Going by the evidence of recent fundraising efforts by some of the affiliate world’s biggest consolidators, the appetite for further deals on the part of investors shows no signs of abating, writes Scott Longley
In January, XL Media announced a share offering – oversubscribed – that raised £31.7m to help capitalise on acquisition opportunities the company has identified in “key verticals”, including gambling.
The offering came two days after the company announced its most recent deal: the €15m all-cash buyout (including €7m upfront and the rest through an accelerated six-month earnout) of Finnish facing online casino affiliate network Good Game.
The gambling affiliate market consolidator-in-chief Catena Media, meanwhile, shows no sign of losing its own hunger for more deals. When it announced its results at the start of February, the company took the opportunity to inform the market it had instructed its banks to explore the possibility of an early refinancing of its existing €100m bond loan through a, presumably larger, new bond issue.
Catena said the move was designed to provide “greater financial flexibility and a larger frame”, suggesting the company intends to further flex its M&A muscles.
That was certainly the message from the results analyst meeting when chief executive Henrik Persson Ekdahl that the company’s three-strong M&A team was “scouting the globe” and that the company had a “very interesting pipeline” of potential deals.
Adding that the company had “only” done 28 deals since 2014, he added that the team were looking at between five and 10 companies every week and that it was “quite selective” on which opportunities it plumps for.
“An acquisition needs to add clear value to what we have,” he said. “This isn’t just multiple arbitrage. We are buying products and systems and assets that we really like and we believe will grow long term.”
Ekdahl was keen to emphasise he didn’t believe that buyout multiples were on the rise despite the current consolidation fervour, pointing to multiples for the deals Catena has completed of between two and six times EBITDA. “We don’t see a change in dynamics for price or how we structure,” he added.
Charles Gillespie, chief executive at Gambling.com Group, which itself raised a total of €16m via the issuance of two convertible bonds last year, agrees that while there is some multiple inflation, it is not significant.
“All of the deals we have done have been in a similar range and the multiples have not really changed,” he says. “We’ve plotted the multiples on a graph over time for all of the affiliate deals and the trend line has a positive slope, but only just barely. Bottom line is they are not really changing. The sellers, however, are a bit more sophisticated and arrive knowing what they want.”
Still, the quantum of buyout prices is certainly picking up. Though not all the sums for all the deals we have seen in recent months are available, the ones that have been disclosed would have been viewed as eye-popping just a couple of years ago.
Catena Media’s Baybets deal is a good example. The headline buyout price for the German-facing sports and financials business was €26.5m, half to be paid in shares, with an earnout of up to €63.5m.
With forward-looking revenues of €9m on a 70% profit margins, it means the multiple of 4.2 times sits within the two to six range that Ekdahl suggested were the company’s parameters.
The earnout is very much a maximum figure. But what Catena considers a “reasonable” scenario has risen to €39m from €30m following the deal to buy the similarly German-facing Dreamworx, which the Baybets management team will now run and will count towards the likely 40% growth target for each of the next two years.
The price provides an interesting data point for the value of that market ahead of any potential regulation — though as Paul Leyland, partner at gambling consultancy Regulus Partners, noted, it is likely the grey market nature of the business partly accounts for the low multiple.
Even in the throes of the drive to consolidate, affiliates are wrestling with the issues of regulation as much as their partner operators.
Catena said it estimates that 60% of its fourth quarter revenues of €20.1m now come from regulated markets and during the presentation Ekdahl pointed to the mostly regulated market focus for future M&A, including an increasing focus on regulating states in the US.
Such comments mirror those of the operators for a reason. As Jesper Søgaard, chief executive at Better Collective, says “there is no question that regulated markets offer more stability in terms of long-term strategy.
“Therefore, we are in favour of more markets becoming regulated,” he adds.
However, there are nuances of approach. “Revenues from grey markets are traditionally a little less reliable, but at the same time, it strongly differs depending on the market,” says Michael Holmberg, chief executive at Raketech.
“Some grey markets have been very stable and will continue to be so for the coming years. Others have a roadmap for regulation or are discussing the possibility.”
The appeal of earnings from unregulated territories – whether darker grey or black – remains, though, particularly for smaller and newer operators.
“There will be start-ups setting out now to target only black or dark grey markets,” says Gillespie from Gambling.com. “There are opportunities to make money in these markets, it’s just not legal. If you are a listed company or looking to be listed in the future, then you have to answer to investors and stakeholders.
“In those circumstances the shift to regulated markets may be ‘inevitable’ as investors will pay more for regulated revenue than they will for unregulated revenue. It’s two different strategies for two different types of companies.”