May 22, 2017

The mega mergers that have taken place within the online gambling sector in recent years have largely been attributed to a need for scale in order for industry participants to cope with the evolving challenges of increased regulation and tax.

Although scale has undoubtedly been a key factor in transactional activity, the need for diversity has become an equally critical driver for businesses looking to offset the risk of legislative change. Diversity may come in different guises, including a geographical spread of revenues or a broader product offering.

The strategic focus on regulated markets that took hold amongst larger operators around 5 years ago seems to have abated. The chasm between multiples applied to regulated vs unregulated income streams by City analysts, who now seemingly advocate a mix of revenues, has narrowed and continues to do so. Unexpected tax hikes in countries with local licensing regimes can make financial performance in these jurisdictions no easier to predict than enforcement action in the so called “grey markets”.

Many operators previously wary of unregulated revenues are looking at growth opportunities in these markets. Conversely, operators who maintained a focus on these jurisdictions but who have ambitions for exit opportunities have sought, or are seeking, to re-balance their businesses through regulated plays. In an industry working at an incredibly fast pace, combinations or acquisitions are being preferred over organic growth in order to meet these goals. Success thereafter will largely depend on the quality of the strategic vision and its execution, including in driving synergies.

However, for all the deals that have happened, many more never made it to signing. The assessment of the overlay of two regulatory risk rationales can quickly lead to arguments on pricing or the need for market closures. In more extreme cases, factors peculiar to one business, such as local vs offshore licence or location of personnel, can scupper deals altogether where a market key to either business is involved.

In recent times, operators and suppliers alike have been clamouring for transactional opportunities to diversify their product offering. Combinations involving sports betting and gaming, such as the aborted Amaya/William Hill merger or NYX’s purchase of Openbet, have been grounded in a need to appeal to more B2C or B2B customers. In the case of B2B companies, it is not clear how long some extremely successful product specialists can grow before seeking to become a multi-product platform provider. The multi-platform providers will continue to sweep up emerging suppliers to bolster their position and stave off this threat.

We are seeing a trend amongst established sector participants who aren’t willing to go all in on geographical and/or product diversity alone. Established sector participants are hedging their bets in term of the success of their core business strategy through investments in software suppliers, data companies, marketing affiliates and nascent businesses (such as e-sports companies and disruptive lottery offerings).

The march towards consolidation is showing no signs of slowing but getting the strategy right is more critical than ever.