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  • Paul Leyland: Shock of short-seller sabotage will wear off as Evolution pays price for “eye-wateringly astronomical” valuation
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Evolution found itself at the centre of a stock market storm last week after investors were spooked by a short-seller report that delved into the live casino supplier’s alleged black market activity, including in some countries subject to US sanctions.

The Stockholm-listed firm’s share price plummeted by 29% during the week, despite issuing a strongly worded statement that described the allegations as false and put the burden of responsibility firmly with its operator clients.

The controversy wiped more than $10bn off the value of a company that until that point had enjoyed an uninterrupted ascent to the top of the public market. Evolution’s share price increased by 196% throughout 2020, for example.

And Regulus Partners partner Paul Leyland believes the business is now paying the price for that trajectory.

“The big issue here is not what was actually being accused, but valuation,” said Leyland while in conversation with Pierre Lindh on the iGaming NEXT podcast.

“The thing that traditionally used to be a floor to share prices was a dividend. Well, try paying a dividend that touches the sides or gets you anywhere close to being relevant to shareholders at the historical valuation ratings of Evolution.

“Immediately, if you have an eye-wateringly astronomical valuation, you are vulnerable. If any shareholder buys into a company at an eye watering astronomical valuation and thinks they have bought something as safe as houses, then caveat emptor. Welcome to stocks and shares – they go down as well as up,” he joked.

The report – filed on 12 November by Ralph Marra of Calcagni & Kanefsky LLP on behalf of unnamed private investigators – alleged that Evolution games were accessible from Iran, Syria and Sudan.

It is common knowledge in the iGaming industry that many leading public companies, including Evolution, earn a significant proportion of revenue from “grey” or unregulated markets.

On this occasion however, the namechecked countries likely set off alarm bells in the minds of increasingly ESG-conscious investors that are not so familiar with the sector.

A similar dip occurred in the summer when Hindenburg Research published a short-selling report into US operator DraftKings. The report urged shareholders to jump off DraftKings stock due to the alleged black-market activity of its in-house technology supplier SBTech.

Again, the share price fell 11% following its publication.

The gambling industry looks like a prime target for short-sellers, with many share prices riding high due to gains accumulated during the Covid-19 pandemic, while examples of grey market operations are relatively easy to expose.

Leyland is keen to apply the law of diminishing returns to this tactic. He said: “The first couple of times you are able to do this, you generate shock, and shock generates overreaction. Overreaction is precisely what short sellers want.

“Nobody died, so the next time this happens, people are going to be a bit less shocked and if we look at the tangible damage, they haven’t lost any clients yet,” he added.

It would be a different story if Evolution’s top-tier operators were suddenly ripping up their contracts, but commercial partners won’t have been outraged by its findings.

Having said that, regulators will almost certainly ask more questions, and Evolution has already pledged to conduct an internal investigation after reaching out to the New Jersey Division of Gaming Enforcement (NJDGE).

Evolution is also in the fortunate (and well-earned) position of having an effective monopoly on live casino provision and established itself as an even more essential partner for operators following the acquisitions of both NetEnt and Big Time Gaming.

But regardless of the company in question, Leyland believes the influence of these short-seller reports will wane over time as investors get to grips with the gambling sector.

“If these short-seller revelations, like with DraftKings and SBTech, don’t actually land any tangible blows, then they lessen in impact each time they are deployed” he told iGaming NEXT.

“If it is the case that Evolution’s systems and controls are super robust, and that this is indeed an issue of a mild circumvention, then the story will die of its own accord,” he added.

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