Analysis: Done deals (Part 1)
A flurry of activity involving some of the industry's biggest names could just be the start of larger scale consolidation in months ahead.
The speed at which regulation and technology are progressing within the industry, coupled with the relatively high amounts of net cash held by operators, means M&A activity is inevitable. But while gaming is maturing and consolidation expected “ mirroring the offline industry now dominated by a handful of operators “ it is by no means easy to predict the deals that will shape the market for years to come.
A flurry of activity at the end of last and turn of this year has seen two of Europe’s largest bookmakers, Ladbrokes and William Hill, move to diversify through investments “ one geographically, the other in products “ while Gamesys acquired Virgin Games and signed a long-term deal to develop real-money and social gaming propositions globally under the Virgin brand.
For many operators one catalyst looming on the horizon is the proposed point of consumption tax due in 2014. Whether this remains at the current rate of 15% on UK gaming profits or is eventually reduced, as many predict, it will nevertheless negatively impact operators’ bottom lines, meaning many will seek to further leverage economies of scale and rely more heavily on earnings in other regulated jurisdictions.
This diversification away from the core UK market will no doubt see some larger operators shopping for successful local brands, while logic and necessity will surely see those at the other end of the scale merge in order to drive down costs and remain competitive in a fully taxed environment.
Going global
In a deal that was first announced in September 2012 and finalised just before Christmas, William Hill teamed up with GVC Holdings to bid for and agree a £454m deal to acquire online operator Sportingbet. The deal will see Hills assume control of Sportingbet’s businesses in the fast-growing Australian market where positive regulatory change is likely, and newlyregulated Spain, while GVC will exchange stock for Sportingbet’s assets in a number of unregulated markets such as Greece and Latin America.
The move by Hills represents a reaction to the need to broaden its online business and “global brand”, while also conceding that building from scratch in a country such as Australia, where a handful of operators dominate the profitable sports betting market, would be expensive, time consuming and risky. The acquisition of Sportingbet, owner of standalone Australian bookmaker Centrebet, will immediately solve these problems.
Founded in 1997 by Mark Blandford, Sportingbet has long been seen as an attractive acquisitionprospect with Ladbrokes holding takeover talks before walking away from a deal in late 2011. The major conundrum for Lads and others taking a close look at the operator, however, was that a large percentage of its revenues were, prior to its Centrebet takeover, generated in grey markets. In a strategic masterstroke by CEO Ralph Topping, Hills solved that dilemma by bringing GVC into the deal in order to siphon off those “unwanted” business segments.
Hills has acquired Sportingbet’s Miapuesta brand which ranks as one of the top three sportbooks in Spain along with bwin.party and market leader Bet365, again allowing it to achieve critical mass in the country much faster than it could have hoped with its own brand. It has a call option to acquire Miapuesta’s customer lists in six months. According to one source, the delay in completing this element of the deal is due to structural reasons “ Miapuesta sits on the same platform as other European Sportingbet businesses including Turkey, so time is needed for data migration before completing the transaction.
Nick Batram, leisure and gaming analyst with Peel Hunt, says Hills may have paid “a bit of a premium” for Sportingbet’s assets, but has “significantly accelerated the time it will take to get a strong market position” in two potentially lucrative countries.
“I think it made absolute strategic sense for William Hill to do a deal like that. While the business is solid, where they want to go is where Paddy Power is “ with 20% of revenues from retail and 80% from online. To do that they’ve got to buy; you can only grow in the core UK market for so long.”
The positive sentiment surrounding December’s deal wasn’t shared by all. Some analysts pointed to the fact that Hills turned down the chance to acquire Centrebet in May 2010 before it was sold to Sportingbet itself for £130m last year, a deal which appeared strategically compelling at the time and proved to be even more successful than expected.
Sportingbet has since claimed a 21% market share in Australian fixed odds online sports betting, leading to a 93% year-on-year rise in net gaming revenues from the country. Had it gone through with the Centrebet purchase, Hills’ move into Australian territory would have arguably been significantly less expensive.
Ivor Jones, analyst with Numis, branded the 55p a share price met in the deal as “unacceptable” and for a long time insisted on a top target price of 90p for Sportingbet. “This is the wrong time to sell the business and William Hill/GVC are the wrong buyers,” he said. “We believe shareholders should vote against the scheme and encourage the board to conduct a proper auction at the proper time.”
Jones also claimed that Sportingbet would’ve been better off selling to an Australian business which could have achieved greater synergies than Hills in the country. “Every £5m of synergies valued on 10 times would be worth circa 5p per Sportingbet share. We believe Sportingbet Australia would be worth more to a bidder which could extract synergies.”
This article appears in the latest issue of eGR magazine. For more information on how to subscribe, please click here.
Read part two of this analysis tomorrow.