From the moment it acquired NetEnt in 2020, Evolution has made it clear that it wanted to be seen not simply as a giant of live casino, but as a “one-stop shop” for online casino operators.
To that degree, the rationale for its acquisition of slot developer Nolimit City is obvious.
Yet to date, Evolution’s random number generator (RNG) division has generated little in the way of organic growth going by recent results.
However, Georg Attling, equity research analyst at Pareto Securities, notes that this was mostly due to a change in strategy. The supplier shied away from frequent game launches, in favour of delivering a higher standard of slot content.
“It is true that in terms of growth, Evolution’s RNG segment has not lived up to our expectations thus far,” Attling explains. “However, this is mainly due to a reworked game launch pipeline.
“After the acquisition of NetEnt (and Red Tiger), Evolution largely scrapped the existing games launch pipeline due to it not meeting Evolution’s standards.”
This has resulted in fewer new launches, making growth “challenging” Attling suggests, though this is likely to change in the near term.
“Entering H2, we expect an increased activity of game launches which should facilitate a return to double-digit growth within the segment,” he adds. “So, the analysis [that the RNG division has underperformed expectations so far] is fair in terms of growth, but it has been a conscious decision.”
As a result, Kevin Dale of Egamingmonitor argues that Nolimit City fits in well with the strategy Evolution had already implemented with NetEnt.
“The content that Nolimit City produces is quite unique in terms of production and imagery,” he says. “Games with darker themes are their most popular, such as Mental, Deadwood, San Quentin, Misery Mining, Fire In the Hole and Tombstone.
“They’re certainly a good fit in terms of production values as they have a clear focus on quality and innovation, rather than quantity of output.”
This distinctiveness, Evolution chief executive Martin Carlesund noted on an analyst call following this morning’s announcement, was a major part of the deal.
He claimed that gamblers tend to recognise the studio behind the slot they are playing with Nolimit City’s games, unlike those from other suppliers. As a result, Carlesund said its content appeals to “advanced slots players”.
“It’s a very specific niche content,” he explained. “It’s graphically rich, it’s very fascinating and it has good mechanics attached to it. Maybe more for the advanced player, but anyone playing Nolimit slots is attracted by that. They know they’re playing Nolimit – it’s very obvious.
“The games are filling a gap that we didn’t have before, clearly so.”
As a result, Attling says that the deal represents a further commitment to Evolution’s slot strategy.
“It reaffirms Evolution’s commitment to the space,” he says. “I argue that it is a doubling-down on the strategy because of the identified potential rather than a way to shake up a slow-growing division.”
When it comes to integration, Dale notes that the process should be made easier by the fact that Evolution has dealt with the challenge of integrating a slot developer before.
“It should be a bit easier for Evolution to digest than the likes of NetEnt or Red Tiger, not least as the product range is similar and they’ve been here before,” he says.
However he warns that given the differences in scale between the acquiring business and acquired, the deal won’t give Evolution access to many more operators.
“It’s a smaller acquisition in terms of content with nearly 60 titles added to their existing portfolio of 630 RNG games and smaller in terms of market share too: Nolimit City would add just under 1% to Evolution’s global share of content (across more than 2,000 operators), taking them from 12% to 13% globally,” he says.
“Nolimit content has some good distribution with around 10% of all casino sites taking their content. Given the sheer reach of Evolution, however, they would gain access to just around 20 new operator sites via this deal.”
The next deal
Evolution provided brief glimpses of Nolimit City’s financials, revealing the business showed great efficiency in turning revenue to profit. The developer expects to bring in €30m in revenue in 2022, yet its earnings before interest, tax, depreciation and amortisation is expected to be around €23m.
Those margins are not dissimilar to those of Big Time Gaming, creator of the popular Megaways mechanic, which was acquired by Evolution last year.
Attling argues that, while good margins are always an advantage, the pattern is unlikely to represent a wider strategy to specifically search for the most cost-efficient businesses to acquire.
“Evolution has stated that it prioritises growth over margins, and still, it has achieved industry-leading margins,” he says, “I think the same rationale goes for acquisitions. Growth and quality come first, and high margins is a nice-to-have but not a must in the short term. A lower-margin business wouldn’t be out of scope in terms of acquisition target if Evolution believes it has the capability of expanding them at a more mature state.”
Carlesund himself gave hints as to the future of Evolution’s M&A strategy. He said that slots was a natural vertical for Evolution to continue to acquire, but also wouldn’t rule out moves in the supplier’s core live casino vertical, if it presented an opportunity to add something new to its portfolio.
“I don’t see the potential in buying a company in live, but who knows? Maybe it occurs,” he said. “But there might be pieces of technology like Digiwheel where we just need this piece of hardware or software or a combination of growth in order to make our games better.
“In slots, we have a clearer view of where we want to be. We want to be a complete supplier but above all we want to hand over the best content in the world to our users.
“There we need some pieces but I think we’ve found those right now.”