The analyst’s take: FDJ’s bid for (Western) European domination

Kindred has been gearing up to be acquired for some time, so for the ball to finally drop isn’t exactly a surprise. Questioning has erred on the FDJ side of things – namely, why Kindred? And why now?

Both FDJ and Kindred attempted to answer these questions in a press conference held yesterday (22 January). Featuring respective CEOs Stéphane Pallez and Nils Andén, the conference talked up Kindred’s history as a critical player in the European gambling market and discussed how the company’s trajectory aligns with FDJ’s future strategic goals.

Like all M&A deals, it ultimately comes down to strategy. But this is a new level for FDJ, says Ed Birkin, senior analyst at H2 Gambling Capital.

“It’s been clear for a while that FDJ are looking to expand into new markets and out of their traditional monopoly, with the acquisition of ZEturf and Premier Lotteries Ireland, but this is a major step-change in their strategic shift.”

FDJ completed its €175.0m acquisition of ZEturf in October, while its €350m bid for Premier Lotteries Ireland closed in November. And, if it’s lucky, Kindred will accept the bid for the outstanding share capital of its business within the upcoming offer period, which will run from 20 February to 19 November.

What’s luck got to do with it?

But luck may have nothing to do with it. Kindred has “unanimously” recommended that shareholders accept the bid, leaving the offer in pretty good stead.

Kindred stands on its own two feet, explains Birkin, with FDJ set to benefit generously from the deal.

“It gives them access to new products – especially in the igaming space, which accounts for 60% of Kindred’s revenues – and entry into new markets, as well as solidifying their positioning in the ‘competitive’ French online markets,” he continues.

As yesterday’s conference heard, Kindred is one of the top five players in Western Europe and has a presence in seven of the top ten markets in the region. Alongside this market access, Kindred can connect FDJ with igaming technologies and the benefits available to tier one online operators, Birkin explains.

“If the French market were to open to icasino, it would also give them a very strong position from day one – something that is very important, given the potential market size,” he says.

Would FDJ also want access to Kindred’s new in-house sportsbook despite acquiring Sporting Group in 2019?

“That’s an interesting question” adds Birkin. “To be honest, I don’t know what their plans would be. Potentially they could merge the two and deliver cost savings, or spin one of them off to recoup some of the purchase price. However it provides extra optionality to the deal.”

Purchase perspective

FDJ’s purchase offer works out at SEK130 per share, which represents a 24.4% increase on the SEK104.50 price of Kindred shares at close on 19 January.

Based on Kindred’s 2023 preliminary results, Birkin believes that the offer is not a value buy “but it looks more attractive on the 2024 projections”.

“However, projections are not the same as actual earnings,” he admits. “I would argue that the purchase is more to do with strategy than a value play.”

The 2024 projections would also factor in Kindred’s North American exit, which it announced in November 2023 alongside 300 redundancies. These formed part of a strategic review launched earlier that year.

“Any purchase is likely to be based on the 2024 projections – with the US exit cost-savings – so that’s already baked into the valuation,” Birkin continues. “Selling down the line could get a slightly better price if the company has shown its ability to hit these 2024 profitability targets but, at the same time, there’s the execution risk that these targets get missed.

“However, FDJ have done due diligence on the business, so you would imagine they’re fairly comfortable with the future earnings projections.”

(Western) world domination

Yesterday’s presentation outlined an end-goal for the FDJ-Kindred business: becoming a “European gambling champion” with a larger scale, more exciting portfolio and improved technological platforms.

Indeed, the business will be a mammoth player in the Western European gambling market. But Birkin shies away from overestimating its reach.

“I do think that this is a meaningful step-change in the company moving from a monopoly French operator with an online presence towards becoming a multi-product top tier European operator,” he posits.

“Combining the cash flow of the monopoly operations with the reach of Kindred as a multi-product, multi-jurisdictional B2C operator – along with a B2B operation – materially changes the direction of travel for the business.”

Nonetheless, he acknowledges the uniqueness of the situation: “There are very few acquisitions available to do this.”