M&A ACTIVITY BUYERS' LANDSCAPE SPOT ON ONLINE GAMBLING

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1 SPOT ON ONLINE GAMBLING Adel Koubaa, Oaklins' online gambling specialist, is pleased to share some high-level industry intelligence in this edition of Spot On. Oaklins has advised on a number of transactions in the online gambling sector in the last 10 years. From larger mergers to smaller transactions driven by technological capabilities and geographical considerations among other factors, Oaklins representatives have been at the center of the market landscape throughout its evolution. The dynamics of the online gambling sector are changing more rapidly than ever before, enabled by advances in technology and regulatory pressures. While certainly creating their share of challenges, these developments also give rise to opportunities, especially in M&A as shown by the large number of transactions taking place. We expect this consolidation trend to continue as market players strive to adapt and fill the perceived holes of their respective businesses. MARKET TRENDS M&A TRENDS IN CHINA Scale is increasingly important Adoption of clearer regulation Offering focus Innovation and user experience key Strong underlying growth Edward Zhu Online Gambling Specialist Oaklins Page 2 Page 5 BUYERS' LANDSCAPE M&A ACTIVITY Page 6 Page 8

2 Market trends Multiple strong trends are currently affecting the online gambling sector Scale is increasingly important With increased costs of customer acquisition, competition and changes in the taxation environment scale is increasingly important. Those without scale will struggle to fund marketing expenses over time, eventually losing market share. Adoption of clearer regulation A more complex regulatory landscape creates opportunities as well as challenges for existing market players Offering focus A wide offering of games, both horizontally and vertically, will be key in improving competitiveness Innovation and user experience key Continuous development of flexible technical platforms, accommodative to changes in user preferences and behaviours, is becoming a key success factor for online gambling platforms Strong underlying growth Strongly increasing demand for online and mobile gambling is expected to drive industry growth in the foreseeable future The above trends collectively contribute to an increasingly dynamic market environment in which players are continuously forced to adapt to maintain or grow volumes and profitability. With the exception of online poker, all industry verticals have shown, and are expected to continue showing, significant growth with soft gaming (lotteries, bingo, skill games) leading the way. Furthermore, online continues to play an increasingly important role in achieving success in the overall gambling sector as consumers seek new entertainment experiences and have omni-channel accessibility expectations. The ever-changing regulatory environment adds a layer of complexity in navigating the market s trenches. Offering accessible and up-to-date gambling solutions could arguably be the most critical factor. Not only is online gambling eating away at the market share of traditional, land-based gambling, but mobile gambling is taking over vis-à-vis its desktop counterpart. For instance, Kindred Group, the operator of Unibet among others, has seen an increase in the mobile gambling percentage of online gross winnings from some 20% to upwards of 60% in just three years, underlining this very important trend. All in all, the online gambling sector can be expected to transform in the coming years as the market matures further and players adapt to ongoing changes Global online gambling market by product vertical (US$bn) 5.8% 6.8% % % % % F 2021F 2.8 Global mobile gambling % of online gross winnings ( F) P 2017F 2018F 2019F 23% 28% 31% 33% 36% 38% 41% Betting Casino Poker Soft gaming 2020F 43% Online % of total Source: H2 Gambling Capital in association with igaming Business Source: H2 Gambling Capital in association with igaming Business 2

3 Market trends Spurring M&A activity based on four primary deal drivers 1 ACHIEVING SCALE IS THE KEY DRIVER BEHIND B2B PLAYER TRANSACTIONS 2 OPERATORS ARE SEEKING LOWER CAC AND WIDER OFFERINGS Scaling up emerges as a key motivator for transactions in the B2B space as players, primarily sizeable ones, pursue portfolio expansion, market penetration and customer-base development. Given that new players entering the B2B market typically possess some form of niched expertise, it becomes natural to consider joining forces with a large industry party or to contemplate making acquisitions in the pursuit of growth. The rationales for takeovers in the operator space are primarily concerned with extracting cost synergies, expanding and differentiating the offering of games, and penetrating current and new markets especially so in light of increasing customer acquisition costs (CAC) and regulatory, profitabilityaffecting threats. Moreover, operators have progressively begun engaging in backward integration by acquiring software developers to strengthen inhouse technological know-how. 3 SOFTWARE CAPABILITIES AND CONTENT LIE BEHIND DEAL MAKING IN MOBILE 4 INCREASED EMPHASIS ON REGULATED REVENUES PROMPTS M&A ACTIVITY Consumer omni-channel expectations have driven players to transact in mobile to a greater extent. Three primary attributes constitute desirable characteristics among targets for market players seeking to amplify their presence in the space: ownership and development capabilities relating to mobile games and platforms, a strong portfolio of mobile content (games) and attractive brands (consumer-facing outlets). The complex regulatory environment stresses the need for companies in the sector to adapt. Technological systems and processes need to be flexible in order to adhere to local regulations and changes, licenses need to be obtained and scale must be achieved to counteract profitability-affecting levies such as the point-of-consumption tax introduced in the UK. Revenues from regulated markets are also viewed as being more sustainable and thus attractive long term. Adel Koubaa, Online Gambling Specialist, Oaklins The observed trends have already started to transform the online gambling market by inducing a wave of consolidation. Beyond scaledriven mega mergers such as the Paddy Power Betfair and Ladbrokes Coral transactions, we are seeing players seek stable, regulated revenues and differentiation by obtaining new capabilities and content. Our view is that the ongoing consolidation will continue as competitors look to make their business models more scalable and sustainable. 3

4 Valuation drivers Ongoing consolidation has yielded higher sector valuations though it is hard to generalize SOFTWARE DEVELOPERS OPERATORS LEAD GENERATORS (AFFILIATES) Main markets large proportion of regulated revenues desirable Active in attractive vertical(s) Business model geared toward online/mobile Niched and unique technological capabilities Strong 'operator and customer bases' Competitive environment stiff competition implies higher CAC Main markets large proportion of regulated revenues desirable Active in attractive vertical(s) Business model geared toward online/mobile High customer lifetime values and retention rates Brands and diversified game portfolios Competitive environment stiff competition implies higher CAC Solid traffic across websites High quality of customer leads generated for operators Size Strong and attractive domains High-level SEO capabilities Active in attractive vertical(s) Exposure to significant traffic from regulated markets Continuing industry consolidation and increasing global competition in most transactions have led to a rise in sector valuations over the last couple of years. An analysis of relevant publicly listed companies via certain key financial metrics, and precedent comparable transactions showing how acquirors have valued targets historically, also reveals valuation differences among the various sub-sectors in the industry. For instance, it becomes clear that igaming developers are typically valued at a premium vis-à-vis operators, largely due to fundamentally different business models. Developers (companies with a B2B focus active in the software development space, either as a developer of back-end management gambling systems or as a developer of games played through computers or mobile devices) typically utilize a recurring revenue model providing stable cash flows, whereas operators (companies with a B2C focus, owning and operating gambling portals, i.e. gaming sites on which consumers are able to play games within various product verticals) employ a model characterized by direct sales. Customers of developers are stable businesses while customers of operators often play on several different sites and are subjected to significant marketing efforts as players compete for the same consumers. The different characteristics of B2B and B2C players yield significant differences in valuations but ultimately company value comes down to an attractive business mix. In conclusion, valuation largely depends on the possession of preferable traits in the eye of the beholder, though the base value of developers is typically higher due to technological differentiation, recurring revenues and higher barriers to entry. Across all igaming segments, exposure to regulated revenues and attractive, high-growth verticals form an advantageous position in terms of valuation. For a full analysis of industry valuation and considerations, please contact one of our specialists listed on page 9. 4

5 M&A trends Cross-border transactions are more frequent as industry players aim to gain access to regulated markets and complementing technologies A chronology of selected recent M&A activity Year Target Country Bidder Country Transaction rationale 2017 Acquire bolt-on technology and content in key gaming markets as well as bring additional regulated revenues 2017 Access to license in Europe s largest regulated market (excl. UK) 2016 Enter into the rapidly growing mobile social gambling space to be well-positioned to capitalize on regulatory relief in China 2016 Expand portfolio and gain access to strong customer bases 2016 Bolster omni-channel offering via expansion of mobile, online, and interactive TV content and development competencies 2015 Widen portfolio of products and brands as well as provide an opportunity to enter into the rapidly growing mobile social gambling space 2014 Gain ownership of a fully integrated, proprietary software platform including a leading mobile casino, as well as access to the growing Nordic igaming market Edward Zhu, Online Gambling Specialist, Oaklins Cross-border transactions are becoming increasingly common in the igaming industry and are no longer restricted to mega-deals. Despite legislative hurdles and restrictions in the Chinese gambling market, there is still a group of buyers attracted by the sector s opportunities that aims to do smart deals within the market. The Chinese gambling market has witnessed a steady flow of foreign acquisitions, including transactions where the acquiror is funded by high-profile investors, such as the private equity fund of Alibaba 70 percent of all acquisitions of game companies since 2015 have been by Chinese buyers. Knowing that the average revenue per user is higher in China than in the USA, it is not hard to imagine the influence China will have on the global gambling scene going forward. By leveraging Oaklins global network and rich cross-border M&A experience, we are able to complete trans-border transactions in a smooth and successful manner. Our track record in this industry is a good demonstration of opportunities in the sector. 5

6 Buyers landscape Financial investors are interested and look beyond the political concerns of the industry It is evident that market players in the sector view acquisitions as a key pillar in their respective strategies as a means to counteract the various challenges and uncertainties that currently surround the operating landscape. The majority actively scan for and pursue opportunities as they arise, testament to the value M&A offers companies in the sector. We also see this in the increased frequency with which certain players engage in transactions as well as in the size of completed deals. The elevated levels of historical and expected growth in the online space have also attracted a great deal of interest from financial investors who dare look beyond the political concerns of the industry that have previously acted as a deterrent. CVC Capital Partners in particular stand out as one of the front runners, having completed several, high-profile acquisitions in the sector. Moreover, giant US-based asset managers such as Blackstone and SpringOwl have eyed large deals in recent years with mixed results. This increased interest is likely to act as a catalyst in the consolidation wave and supports the expectation of its continuance. 6

7 Buyers landscape Market consolidators are optimistic about the future Cherry has the size and entrepreneurial spirit to operate in large, regulated markets while encouraging innovation and growth. Our differentiated business-area strategy creates opportunities to continue growing faster than the market, both through organic growth and via acquisitions. Anders Holmgren CEO, Cherry Acquisitions have been an instrumental part of Stride Gaming s rapid growth and success to date, and the company will continue to search for acquisition opportunities that are accretive to earnings. The company will also look to enter into other soft gaming verticals that complement Stride Gaming s existing business. Stuart Eitan Boyd CEO, Stride Gaming Playtech has always been an acquisitive company. We are constantly evaluating M&A opportunities and believe there are significant opportunities going forward. We are truly excited about the future. This industry is in its infancy and there are a lot of growth opportunities out there. Ron Hoffman CFO, Playtech We see significant opportunities for the Kindred Group arising from local regulation. The introduction of local regulation accelerates consolidation in the industry and gives an advantage to those operators whose strategy and scale positions them to meet these challenges. We are always looking at opportunities, judging them on a case-by-case basis. Henrik Tjärnström CEO, Kindred Group 7

8 M&A activity Selected case studies 500.com Limited, a leading online sports lottery service provider in China, has agreed to purchase approximately 93% of the outstanding shares of The Multi Group Ltd. for approximately US$56 million in cash. Potential buyers: 16 Headquartered in Malta, The Multi Group operates Multilotto.com, which is considered one of the top online lottery betting and casino platforms in the Nordic countries where it holds a substantial market share. Multilotto.com offers players the ability to bet on the outcomes of several of the world s largest lotteries through its proprietary and scalable platform. In 2016, The Multi Group reported revenues of US$11.5 million and an EBITDA of US$6.5 million. The company is expected to maintain a strong growth trajectory in 2017 with expected revenues of US$17 million and an EBITDA of US$8.5 million. No. of bidders: 5 EBITDA multiple: ~9x 500.com offers a comprehensive and integrated suite of online lottery services, information, user tools and virtual community venues to its users, and was among the first companies to provide online lottery services in China. Deal size: >US$50m Oaklins' Swedish and Shanghai-based teams were the advisors on this transaction. Two of the fastest growing online betting operators Paddy Power plc and Betfair Group plc have merged. The new entity, Paddy Power Betfair plc, is worth c. US$11 billion, making it one of the world s largest public online betting and gaming companies by revenue with enlarged scale, capability and distinctive complementary brands. Betfair is an innovative online betting and gaming operator, which pioneered the betting exchange model in 2000, changing the landscape of the sports betting industry. Combined sales: US$1.5bn Paddy Power is an international multi-channel betting and gaming group, offering online services and a chain of retail outlets throughout Ireland, Northern Ireland and Great Britain. Combined EBITDA: US$245m Expected synergies: >US$81m The merger was implemented by Paddy Power plc making an all-paper offer for Betfair Group plc. Oaklins' team in Ireland advised Paddy Power on this transaction. Our Irish team has been a longstanding advisor to Paddy Power, advising on public offer issues, acquisition strategy and the acquisition of Sportsbet Australia (alongside Oaklins' Australian team) and Cayetano. 8

9 About Oaklins MEET OAKLINS, THE WORLD S MOST EXPERIENCED MID-MARKET M&A ADVISOR 700 professionals 60 offices 40 countries 1,500 transactions 16 sectors Oaklins offers a comprehensive range of services M&A advisory (buy- and sell-side) Growth equity and equity capital markets advisory Debt advisory Corporate finance services Oaklins industry specialists Online gambling is one of our focus areas. Combining comprehensive sector knowledge with global execution has led Oaklins to become the most experienced M&A advisor in the online gambling sector, with a large contact network of the most relevant market players worldwide. This results in the best possible merger, acquisition and divestment opportunities for online gambling companies. If mergers, acquisitions or divestitures of businesses or business units are part of your strategy, we would welcome the opportunity to exchange ideas with you. Please find our contact details below. Adel Koubaa, Managing Partner Stockholm, Sweden T: Edward Zhu, Managing Director Shanghai, China T: Boaz Levi, Partner Tel Aviv, Israel T: Ger Heffernan, Director Dublin, Ireland T:

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