June 1, 2020
This article was first published on 20 May on IGB and can be found here.
With the share prices of some of the major online players currently proving more resilient than expected following a period of vastly divergent performances across the sector, David McLeish analyses the immediate opportunities and likely drivers of consolidation plays over the next 12-18 months
There has been no particular let up in M&A activity in the online gambling sector for some years now. Covid-19 has, to a large extent, temporarily pressed the pause button on consolidation.
In the rare moments between being kicked out of group calls due to temperamental Wi-Fi and failed auditions for back-up careers as school teachers, predictions of a global recession shouldn’t ordinarily make for pretty reading for dealmakers in any sector.
However, the resilience in the share prices of many of the major online players (at least compared with the initial doom mongering) and completion of the Flutter/Stars and DraftKings/SBTech tie ups seem to offer the glass half-full brigade a right to feel (cautiously) optimistic.
The vastly differing performance of gambling stocks over the last 12 months has demonstrated that strong strategic focus and the ability to navigate sector specific challenges remain key differentiators to investors.
So what trends might we expect in terms of consolidation plays over the next 12-18 months?
Immediate opportunities post-lockdown
With some companies struggling with cashflow issues and debt covenants, it is plausible that private equity firms, which have become increasingly comfortable with the sector in recent years, will look to pick up value propositions and back their ability to drive efficiencies and/or combine businesses.
It is also likely that operators may look to cherry pick from those that go to the wall.
The headache surrounding the full integration of a struggling business means we might reasonably expect more asset deals like Betfred picking up MoPlay’s player database and 888’s acquisition of BetBright’s sports betting platform.
Diversification of product offering
Only time will tell if the recent uptick in casino, bingo, poker, virtual sports and e-sports will outlast the return of sporting fixtures and, particularly in the case of casino, the gaze of regulators.
Covid-19 has, however, provided a reminder that a well-rounded offering can help you better weather even the strongest of storms. It seems likely that bingo-focussed businesses will receive more attention from acquirers in the coming months.
And although esports remains an embryonic investment opportunity for most operators, its upsurge suggests that further attention may well be warranted and acquisitions, or more likely strategic investments, may well provide a head start. Ditto virtual sports for traditional sportsbook suppliers.
Geographical mix and regulatory interventions
For the traditionally European-focused operators and suppliers, there is a trend away from doubling down on the usual suspects when it comes to geographical focus.
Regulatory intervention (seemingly accelerated by media and political sentiment) in the UK, Italy, Spain and Sweden and the proposed legislative frameworks in Germany and the Netherlands are causing operators, in particular, to look further afield.
The US remains a draw but one which instinctively seems to best suit the operators with scale, financial firepower and (some) in-house technology.
Eastern Europe and Africa continue to offer opportunities for those willing to experiment in less established regulated online markets.
Structured deals involving heavy deferred consideration elements to tie in owners with knowledge of local regulated markets are set to continue – recent forays into the Georgian and Brazilian markets by major operators are surely a sign of things to come.
And many operators and suppliers are still looking East, particularly those with a greater risk appetite albeit often pursuant to commercial partnerships.
We continue to see interest from operators and suppliers alike in grey market revenues as part of an antidote to interventionist regulators.
Businesses with more exposure to these markets may attract attention from acquisitive operators but with consideration mechanics necessarily reflecting the downside risk related to developments in terms of potential local legislative and enforcement initiatives.
However, it is still difficult to imagine a tier 1 operator explaining the acquisition of, say, an Asian-facing business at the same time as investing in the longer-term play offered by state-by-state regulation in the US.
Controlling the tech roadmap
With the regulatory direction of travel pointing away from reliance on VIPs, traditional advertising channels and bonus offerings, many operators are betting that the long-term winners will be those which can differentiate themselves in terms of product innovation and customer experience.
This explains the desire of some operators to control their own technology roadmap, particularly those focusing on the US.
And with US land-based operators resorting to opening drive-throughs during lockdown, what price on a major US casino owner looking to secure its future through the purchase of a significant technology-rich European target?
Some major transactions in recent years have brought together B2B and B2C businesses (such as Playtech’s purchase of Snai in Italy and the DraftKings/SBTech deal) and this trend looks set to continue.
On a smaller scale, in-housing platforms or acquiring up-and-coming games studios will help operators to differentiate (particularly when it comes to exclusive content).
At the other end of the spectrum, there is more significant execution risk in a combination involving an established B2C operator and B2B provider, particularly with regards to the latter’s ability to retain its income streams from competing B2C operators, but, if done well, it could offer the best of both worlds.
Finally, with the need to demonstrate a real commitment to compliance and social responsibility to stay ahead of regulatory headwinds, we can expect to see operators and suppliers looking to acquire, or at least invest in, one of the multitude of AI/machine learning businesses seeking to develop solutions around player analytics.
In terms of the impact of regulatory developments in recent years on the supply chain, marketing affiliates have been hit harder than most, with advertising bans in key regulated territories and major operators feeling pressured into reviewing their affiliate programmes, culling their list of partners and/or ending these partnerships altogether.
The listed affiliates would seem to have a natural advantage in terms of the ability to demonstrate strong governance and responsible advertising, as well as diverse revenue streams, and consolidation at this level, potentially through all share combinations, may offer a route to a market-leading position if stakeholder interests can be aligned.
Just a few years ago it was impossible to imagine the clustering of the well-known gambling brands now housed with the GVC and Flutter groups.
Despite the lack of a retail estate within the Stars Group, many commentators feared that its takeover by Flutter wouldn’t pass muster with competition authorities in the UK and Australia.
This speculation proved unfounded, with the Competition and Markets Authority in the UK re-affirming its “frames of reference” approach, whereby it will analyse individual segments of the market (rather than the overall combination) as part of its assessment of the effects of a merger.
The analysis of the market undertaken by the competition authorities on this deal may well embolden participants in future mega-merger discussions.
Safety in numbers?
Many of the predictions and trends point towards size being important in order to drive a successful business with an offering which is diverse from both product and geographical perspectives whilst being well equipped from a technological perspective to deal with regulatory and compliance changes.
Although the larger B2C and B2B players will continue to hoover up promising challengers, the very different challenges presented by the US market (which, theoretically at least, is 50 different markets) along with renewed interest from media companies in leveraging their brands into the sector will mean a continued emergence of hybrid business models.
For European operators which have fallen behind the leading pack, all share mergers with similar sized businesses may represent a last roll of the dice.
As consolidation continues, large scale integration projects combined with longer term investment in the US could spread management teams very thin.
It will be those companies which can execute these projects and stay in the regulators’ good books whilst continuing to identity strong acquisition and investment opportunities (and sniff out the bad ones through targeted due diligence) that should ultimately prosper.