Playtika
Updated Covenants Tear Sheet: Change-of-Control Provisions Under Playtika’s Debt Docs Potentially Implicated by Contemplated Equity Sale, ‘Strategic Alternative’ Transactions
Mon 03/14/2022 11:49 AM
Relevant Items:
Playtika Covenants Tear Sheets, Debt Document Summaries
Playtika Debt Documents
On Feb. 24, mobile gaming company Playtika released its fiscal year 2021 financial results. The company reported fourth-quarter adjusted EBITDA of $212.5 million, a 1% increase compared with $210.4 million in the prior-year quarter, and fourth-quarter revenue of $649 million, a 13.2% increase compared with $573.5 million in the prior-year quarter. Adjusted EBITDA for the year was $982.7 million, up approximately 4.4% from the prior year.
Also on Feb. 24, Playtika announced that its board of directors had “initiated a process to evaluate Playtika’s potential strategic alternatives to maximize value for stockholders” and “intends to consider a full range of strategic alternatives, which could include a sale of the company or other possible transactions.” The company “has not set a timetable for the review process,” it stated, and “does not currently intend to disclose developments related to the process.”
In connection with the strategic review, Playtika has retained The Raine Group as its financial advisor and Latham & Watkins as legal counsel.
Earlier, on Jan. 24, Playtika announced that its largest stockholder, Playtika Holding UK II Ltd. ("PHUK II"), controlled by affiliates of Yuzhu Shi, “has decided to explore options for a potential sale of a portion” of its Playtika common stock, “currently contemplated to be approximately 15 to 25% of the total shares of Playtika currently outstanding.” Per the release, if such a sale occurs, “depending on the number of shares to be sold, PHUK II, Yuzhu Shi and their respective affiliates may no longer control a majority of the outstanding shares of Playtika.”
Playtika held an investor call on March 1 but expressly restricted the scope of the call to its financial results and did not address the announcement regarding its evaluation of “strategic alternatives.”
Playtika’s debt consists of an undrawn $600 million revolving facility and $1.9 billion of term loans, executed under the same credit agreement, and $600 million of unsecured notes due 2029. Comprehensive analyses of the credit agreement and 2029 notes can be accessed HERE.
In this update, we discuss the change-of-control provisions in Playtika’s debt documents, which are potentially implicated by PHUK II’s contemplated sale of Playtika stock or by certain transactions that may be under consideration as strategic alternatives for Playtika. We conclude that the proposed sale of equity by PHUK II is unlikely to trigger the change-of-control provisions under either the credit agreement or the notes. However, other strategic alternative transactions might result in a change of control under Playtika’s debt, requiring it to replace or amend the credit agreement and/or offer to repurchase the 2029 notes at 101%.
Playtika’s capital structure as of Dec. 31, 2021, was as follows:
Covenant conclusions including debt, liens and restricted payments capacities based on the most recent financials can be found in our updated covenants tear sheet HERE.
In debt documents, change-of-control provisions generally protect lenders or noteholders in the event of a transaction involving a change in ownership. Therefore, the PHUK II equity sale and strategic alternative transactions including sale of the company, as described in Playtika’s recent announcements, may implicate the change-of-control provisions in the company’s credit agreement and indenture.
As discussed below, a sale by PHUK II of 15% to 25% of Playtika’s stock is unlikely to trigger the change-of-control provisions under either the credit agreement or the notes. However, a sale of the company or some other strategic alternative transaction could result in a change of control under Playtika’s credit agreement and its note if that transaction results in another entity controlling a majority of voting power in the company or if it involves a sale of substantially all the company’s assets. A change of control under the credit agreement would require the company to replace or amend the agreement to avoid default, while under the 2029 notes it would trigger a required offer to repurchase the notes at 101%.
Under the credit agreement, the occurrence of a change of control is an event of default, allowing a majority of lenders to terminate commitments and accelerate outstanding loan borrowings.
The credit agreement’s change of control definition includes the following triggers:
“Permitted Holders” is defined to include PHUK II and its parent companies and affiliates. As discussed in our prior coverage, Playtika is controlled by Yuzhu Shi, chairman of Giant Network Group, through his indirect interest in PHUK II. According to a Feb. 25 amended 13D filing, based on stock outstanding as of Nov. 1, 2021, PHUK II beneficially owned 51.8% of Playtika’s common stock and Yuzhu Shi beneficially owned 60.2% (which includes the 51.8%).
As mentioned above, PHUK II is reportedly considering selling 15% to 25% of Playtika’s total outstanding stock. While a sale of any amount in this range would cause the permitted holders to lose majority control, the voting stock trigger also requires that another entity or group obtain beneficial ownership of a majority of the voting stock.
According to Playtika’s 2021 proxy statement, the second-largest shareholder behind PHUK II is On Chau, an individual, with beneficial ownership of 20% of Playtika’s common stock as of April 12, 2021. Based on that disclosure, even assuming PHUK II sold 25% of Playtika’s outstanding shares to Chau, such transfer would not trigger a change of control because Chau’s post-transaction ownership would be only 45%.
According to another 13D filing, PHUK II remains subject to a lockup agreement with respect to 50% of its shares until July 14 (the lockup with respect to the other 50% ended on Jan. 14).
Therefore, a sale by PHUK II of 15% to 25% of Playtika’s equity is unlikely to trigger a change of control under the credit agreement, because based on available information, such a sale cannot result in another entity gaining majority voting power in the company.
Strategic alternative transactions involving a sale of equity could trigger a change in control under the voting stock trigger, but only if the transaction results in a third party owning a majority of Playtika’s voting stock. However, no change of control under the credit agreement will occur from a sale of equity that results in dispersed ownership, such that no entity or group holds majority voting power post-transaction.
As discussed in more detail below, a strategic alternative transaction involving a sale of substantially all Playtika’s assets would also trigger a change-of-control event of default under the credit agreement due to the cross-trigger mechanism (assuming the 2029 notes are then outstanding).
If Playtika opts to pursue a transaction that would trigger a change of control under the credit agreement, then because a change of control is an event of default, the company would need to refinance or otherwise retire the credit agreement or seek an amendment from lenders to permit the transaction. As of Dec. 31, the revolver was undrawn and $1.9 billion of term loans were outstanding. Because the change-of-control provisions do not implicate any “sacred rights” under the agreement, the necessary amendments would require consent from a majority of lenders only.
A Change of Control Under 2029 Notes Requires an Offer to Repurchase at 101
Under the 2029 notes, a change of control requires the issuer to make an offer to repurchase the notes at 101%. As discussed below, this requirement is likely to be triggered by the same transactions that would constitute a change-of-control event of default under the credit agreement - if Playtika pursues a transaction that results in a third party controlling a majority of the issuer’s voting stock (unless structured to fit a narrow exception). Under the notes, a change of control would also occur if the company sells substantially all of its assets.
The 2029 notes’ change-of-control definition includes the following triggers:
The 2029 notes define “Permitted Holders,” in relevant part, in the same way the credit agreement does to include PHUK II and its parent companies and affiliates.
As noted above, the voting stock trigger under the 2029 notes includes an exception, under which a change of control will not be triggered if the issuer becomes a wholly owned subsidiary of another entity and the issuer’s pre-transaction voting stock is converted or exchanged for voting stock of the new parent entity representing more than 50% of the voting power of that entity.
Assuming that a sale of 15% to 25% of Playtika equity by PHUK II, standing alone, cannot result in any other entity controlling a majority of Playtika’s voting stock, such a sale will not trigger a change-of-control offer under the 2029 notes. Some other strategic alternative transaction involving a sale of equity that does result in such third-party control may require Playtika to make an offer to repurchase the 2029 notes at 101%. However, to the extent the company can structure a “strategic alternative” equity sale transaction to meet the exception to the voting stock trigger, it may be able to avoid triggering the 101% offer requirement.
A strategic alternative transaction that constitutes a sale of substantially all assets would also constitute a change of control under the 2029 notes, requiring an offer to repurchase at 101%.
The 2029 notes recently traded at 92.7, suggesting that the market does not expect a change of control to be triggered under the notes.
--Mitch Oates
Playtika Covenants Tear Sheets, Debt Document Summaries
Playtika Debt Documents
On Feb. 24, mobile gaming company Playtika released its fiscal year 2021 financial results. The company reported fourth-quarter adjusted EBITDA of $212.5 million, a 1% increase compared with $210.4 million in the prior-year quarter, and fourth-quarter revenue of $649 million, a 13.2% increase compared with $573.5 million in the prior-year quarter. Adjusted EBITDA for the year was $982.7 million, up approximately 4.4% from the prior year.
Also on Feb. 24, Playtika announced that its board of directors had “initiated a process to evaluate Playtika’s potential strategic alternatives to maximize value for stockholders” and “intends to consider a full range of strategic alternatives, which could include a sale of the company or other possible transactions.” The company “has not set a timetable for the review process,” it stated, and “does not currently intend to disclose developments related to the process.”
In connection with the strategic review, Playtika has retained The Raine Group as its financial advisor and Latham & Watkins as legal counsel.
Earlier, on Jan. 24, Playtika announced that its largest stockholder, Playtika Holding UK II Ltd. ("PHUK II"), controlled by affiliates of Yuzhu Shi, “has decided to explore options for a potential sale of a portion” of its Playtika common stock, “currently contemplated to be approximately 15 to 25% of the total shares of Playtika currently outstanding.” Per the release, if such a sale occurs, “depending on the number of shares to be sold, PHUK II, Yuzhu Shi and their respective affiliates may no longer control a majority of the outstanding shares of Playtika.”
Playtika held an investor call on March 1 but expressly restricted the scope of the call to its financial results and did not address the announcement regarding its evaluation of “strategic alternatives.”
Playtika’s debt consists of an undrawn $600 million revolving facility and $1.9 billion of term loans, executed under the same credit agreement, and $600 million of unsecured notes due 2029. Comprehensive analyses of the credit agreement and 2029 notes can be accessed HERE.
In this update, we discuss the change-of-control provisions in Playtika’s debt documents, which are potentially implicated by PHUK II’s contemplated sale of Playtika stock or by certain transactions that may be under consideration as strategic alternatives for Playtika. We conclude that the proposed sale of equity by PHUK II is unlikely to trigger the change-of-control provisions under either the credit agreement or the notes. However, other strategic alternative transactions might result in a change of control under Playtika’s debt, requiring it to replace or amend the credit agreement and/or offer to repurchase the 2029 notes at 101%.
Playtika’s capital structure as of Dec. 31, 2021, was as follows:
Covenant conclusions including debt, liens and restricted payments capacities based on the most recent financials can be found in our updated covenants tear sheet HERE.
Analysis of Change-of-Control Provisions Under Playtika’s Debt Documents
In debt documents, change-of-control provisions generally protect lenders or noteholders in the event of a transaction involving a change in ownership. Therefore, the PHUK II equity sale and strategic alternative transactions including sale of the company, as described in Playtika’s recent announcements, may implicate the change-of-control provisions in the company’s credit agreement and indenture.
As discussed below, a sale by PHUK II of 15% to 25% of Playtika’s stock is unlikely to trigger the change-of-control provisions under either the credit agreement or the notes. However, a sale of the company or some other strategic alternative transaction could result in a change of control under Playtika’s credit agreement and its note if that transaction results in another entity controlling a majority of voting power in the company or if it involves a sale of substantially all the company’s assets. A change of control under the credit agreement would require the company to replace or amend the agreement to avoid default, while under the 2029 notes it would trigger a required offer to repurchase the notes at 101%.
A Change of Control Under the Credit Agreement May Require Agreement to Be Replaced or Amended
Under the credit agreement, the occurrence of a change of control is an event of default, allowing a majority of lenders to terminate commitments and accelerate outstanding loan borrowings.
The credit agreement’s change of control definition includes the following triggers:
- A voting stock trigger, which occurs if the “Permitted Holders” no longer have majority voting power to elect directors and another entity or group has beneficial ownership of a majority of voting stock on a fully diluted basis (or, if greater, the percentage of voting stock held by permitted holders on a fully diluted basis); and
- A cross-trigger to the change-of-control provisions in the 2029 notes (which are described below).
“Permitted Holders” is defined to include PHUK II and its parent companies and affiliates. As discussed in our prior coverage, Playtika is controlled by Yuzhu Shi, chairman of Giant Network Group, through his indirect interest in PHUK II. According to a Feb. 25 amended 13D filing, based on stock outstanding as of Nov. 1, 2021, PHUK II beneficially owned 51.8% of Playtika’s common stock and Yuzhu Shi beneficially owned 60.2% (which includes the 51.8%).
As mentioned above, PHUK II is reportedly considering selling 15% to 25% of Playtika’s total outstanding stock. While a sale of any amount in this range would cause the permitted holders to lose majority control, the voting stock trigger also requires that another entity or group obtain beneficial ownership of a majority of the voting stock.
According to Playtika’s 2021 proxy statement, the second-largest shareholder behind PHUK II is On Chau, an individual, with beneficial ownership of 20% of Playtika’s common stock as of April 12, 2021. Based on that disclosure, even assuming PHUK II sold 25% of Playtika’s outstanding shares to Chau, such transfer would not trigger a change of control because Chau’s post-transaction ownership would be only 45%.
According to another 13D filing, PHUK II remains subject to a lockup agreement with respect to 50% of its shares until July 14 (the lockup with respect to the other 50% ended on Jan. 14).
Therefore, a sale by PHUK II of 15% to 25% of Playtika’s equity is unlikely to trigger a change of control under the credit agreement, because based on available information, such a sale cannot result in another entity gaining majority voting power in the company.
Strategic alternative transactions involving a sale of equity could trigger a change in control under the voting stock trigger, but only if the transaction results in a third party owning a majority of Playtika’s voting stock. However, no change of control under the credit agreement will occur from a sale of equity that results in dispersed ownership, such that no entity or group holds majority voting power post-transaction.
As discussed in more detail below, a strategic alternative transaction involving a sale of substantially all Playtika’s assets would also trigger a change-of-control event of default under the credit agreement due to the cross-trigger mechanism (assuming the 2029 notes are then outstanding).
If Playtika opts to pursue a transaction that would trigger a change of control under the credit agreement, then because a change of control is an event of default, the company would need to refinance or otherwise retire the credit agreement or seek an amendment from lenders to permit the transaction. As of Dec. 31, the revolver was undrawn and $1.9 billion of term loans were outstanding. Because the change-of-control provisions do not implicate any “sacred rights” under the agreement, the necessary amendments would require consent from a majority of lenders only.
A Change of Control Under 2029 Notes Requires an Offer to Repurchase at 101
Under the 2029 notes, a change of control requires the issuer to make an offer to repurchase the notes at 101%. As discussed below, this requirement is likely to be triggered by the same transactions that would constitute a change-of-control event of default under the credit agreement - if Playtika pursues a transaction that results in a third party controlling a majority of the issuer’s voting stock (unless structured to fit a narrow exception). Under the notes, a change of control would also occur if the company sells substantially all of its assets.
The 2029 notes’ change-of-control definition includes the following triggers:
- A voting stock trigger, which occurs if an entity or group, other than a permitted holder, becomes the beneficial owner of voting stock representing at least 50% of voting power, subject to an exception for certain holdco transactions in which the issuer becomes a wholly owned subsidiary of another entity and the issuer’s voting stock outstanding immediately before the transaction is converted into or exchanged for voting stock of the new parent entity representing more than 50% of the voting power of that entity; and
- An asset sale trigger, which occurs if Playtika sells all or substantially all assets of the restricted group to a third party.
The 2029 notes define “Permitted Holders,” in relevant part, in the same way the credit agreement does to include PHUK II and its parent companies and affiliates.
As noted above, the voting stock trigger under the 2029 notes includes an exception, under which a change of control will not be triggered if the issuer becomes a wholly owned subsidiary of another entity and the issuer’s pre-transaction voting stock is converted or exchanged for voting stock of the new parent entity representing more than 50% of the voting power of that entity.
Assuming that a sale of 15% to 25% of Playtika equity by PHUK II, standing alone, cannot result in any other entity controlling a majority of Playtika’s voting stock, such a sale will not trigger a change-of-control offer under the 2029 notes. Some other strategic alternative transaction involving a sale of equity that does result in such third-party control may require Playtika to make an offer to repurchase the 2029 notes at 101%. However, to the extent the company can structure a “strategic alternative” equity sale transaction to meet the exception to the voting stock trigger, it may be able to avoid triggering the 101% offer requirement.
A strategic alternative transaction that constitutes a sale of substantially all assets would also constitute a change of control under the 2029 notes, requiring an offer to repurchase at 101%.
The 2029 notes recently traded at 92.7, suggesting that the market does not expect a change of control to be triggered under the notes.
--Mitch Oates
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