Lee Richardson – Gaming Economics – A Review of Gambling Corporate Acquisition in 2014

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Lee Richardson – Gaming Economics

Big year, better year?

The past twelve months have witnessed some of the biggest deals in the history of the e-gaming industry, despite a regulatory and taxation backdrop of unprecedented challenge and change, across the globe.

Consolidation continues, and it already seems likely that next year will see more of where the large get larger, the middle gets squeezed and the small start struggling to survive.

Looking back…

Any industry review of 2014 probably has to start with the most audacious deal of all.

In 2010, Amaya was a tiny gaming company newly-listed on the Toronto Venture Exchange, with revenues of just $6m (£4m). Four years on, and with a string of industry acquisitions already under its belt, it was ready to acquire the mighty Poker Stars, the privately-owned and largest online poker operation on the planet. A complex, Wall Street-backed $4.9Bn (£3.15Bn) deal was concluded in the summer, and Amaya’s stock soared, making them the most-valuable listed e-gaming business in the world.

One remaining ‘gap’ in Amaya’s portfolio – a viable sports-betting product – fuelled rumours in the autumn concerning a possible approach for Bwin.party, who’d had a torrid time during 2014, losing almost 30% of their market-value. In November, under-performing Bwin.party were forced to confirm to the markets over ‘media speculation’ they’d had ‘approaches from various parties’. Discussions continue, apparently.

Close behind the Amaya/Wall St. deal came Apollo Global Management and TPG, two of the largest US private equity players. They entered the e-gaming sector by investing $484m (£310m) in Caesars Acquisition Co., which houses the online gambling assets of financially-struggling Caesars Entertainment, once the largest owner, operator and developer of land-based casinos in the world.

Private-equity specialists were busy on this side of the Atlantic too; just before Christmas, CVC Capital Partners agreeing to acquire Skybet from satellite broadcaster Sky, valuing the gambling operation at £800m ($1.25Bn). Sky will be paid £600m ($935m) when the deal is concluded and will retain a 20% stake. CVC, which has previously held interests in the betting and gaming sector with holdings in both William Hill and IG Group, attempted, in 2013, to buy Betfair in a £1bn ($1.56Bn) deal, but failed to agree on price.

Betfair’s shareholders will look back on 2014 with a high degree of satisfaction, as the share price finally climbed above its 2010 IPO benchmark of £13 ($20) for the first time in four years, giving the company a market value of £1.4Bn ($2.20Bn), up 22% from a year ago.

Those listed industry stocks who also have substantial retail betting operations didn’t fare so well. The additional impact of new taxes, duties and political pressures led to market sentiment affecting Ladbrokes, who were down 36% in value over the year, and William Hill (-10%.). That contrasted sharply with ‘purer’ e-gaming stock performances by Unibet (+54%) and Paddy Power (+8%).

Overall, Fantini Research’s Interactive Index, a weighted-index of 12 industry stocks, showed a flat performance in 2014, with many investors clearly hoping for vastly-improved performances in 2015.

Looking forward…

We can expect to see some new IPO activity in the New Year, with NYX Group, the mid-size but fast-growing games and platform provider flagging its intention to float on the Toronto Venture Exchange (TSXV), perhaps during Q1. NYX’s choice of listing in Toronto rather than London is an interesting decision – most of its revenues come from European-facing clients – and the market sentiment associated with this IPO will be an interesting comparison with what has traditionally been LSE-listed Playtech’s territory. It might also serve as a demonstration of whether smaller providers can still realistically compete in an increasingly global supplier market.

Playtech themselves recently topped-up an already impressive cash pile with a £250m ($390m) bond issue, clearly indicating that they see yet further acquisition opportunities in the sector. They too have been associated with a potential bid for Bwin.party, but it’s difficult to envisage quite how the markets might react to such a move in strategic terms.

From the operator’s perspective, then certainly the Skybet/CVC deal intrigues more than most. Destined to be completed in the New Year, some observers questioned the deal’s apparent 16- times earnings-multiple; with such a valuation, one can fully expect the new owners to be seeking fresh opportunities for growth. Can Sky leverage their betting-brand beyond the ultra-competitive UK domestic market? Expansion into Italy has been ‘under review’ by Skybet’s management before, and it’s possible we could see that materialise in 2015.

With the likes of Playtech, and a newly-resurgent Betfair, waiting in the wings with money to spend (perhaps £700m ($1.10Bn) between them) and with respective market-shares to leverage, we have to expect new acquisitions next year from the pair of them.

2014 closed with Amaya’s stock down 18% after publicity surrounding a police raid on its Quebec operations in December helped wipe almost $1Bn (£640m) off its value; it looks likely this story won’t fully unfold until the New Year.

Conclusion

In his newly-published book – The Future is Small – Gervais Williams, one of the City’s most respected fund managers, believes that “…the whole thrust of the internet, and modern technology, favours the young, the small and the nimble.”

As last year showed only too clearly, the e-gaming industry seems to be taking quite the opposite route, where the big get bigger, and the rest come under pressure.

Will every single mega-deal from last year deliver value in 2015? Almost certainly not. Will all of the listed operators and suppliers who underperformed last year fare better next year? Highly doubtful. Will Bwin.party find itself under new ownership? Perhaps.

What is certain, though, in that whatever 2015 holds for the industry, it’ll be as fascinating a ride as ever

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Lee Richardson – Founder- Gaming Economics

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