Just another wave or seismic changes? Trends in M&A

With North American companies making the M&A headlines in the summer of 2014 through the multi billion-dollar combinations of Amaya/PokerStars, GTECH/IGT and Scientific Games/Bally, it has been the turn of some of the leading European operators to take centre stage over the last 18 months. The acquisitions of Sky Bet by CVC and Jackpotjoy by Intertain, together with the high-profile mergers of Ladbrokes/Gala Coral, Betfair/Paddy Power and GVC/Bwin.Party, left the press wondering if there were more deals out there to be done.

However, industry followers know that, particularly in the online sector, there has been a constant stream of M&A activity over the last 10 years. Much activity has occurred at the mid-market level with strategic investments and bolt-on acquisitions having a significant cumulative impact. Some waves of consolidation have been bigger than others but the sea has rarely been calm.

Step up NYX, which, with some help from William Hill and Sky Bet, sealed the £270m acquisition of OpenBet from Vitruvian Partners in April 2016, providing further evidence, if it was needed, that there is no sign of slowdown in strategic acquisition and investment activity.

But what has been driving the latest round of deals and what trends can we identify from the tie-ups?

Drivers for recent M&A

Operators and suppliers alike have been drawn to M&A activity because of the evolving challenges facing the online gambling sector: • The competitive landscape has driven up the costs of player acquisition (including marketing) and retention; • The patchwork of international gambling regulation, particularly the shift from .com to .local, has forced even the largest operators to focus operational capability and marketing firepower on fewer jurisdictions; • The introduction of new gambling taxes in regulating and existing regulated markets (such the UK) has threatened to challenge margins; • A series of responsible gambling initiatives from regulators, including time-outs and self-exclusions, have had an unexpectedly dramatic effect on some operators with the full impact yet to be felt.

Nevertheless, as acknowledged by Ladbrokes on announcement of their merger with Gala Coral, “digital sports betting and gaming remain the key growth opportunities in our market” and with the Gambling Commission’s own statistics in late 2015 indicating that the UK online market is currently worth £3bn in gross gaming yield3, it seems many industry participants have concluded that scale achieved through acquisition and streamlining of costs is the best way to overcome these hurdles and to maintain, and hopefully grow, margins. The consolidation trend has also created somewhat of a domino effect with management teams, particularly in listed companies, under pressure not to be left behind.

However, without funding, the larger scale corporate activity would, in many cases (the all-share merger between Betfair and Paddy Power being the notable exception), be confined to the drawing board. Ironically, it is the growing maturity of the online sector that has created the challenges mentioned above but which has also unlocked the funding needed for the bigger transactions.

The high margins consistently delivered by successful companies in the industry and mooted compound annual growth rates of 8.7% have attracted private equity funds and major debt players to commit funds to drive online expansion. One report in 2015 indicated that over £30bn of capital was available for deployment from gamblingfocused private equity funds across the US, UK and Europe.5 US funds have had to look to European operators given the slowerthan- anticipated pace of regulatory change in their own market.

Examples of significant injections of capital in the sector include: • CVC, a fund with a history of investments in the gambling industry, making its first pure online play through its acquisition of Sky Bet; • Blackstone, Deutsche Bank and others committing a combination of equity and debt funding for Amaya to purchase PokerStars at a level previously unimaginable for a digital gambling business; • Intertain and NYX having managed to tap into the Canadian investment community to fund their expansion plans; • Cerberus providing a significant facility to GVC in connection with its acquisition of Bwin.Party.

The availability of equity and debt funding has created a seismic shift in the ability of online businesses to expand by acquisition. Furthermore, the valuation principles applied over the last 18 months will have an impact on deals for years to come.

Trends in recent M&A

Although the motivations behind each merger, acquisition or investment are different, there are some trends which can be identified

Importance of synergies – given the importance of operational efficiencies, many merger participants have placed a great deal of emphasis on synergies in order to drive value. Whilst achieving anticipated synergies and servicing acquisition debt, management teams will need to ensure they remain equally focussed on customer experience and innovation in their offering so that operators who as yet have chosen to focus on organic growth don’t steal a march on them.

Multi-brand strategy – in view of rising marketing costs, many operators began to focus on a single-brand strategy in recent years. Others have seen the opportunity to acquire an ailing brand and turn it around, including through switching the technology that powers it (e.g. Unibet’s acquisition of Stan James). It would be a bold acquirer who announces a re-branding of a target business and this has not happened to date. It will be interesting to see how the multi-brand strategy unfolds with logic dictating that different brands will be used for different markets and/or products rather than competing for the same players.

Omni-channel – operators and suppliers alike have placed a great deal of emphasis on the need to create a seamless customer journey across their retail, desktop and mobile offerings. There are clear signs that retail players transitioning to an online environment are more valuable.6 However, operators remain heavily reliant on their suppliers in making this a reality. Playtech’s acquisition of the VLT business of Aristocrat Lotteries will surely not be the last move by a supplier to bolster its ability to deliver a solution across all channels.

Regulated vs unregulated – operators have had a tendency to focus on businesses with similar regulatory strategies. We have yet to see a big tie-up between operators with a distinctly regulated and unregulated market focus respectively. GVC’s first announcement following the acquisition of Bwin.Party made it clear that it is looking to reverse the market closure strategy adopted by Bwin.Party in recent years and there has been some signs of convergence between the valuation multiples being applied to regulated and unregulated revenue in the public markets. The huge growth of online gambling in Asia and a new round of EU infringement proceedings may result a rethink of a purely regulated approach. But will a regulated market-focussed operator be willing to kick-start a new strategy in unregulated markets through acquisition?

Reliance upon suppliers – there are clear signs that operators are looking to increasingly insource software development and/or have a greater influence over their suppliers’ roadmaps, albeit with mixed results. Some operators have successfully acquired small in-house casino development teams in attempt to differentiate their offering, whilst continuing to rely on the specialist providers for the vast majority of their content. Rank’s investment in Bede Gaming was an early sign of an operator wanting input on the strategy of one of its key platform providers. However, the £80m investment in NYX by William Hill takes this to a new level, and the balance between the independence of the platform provider and the expectation of an operator wanting more control over its own destiny will be interesting to observe.

One-stop-shop suppliers – the huge challenges presented by platform migrations have been a factor in merger discussions with buy-in from key suppliers crucial to the success of any integration plan. Will NYX’s acquisition of OpenBet represent a potential challenge to Playtech’s stated position as the only omni-channel provider with expertise across all key verticals?

Opportunism vs stability – industry participants need to be prepared to react quickly to consolidation opportunities that may present themselves in the market. However, investor sentiment can change quickly and create problems for businesses which have been founded on aggressive acquisition strategies. It will be interesting to see the fortunes of companies such as Amaya and Intertain in the coming months.

Final thoughts

Unlocking new sources of funding has been the key in driving the latest wave of M&A consolidation in the gambling industry. For every challenge thrown up through regulatory and other changes in our maturing industry, there are further opportunities for growth for operators and suppliers and no signs of let up in the transactional activity at all levels. Picking the right deal, and no less crucially, successfully executing complex integration strategies will be a key factor in determining who will sink and who will swim.