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Back in June 2012, this author recommended buying Global X Funds (NYSE: GREK) (the Greece ETF known as GREK). At the time, people thought I was crazy. Flash forward to today, GREK is up about 100% since that recommendation. I also started to look at some Greek companies including one named OPAP SA (Athens:OPAP). To my surprise, a new filing showed that Seth Klarman’s Baupost Group owns 5.2% of  OPAP. According to Greek media sources, Seth Klarman is looking to increase that to 10%.  Dan Loeb’s Third Point, TPG Capital and BC Partners have expressed interest in the company as well.

Below we provide some basic background on the company which is attracting interest from many large value investors.

First a look at valuation from a Greek research firm, Piraeus Securities.

OPAP valuation and model

OPAP, 34.4% owned by the Greek State, is the biggest listed gaming operator in Europe in terms of revenues (estimated at €4,011.8m in 2012). In 2000, OPAP acquired the sole concession to operate all numerical lottery and sports betting games in Greece (ex-horseracing) until 2020 and extended this concession for another 10 years in 2011. Currently, the company operates through a landbased distribution network of circa 5,000 agencies under license agreement.

Owing to its monopoly status, OPAP controls 71% of the Greek gaming market. Casinos control 22%, State lotteries another 5% (12 year concession acquired by an OPAP-led concortium) and horseracing (run by ODIE) the remaining 2%.

According to estimates, although forbidden by law, the Greek on-line gaming market generates some €3,750m in poker/casino (€1,750m) and fixed-odds betting revenues (€2,000m). In sharp contrast to the legal market, the illegal operators pay zero taxes and have small distribution costs. They are thus able to offer competitive payouts to winners (as high as 95%). OPAP does not offer on-line gaming services.

Latest developments

In early February 2013, the ministry of finance announced it will submit to Parliament a law adjustment that will re-establish a tax free threshold for punters’ wins below €100. News is positive for OPAP as the 10% tax rate that was introduced at the beginning of the year was projected to hit OPAP’s turnover by ~13% through reduced recycling of wins. That being said, there will be a 15% tax on wins of €100-500 and a 20% tax rate for higher amounts. The European authorities have okayed the move.

According to a draft bill prepared by the Ministry of Finance, OPAP’s Video Lottery Terminals (VLTs) license will be valid for a 10-year period starting from either 12 months following the publication of the Gaming Committee’s rulebook or from the commercial operation of the first terminal. OPAP will be obliged to commence VLTs operations within 18 months from the aforementioned publication.

VLT and on-line players will be obliged to issue personal cards so that restrictions can apply. The personal card for punters is set to have a negative impact on the level of VLTs’ and online activity but moves towards the right direction as far as justifying the Greek gaming monopoly is concerned.

OPAP extended for another 3 months the IT contract with the Intralot-led consortium (up until end April 2013).

The European Court of Justice (ECJ) issued a ruling on the joined cases of Stanleybet and William Hill, as well as that of Sportingbet regarding the Greek gaming monopoly granted to OPAP. The ruling moves along the lines of the formal opinion expressed by the Advocate General of the ECJ on 20 September 2012. To start with, the ECJ does not object a gaming monopoly per se as long as certain preconditions are fulfilled.

The monopoly must a) reduce opportunities for gambling, b) limit activities in that domain in a consistent and systematic manner and, c) assist the local authorities in imposing strict control over the expansion of the sector of games of chance, solely in so far as is necessary to combat criminality linked to those games.

It is for the national court (Greek Council of State) to ascertain whether this is the case. If not, there must be changes so that local legislation conforms to EU laws or the monopoly must be removed. For OPAP, the fact that it is listed, operates on shareholder wealth maximization criteria and follows a commercial policy of expansion, has expanded abroad, advertises itself and its products, introduces new games and does not limit betting per person are key areas that need to be examined by the local courts.

The ECJ also ruled that should local courts conclude that there is incompatibility between local and EU laws, then there should be no transitional period during which local authorities refrain from considering applications of third parties to operate in Greece.

According to Kathimerini newspaper, the Greek government will grant OPAP monopoly rights for online betting in Greece and will shut down the remaining 24 on-line providers that have been on a transitional mode since late 2011. The government will reportedly amend law 4002/2011 and inform the European Commission. The amendment will also include other changes like the number of VLTs allowed per gaming hall (number raised to 50 from 25). The same report suggested that OPAP’s competitors will be only permitted to offer ‘live’ casino games on-line (poker and blackjack). The Remote Gambling Association (RGA) has already notified the Greek authorities that it will proceed with all the necessary legal actions against OPAP’s monopoly.

The Hellenic Republic Asset Development Fund (TAIPED) announced the conclusion of the tender process regarding the 12-year national lotteries concession and accepted the offer made by the OPAP-led consortium (OPAP 67% including Lottomatica’s 33% stake transfer, Intralot 16.5%, Scientific Games 16.5%). The upfront payment for the license is €190m, with the Hellenic Republic also receiving 30% of gross gaming revenue but not less than €30m in the first year of operation and €50m for the remaining 11 years of the concession (total guaranteed payments at €580m), unclaimed prizes estimated at €170m throughout the concession period and finally the proceeds from the New Year’s Lottery estimated at €130m throughout the concession period. The concession agreement will be signed in March 2013 and the consortium will assume the operation of state lotteries in September 2013.

Q3 conference call highlights

a. OPAP reiterated its belief that it is the only operator that will acquire a license to offer sports betting online – Opap believes its monopoly applies over the internet as well b. OPAP said it sees no threat for its monopoly and considers the recent opinion from the European Court of Justice as positive. OPAP lowered the payout range to 35%-50% from 50% previously adding that investments for new licenses will definitely have an impact on the dividend policy.

Following an agreement with the European commission, the Ministry of Finance announced that from 2013 and up to 12/10/2020, OPAP S.A. will pay the Greek State a royalty equal to 30% of the gross win of its legacy games provided for in the contract dated 12/15/2000 between the Greek State and OPAP S.A.. With regards to the concession extension between 10/132020 up to 10/122030, the Greek State will receive a gross win royalty amounting to 5%, while a part of the €375m paid in

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