Seven talking points from the Stars Group/Sky Bet deal

The Stars Group shocked the industry over the weekend with its $4.7bn takeover of the single largest online betting brand in the UK, Sky Bet.

Executives from both firms joined an analyst call Monday to share the rationale for the deal, which has only been seriously discussed since January.

Here’s the key talking points:

• Did Stars overpay?

The $4.7bn price tag equates to a trailing 12-month EBITDA multiple of 12.8x (including synergies). That looks on the heavy side compared to 6.2x for Playtech, 6x for Ladbrokes Coral. However, Sky Bet CEO Richard Flint said Monday the firm’s most recent results were even more impressive than the trailing year, with revenues up 47% to £339m in the latter six months of 2017. Those revenues are also exclusively form regulated markets.

Davy’s David Jennings added: “The Stars Group is acquiring one of the highest quality businesses we have come across in the sector. It ticks every box with respect to its strategic goals and at a price that is in no way excessive.”

• The BetStars brand is going to be scaled back

Stars CEO Rafi Ashkenazi said Stars would be using Sky Bet as its sports betting brand in jurisdictions where possible (likely regulated markets), and using “BetStars powered by Sky Bet” in other (i.e. grey) markets.

It suggests BetStars customers in regulated markets like the UK and Italy will be migrated over to Sky Bet, which should have “immediate benefits to TSG sports betting operations”, according to a note from Eilers & Krejcik.

The Sky brand could also be used over in Australia, where Stars’ newly-acquired CrownBet and William Hill Australia business will soon need a new name.

• The platforms will remain separate (for now)

The two sportsbook brands would remain on separate platforms, according to Ashkenazi, with each one being used depending on the market, as noted above, perhaps in an effort to avoid the type of lengthy integration which tied up Paddy Power Betfair’s tech teams for the best part of a year and slowed new product development to a standstill.

Eilers noted: “[Separate platforms] is likely revenue positive in the short-term but does add a layer of technology complexity as both businesses scale.

“We’d expect [combining them] to be a longer-term ambition even if not on the current roadmap. The direction the newly combined entity takes here is something we’d rate as being a major factor in its longer-term success.”

• What does this mean for the US?

Ashkenazi said on Mondays’ investor call that the enlarged group was “well positioned to take advantage of the liberalisation of the US sports betting market”.

While some questioned the truth of that, Cenkos analyst Simon French foresaw one path forward, saying: “Sky Bet could easily be ‘reskinned’ as ESPNbet or equivalent for the North American audience under a licensing deal.”

Sky Bet’s media partnerships are one of the two main reasons for Sky Bet’s success, according to CEO Richard Flint, so a similar relationship with ESPN in the US could make sense.

• Italy and Germany are the first targets for revenue synergies

Ashkenazi said several times the initial gains for the group would come in Germany and Italy where Stars’ (mainly poker) customers could be cross-sold to Sky’s sports product and vice versa. The exec also spoke about utilising Sky Bets media partnerships to promote both brands.

However it’s worth noting that Sky Bet has yet to replicate its UK model and success in these two markets, with less than 1% projected market share in eacch. As a result cross-sell could be the more successful angle in the short term, with Stars boasting a huge poker player database in both markets.

• All eyes turn to William Hill

With Stars a long time suitor of William Hill, the London-listed firm appears to be on the outside of sector consolidation, looking in.

Berenberg identified Hills as the firm most negatively affected by the deal, explaining: “At this, stage, we struggle to see who else could afford to buy William Hill.”

Reports of a £2 cap on FOBT stakes could further force Hills’ hand, with old dancing partner 888 mooted by several analyst as a potential option for a deal.

• The big four

The negative ramifications of the Stars deal may not end at William Hill, with smaller operators increasingly under pressure from the consolidating giants and regulatory pressures.

As Cenkos’ Simon French put it: “We think there is much TSG can learn from SBG and that combining these two businesses could create a global, purely online, market leader. In an industry where scale matters this must inevitably negatively impact smaller operators.”

Conversely the deal creates a tier of four major operators at the top of the industry in the form of bet365, GVC, Stars and PPB. “The battle between the four heavyweights is only just beginning,” predicted Davy’s David Jennings.