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Don Best: Jewel in Scientific Games’ crown, or thorn in its side?

| By Hannah Gannage-Stewart | Reading Time: 2 minutes
Julian Buhagiar responds to yesterday's acquisition of Don Best by Scientific Games

Scientific Games’ acquisition of Don Best Sports was met with a less-than-enthusiastic response by investors, argues Julian Buhagiar, citing SGMS’s 9% climb in share price by closing yesterday (9 October).

Why has there been such a lukewarm reception to Scientific Games' acquisition of US betting and data supplier Don Best? It may be a reflection of Don Best's data gathering techniques; using pricing analysts at games or the aggregation of feeds from largely offshore sportsbooks. Or it could be its relatively low annual revenue of around $15m.

On the face of it, the acquisition is strategically a good one. A new platform offering is likely to fare better than the incumbent OpenBet platform. Indeed, there have been doubts as to whether the latter is fit for purpose having only secured one major sports betting contract in the US post-PASPA, despite SG being the online casino provider of choice across numerous New Jersey operators.

On technology alone, Don Best would appear to be a jewel in SG’s crown especially given the data aggregation potential, but it will be interesting to see just how SG manages to bolt this tech onto its proprietary business and just how complex a process this will be.

Fortunately, we are still very much in the early days of US sports betting re-regulation and SG’s IT and trading teams will have some time to rewire the system to accommodate specific US needs. That said, it is peak US sports season and they will have to work overtime to ensure more customers come on board.

One of the more significant factors behind SG’s inability to rally new enthusiasm, at least in the short term, lies more in the way it has amassed a significant amount of debt over time. Following its Q2 earnings report a few months ago, SG continues to be highly debt-leveraged; with more than $9bn owed in various loan-related instruments.

Consequently, any below-target earnings will be amplified because of an increasing difficulty to service debt. The last numbers may have missed targets by modest amounts, but investors have started to question the company’s ability to turnaround profits, and by extension, their returns.

Thus, any new acquisitions, such as Don Best, may be well-suited to SG in terms of its long-term strategic growth plans, but investors are more concerned around the company’s ability to service its short- to medium-term debt obligations.

There has been a recent shift in the structure of US M&A transactions and we have seen a spike in interest from private equity and venture capital firms, most recently with Sportradar and Genius Sports.

Interestingly, both also offer data services, which savvy investment firms know will always be in demand and offer stable and consistent annuity revenue unaffected by high customer acquisition costs or taxes. They will also be invaluable when aiming to engage and retain existing players and acquire and attract a new, younger mobile-first audience.

We fully expect momentum around these types of deals to increase, especially around data-driven software suppliers and fast-growing platform providers, with exit valuations that will tempt even the most risk-averse firms given their medium- to long-term outlook. The potential of a larger-scale re-regulated US gaming and betting market is finally turning heads.

Julian Buhagiar is co-founder of RB Capital. He is an investor, CEO and board director to multiple ventures in gaming, fintech and media markets and has lead investments, M&As and exits to date totalling more than of $340m.

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