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M&A watch: The end of the mega deal?

| By Stephen Carter | Reading Time: 5 minutes
Some commentators suggest blockbuster transactions have had their day but RB Capital’s Ben Robinson sees more big-ticket M&A ahead

Some commentators may suggest blockbuster transactions have had their day but RB Capital’s Ben Robinson sees many reasons to look forward to more large scale M&A action

In the post-dotcom era, a handful of technology companies (such as the likes of Alphabet and Amazon) have risen to the mythical status of unicorn ($1bn+ valuation), or even super unicorn ($100bn+).

The huge publicity swirling around these companies makes it tempting to see the rise of unicorns as a growing trend. However it is also important to bear in mind that, as the fairytale-inspired name first coined by the venture capitalist Aileen Lee suggests, they are still exceedingly rare, with only 0.07% of startups ever reaching such status.

This is especially true in the gaming industry. Only a handful of companies in this market have ever been able to claim multi-billion-dollar valuations. And In almost all cases, they are publicly listed operators that have only broken the billion-dollar benchmark through one or more significant key acquisitions:

Billion-plus gaming Unicorns (market caps)
Stars Group CA$8.7bn (£5.2bn)
GVC £5.34bn
Paddy/Betfair £5.32bn
IGT $4.3bn
SG Digital $2.3bn
William Hill £2.16bn
Kindred (23.3bn SEK) £2bn
Playtech €1.55bn

Consolidation among the big players in the sector has accelerated in recent years, with mega deals materialising principally for the following reasons:

(i) an emphasis on squeezing out the competition
(ii) expansion into new territories via large scale mergers
(iii) landgrabs in regulated markets
(iv) forward-thinking regulatory opportunities in emerging (and soon to be regulated) markets

These drivers have seen Paddy-Power Betfair, GVC, and the Stars Group all successfully execute multi-billion-dollar deals to consolidate dominant market positions and play on a more global scale, particularly with the sportsbook-led opening of the US.

European markets, according to Thompson Reuters Intelligence research, have seen a resurgence in cross-sector mega deals, with the value of M&A activity doubling year-on-year in the year to date. The number of transactions has however fallen by 18% to 6,201, the lowest level since 2005.

So, outside of gaming, fewer companies have been buying, but with deeper pockets.

The same can’t be said for gaming. RB Capital’s M&A Monitor data has highlighted a fluctuation in €500m-plus mega deals (see table), with €32.6bn spent in the last four years, a flurry of five huge acquisitions materialising every 24 months, and a minor downward trend in deal-size from 2015 to the present day.

$500m+ mega deals since 2015 (Source: RB Capital)

Both 2016 and 2018 have seen the largest splurges with €20.5bn spent on deals two years ago, including the two mammoth mergers of Ladbrokes-Coral and Paddy Power-Betfair, while 2018 so far (total spend of €10.6bn) has had a distinctly new market feel about it.
This year has seen Paddy Power again active in acquiring US fantasy sports brand FanDuel, the Stars Group splashing out €4bn to purchase Skybet and GVC coming back for more following its 2017 Bwin completion by acquiring the less than two-year-old merged Ladbrokes Coral business.

Some have suggested blockbuster transactions have had their day with the most significant deals already done, and those businesses now predicted to pursue more organic growth strategies. But there are many reasons why we can look forward to more M&A action.

Just the beginning
The number of mega transactions may have fluctuated in recent times but there is still huge value to be driven across an array of growing assets.

Around five years ago, most deals in the UK and Europe were driven by a mission to boost or establish scale or rapidly gain first mover market share in regulated or soon-to-be regulated markets. However, most 2018 deals have been driven by the promise, and now growing reality, of US state-by-state regulation.

Although it is early days for other states to jump on the bandwagon, investor appetite from US operators and European suppliers has been intense. And with ‘real’ revenues now  coming through Nevada ($247m in wagers), New Jersey ($100m) and even Delaware turning a tidy £17m in bets in August, this is only set to continue.

We are also, remember, still in what is traditionally deemed the ‘quiet period’ ahead of the busiest months for sportsbooks of October and November, when all four major US sports’ biggest events coincide.

Crucially, there has been a shift in the structure of recent transactions and we have seen a spike in interest from private equity and venture capital firms as several states open for business and others look to follow suit.

Sportradar and Genius Sports have both been the focus of VC/PE investment that aims to capitalise on US market expansion. Interestingly both offer data services, which savvy investment firms know will always be in demand and thus offer stable and consistent annuity revenue unaffected by high customer acquisition costs, taxes and/or levies.

They will also be invaluable when aiming to engage and retain existing players and acquire and attract a new, younger mobile-first audience.

These are far from small deals. The Canada Pension Plan Investment Board has teamed up with growth equity firm TCV to part with more than $700m in exchange for a 39% stake in Sportradar.

Renowned PE investor Apax Partners, that has previous gaming experience investing in, and since exiting, Candy Crush developer King, went one step further by swallowing up sports data and media rights distributor Genius Sports Group with the capital injection allowing it to pursue its international expansion strategy, largely in the US.

We expect these types of structured deals to continue, especially around data-driven software suppliers and fast-growing platform providers, with exit valuations that will tempt even the most risk averse PE/VC firm given their medium/long- term outlook.

The potential of a larger-scale re-regulated US gaming and betting market is finally turning heads.

As much attention has been focused on cross-Atlantic activity in recent months, we should also have a last word on European M&A. It is worth remembering that the ever-changing nature of markets here, alongside several other factors, is likely to encourage further M&A and potentially far more mega deals than in the US.

The first driver lies in the regulatory pressures in dot.country markets and continued regulation throughout Europe. This is taking place in both regulated markets (such as the overly saturated and increasingly volatile UK), maturing regulated markets such as Italy and Spain and recently regulated or regulating markets in regions such as Eastern Europe.

Next year will see the UK and various licensed jurisdictions such as Gibraltar, Alderney and the Isle of Man come to grips with an unclear and worryingly uncertain future outside the European Union.

Also several operators managing increasingly severe financial regulatory fines for repeated marketing abuses which may drive them to sell or divest certain assets. Huge competition will almost certainly push an increasing number of smaller brands and suppliers to speed dial the right sell-side brokerage.

Other markets such as Italy (with reputable brands still working out how to market products under a draconian advertising ban) and Spain that has proven hard to operate in but is showing glimmers of promise, will see M&A as a medium-term option to either get out for good or remain and claim more market share.

But large-scale action won’t be happening any time soon, not until the respective legislations reach agreeable middle-ground.

And lastly, newly regulated and regulating markets including the likes of Romania, Czechia, Bulgaria, Poland and others.

Expect a return to the good old landgrab days with larger, experienced mega-deal brands such as GVC already making moves into places such as Georgia with an eye to the future and educated, mobile and tech savvy audiences.

Others are sure to follow but now that some of the major mega deals have been done, gaming companies will find it increasingly harder to compete and are even less likely to become Unicorns.

In summary, over the next 18-24 months expect ever more creative acquisitions Stateside as buyer risk starts to fall in the face of medium-term gains.

On this side of the pond we anticipate a flurry of short-term UK-based activity with players exiting whilst they’re (pre-Brexit) ahead.

Medium-term M&A is expected to be strong for central and southern Europe. And the Nordics will (as always) be at the mercy of longer-term pension fund trackers. The M&A market will remain flush with activity for a good time to come. So watch this space.

Ben Robinson is co-founder of boutique advisory firm RB Capital, focused on the igaming, fintech and media sectors; working with start-ups and scale-ups looking to raise capital, but also established businesses looking to take their business to the next level or initiate a liquidity event.

Related articles: M&A watch: Regulated vs. grey

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