Investors watching for key developments in the closely watched patent infringement suit filed by MGT Capital (NYSEMKT:MGT) against five gaming heavyweights will welcome two important meetings taking place this week on May 9th and 10th. One will occur inside the courtroom and one outside the courtroom, but both will have significant ramifications for the future legal proceedings and for the possible settlement discussions going forward.
It all started on November 2, 2012, when MGT filed a high profile patent infringement suit against Caesars Entertainment (NASDAQ:CZR), MGM Resorts International (NYSE:MGM), WMS Gaming, Inc. (NYSE:WMS-OLD), Penn National Gaming (NASDAQ:PENN) and Aruze Gaming America, Inc. The suit alleges that these companies are violating MGT's patent used in slot machines. The estimated present value of the royalties over the life of this patent range from $330 million to $4.5 billion.
MGT's business is to acquire and monetize intellectual property rights. MGT has a current market cap of only $19.8 million, a debt-free balance sheet, and approximately $8 million in cash. That cash position was just bolstered last week when 678,934 warrants were exercised at $3.85/share, adding a fresh $2,613,895 to the balance sheet.
The key developments of this week include:
May 9: Case Management Conference
This Thursday, May 9, at 1:30 pm, United States Magistrate Judge F. Keith Bell of the Southern District of Mississippi has ordered a case management conference with all parties (defendants and plaintiff) required to participate. At this conference, the court and all parties will discuss among other things dates for a settlement conference, completion of discovery, motions, the final pretrial conference and trial.
Additionally, Judge Bell has requested that each party submit a confidential settlement memorandum to include the following three items:
- Brief explanation of the case and a candid appraisal of the respective positions
- Possible settlement figures
- Good faith estimate of the expense of carrying the litigation through trial and the appellate process, if not settled
Since MGT filed its suit in November 2012, the following motions have been filed and are pending Judge Bell's ruling:
- WMS (joined by CZR and MGM) filed motion to sever the litigation against each defendant
- WMS filed motion to transfer the action against WMS to the Northern District of Illinois
- WMS filed motion to dismiss the case
- Aruze & PENN filed motion to dismiss case
- Aruze and PENN filed a motion to transfer venue to Nevada and Pennsylvania, respectively.
- MGT filed a motion to request Oral Argument regarding WMS motions #1, #2, and #3.
As of May 7, the court has not made any decisions on these motions.
May 10: WMS Shareholders Vote on Adoption of Merger with Scientific Games (NASDAQ:SGMS)
Because WMS is one of the most important defendants in MGT's patent infringement suit, the pending merger of WMS with Scientific Games matters in a big way. As others have speculated in previous articles, pressure will mount for WMS (or Scientific Games post-merger) to settle with MGT to eliminate the overhang of a pending jury trial.
As background, Scientific Games, a New York based supplier of lottery systems and instant ticket plans, announced on January 31, 2013, their agreement to acquire WMS Industries for $1.5 billion to create a global supplier of lottery equipment and slot machines. The buyout price Scientific Games offered WMS was at a 59% premium, or $26/share, to its closing price the day before the acquisition announcement.
In addition to regulatory approval, the merger needs the approval of a majority of the outstanding shareholders of WMS common stock and that vote will happen on Friday, May 10. An affirmative vote to merge with Scientific Games on Friday will be a positive development for MGT Capital. As the merger comes closer to fruition, the likelihood of a settlement is even greater.
But with a quick glance at the balance sheets of WMS and Scientific Games, some were skeptical how they would be in a position to potentially offer a cash settlement to MGT. After all, WMS's cash position was only $69.2 million with $85 million in long term debt according to their recent quarterly report. And Scientific Games wasn't much better with only $90 million in cash and over $1.4 billion in long term debt as of March 31, 2013.
Those concerns were completely removed on April 9, 2013, when Scientific Games received a commitment of $2.6 billion in loans from Bank of America, Credit Suisse Group, UBS, JPMorgan Chase & Co., Royal Bank of Scotland, Deutsche Bank, Goldman Sachs, and HSBC to help fund its purchase of WMS.
So why did Scientific Games need a $2.6 billion loan for a $1.5 billion acquisition? One could imagine that $85 million could be used to retire the debt of WMS. Also, Scientific Games just reported in their recent quarterly filing that $3.8 million in expenses associated with the merger were paid in the first quarter of 2013. If we were to extend that $3.8 million run rate for the remainder of 2013, Scientific Games' merger related expenses would total $15.2 million. That still leaves $1 billion in cash available to use for general corporate purposes. These liquid assets would give Scientific Games the ability to offer a generous settlement to MGT if it chooses to not proceed with a lengthy and costly jury trial.
For those looking for developments in MGT's patent infringement suit, this week provides two key developments on May 9th and 10th. At each meeting, decisions will be made to give investors significant clues to where this case is headed inside the courtroom and where potential settlement is headed outside the courtroom.
On May 9th, if the judge decides to schedule upcoming hearings, settlement conferences, discovery and trial dates, the clue is that the trial will move forward and the motions to dismiss will be unsuccessful. On May 10th, if WMS shareholders approve the merger with Scientific Games, the clue is that the merger will most likely happen by year's end, therefore increasing the pressure for a settlement with MGT.
Disclosure: I am long MGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.