ($0.20 Per Share)

• Acquisition Cost: Playtech would only need to purchase the remaining 75% of shares not already owned, resulting in a cost of approximately $30.7 million (75% of 205.8 million shares at $0.20 per share).
• Strategic Advantage: Provides Playtech with full operational control, eliminating public market scrutiny while leveraging existing synergies.
• Per Share Value: $0.20.

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Is Northstar a Good BET?

My thinking? Northstar Gaming offers significant upside potential, underpinned by Playtech’s strategic & operational support. The base case valuation at $0.24 per share reflects substantial growth prospects from current levels, while the upside case highlights a very attractive per-share valuation of $0.69. A go-private scenario at $0.20 per share represents a realistic premium and decent ROR for an investment at current levels. The downside case (bankruptcy), while unlikely, remains a possibility for any business, especially one with a high debt load and no current profitability.

With a market cap of $10.3 million, the current share price reflects extreme skepticism about the future. It is possible much of that has been caused by one large shareholder with an unknown agenda indiscriminately dumping stock. However, Playtech’s deep involvement as an investor and supplier, and guaranteeing the the recent financing provide a strong backstop & launchpad, making Northstar a risky but compelling opportunity for investors seeking exposure to the high-growth online gaming market.

Disclosure  –  The Author is a (new) Northstar Gaming shareholder (hard to resist 5 cent paper!).   The Author is not compensated in any way by Northstar and has no commercial or financial relationship with the company except as a shareholder.