Is bolt-on the new black?

Bolt-on acquisitions have become increasingly popular with top-tier operators after the last few years of transformational M&A dramatically altered the online gambling landscape. The Stars Group (TSG) bought Sky Betting & Gaming (SBG) before Flutter Entertainment swallowed them both, while GVC has ballooned in both size and market cap since purchasing Ladbrokes Coral.

These power-shifting deals saw the companies listed above sidetracked for a prolonged period as technical integrations and department reshuffles drained just about every resource available.

Once the bulk of the heavy lifting was done and synergies transpired to top up the bottom line, management would collectively mop their brows and think, ‘Maybe we should leave it a while before we go through all that again’.

This is where bolt-on acquisitions come in handy. Where mashing multiple FTSE-listed companies together can feel akin to the latest TikTok craze of whooshing a freshly finished puzzle off the table, against a wall and onto the floor, bolt-on deals don’t cause quite so much disruption.

While not every bolt-on deal works out as planned, the operational risks are substantially fewer. They can fast-forward launching into new markets with the add-on of local knowledge, all the while inspiring product diversification and the strengthening of technical assets.

Two crystal-clear examples of this (if you’ll pardon the pun) are GVC’s acquisition of Crystalbet in 2018 (51% for €41.3m) and Flutter’s purchase of Adjarabet in 2019 (51% for €116m), both at the far edge of Eastern Europe in Georgia. This former Soviet republic shot up the ranks to become GVC’s fifth most lucrative market for full year 2019, as online revenue increased by 59% following the acquisition.

Before departing his role as CEO in July 2020, former GVC boss Kenny Alexander said: “The best example of M&A I would like to do is to repeat the Georgia acquisition. It was a market we weren’t in, so we bought it, retained the management and kept them on post-earnout.” He added: “If we could find another deal like that, then we would definitely pull the trigger on it.”

And GVC did pull the trigger, only this time in Portugal and under the watchful eye of new chief executive Shay Segev. The FTSE 100 operator agreed a deal in October 2020 to acquire Portuguese sports betting operator Bet.pt for an initial fee of €50m, with a further €10m to be paid over the next two years subject to certain conditions being met.

In the ensuing analyst call, Segev said the acquisition “ticked all the boxes” for GVC, fitting into its M&A strategy of bolt-on buys in regulated markets, where their presence was previously lacking. “It fits very well in those types of deals where we have strong proven track record with a focus on regulated markets. Portugal still has growth in front of it and we can create further value.”

He added: “There’s an exciting pipeline ahead of us. We’ve parked a lot of it due to the pandemic, but we’re still looking at bolt-on deals in new markets targeting new audiences. M&A is still important to us. While we may not see transformational acquisitions to the scale of the Ladbrokes Coral integration, we’re still eager to capitalise on new markets, technologies and brands.”

CEO Shay Segev said the acquisition of Portuguese sports betting operator Bet.pt “ticked all the boxes” for GVC

Segev is not the only online gambling hotshot treating transformational consolidation with trepidation. William Hill is about to be turned upside down by Caesars Entertainment in a £2.9bn takeover of the bookmaker’s assets before flogging the non-US parts to suitors elsewhere. Strong-performing 888 is one buyer potentially interested in Hills’ online European business, but CEO Itai Pazner cautioned a few words of wisdom while comparing bolt-ons to big deals.

He told EGR: “Obviously bolt-on acquisitions are easier to do, and they have less of an impact on the business, for good or for ill, than the transformational deals which take more time and resources to achieve. Transformational deals are the ones for me that you must absolutely get right. If you get a bolt-on deal wrong, it can be a little damaging for a short term to medium period. However, if you get a transformational deal wrong, then it’s definitely not going to help you to remain one of the top companies in the industry – if anything it could go the other way around,” he warned.

An easy win?

But what do the money men in the City think of all this? Are bolt-ons considered an easy win? For Julian Buhagiar, co-founder of boutique investment firm RB Capital, they are more of an easy sell than an easy win, especially to those at the top counting their cash.

“The shareholders of public companies seem quite happy with bolt-on as opposed to full-blown because it doesn’t signal a 180-degree strategy change,” says Buhagiar. “There is a management of the narrative, which is more about growing through smaller acquisitions than having to merge to survive.”

He adds: “Focused purchases tend to be a quick win across the board because shareholders like it, regulators like it and more importantly there is no radical change at the top, so the board remains the board and there is nowhere near as much politics involved.”

According to analysts, one major advantage of bolt-on acquisitions is that they can continue to run at arm’s length, leaving management to keep their eye on the core business. These acquired firms have been bought because they are successful and in-demand, so there is often no need to drastically alter a winning strategy.

Pre-existing staff will often boast invaluable local expertise, especially if the parent company is entering the market for the very first time, so it makes sense to keep them on board and leave them to go about their business.

“Let the business continue, at least until you understand the dynamics of it,” says Buhagiar. “At some stage in a two- or three-year run, you might look at ways to improve synergies by subsuming different business units to get better cashflow and better expense management across the board.”

A key incentive for this strategy relies on structuring bolt-on deals based on financial earnouts for the existing founders and management, according to Wiggin partner David McLeish. McLeish advises clients across a range of industries on UK and international transactions with a focus on gambling, technology and sport. He says: “Finding an established business, and then being able to bring your own economies of scale via bargaining power with suppliers or your own technology, offers obvious upside immediately for both parties.

“Unlike the mega-mergers, bolt-ons are typically structured with an earnout element and that means you’ve very often got the founders tied in for an extended period and incentivised to help you continue the trajectory of the business.”

One prominent example of this working out is Betsson buying a 75% stake in Brazilian horseracing business Suaposta back in 2019 to improve its Latam footprint. Fast-forward to September 2020 and the business has rebranded as Betsson and is powered by the Malta-based operator’s proprietary sports betting platform. Suaposta founder André Gelfi is now in fact MD of Betsson in Brazil.

“That is a nice way of building those deals so that everyone shares in the upside while you continue to get access to that existing expertise,” McLeish adds. “There is less executional risk than on the massive deals and because they often include private instead of public companies, you can structure them with earnouts heavily in mind.”

There are many examples to demonstrate why buying an established business to increase geographic diversification can provide an effective shortcut to entering the market on an organic basis. Betsson may have been successful in Brazil, but the UK was a different story.

The operator made a significant marketing splash for its Betsafe brand upon entry, signing expensive sponsorship deals with Conor McGregor and Premier League giants Manchester City. Despite this, brand penetration was severely limited in a competitive and mature market. In October, Betsson decided to close eight of its nine UK-facing brands to reallocate funds to more profitable markets.

Perhaps former GVC chief Alexander said it best before stepping down. When asked whether GVC would ever consider paying its way into new markets with one of its existing brands, Alexander replied: “We’ve toyed with that in the past and weighed up the pros and cons of just using the bwin brand, or any of our existing brands. I think it makes more sense to go in and acquire an established brand with local expertise. Industry examples show that it would be a better and more efficient use of our time and capital to acquire a brand via M&A, rather than to plough in there with our brand and a new team.”

A globetrotting gamble

Flutter and GVC have enjoyed success with bolt-on buys in Eastern Europe, while Betsson has prospered in Brazil. But which markets would our City experts target if they were handed the keys to the kingdom?

“The Far East,” says Buhagiar, after mulling over the pros and cons of both Latam and Europe. “The content that works there is radically different to the rest of the world, so if you have content that does convert in that territory and is able to acquire customers, hold on to it for dear life. These are in very hot demand right now.”

While online gambling firms have so far weathered the storm of Covid-19, how will the pandemic affect the bolt-on acquisition strategy going forwards? Might smaller targets emerge cash-strapped and ripe for takeover, or will the big players be cautious and keen to protect their liquidity positions?

One conclusion is that retail operators will have significantly declined in appeal. GVC announced that retail closures between November and December 2020 across its UK and European portfolio would damage EBITDA to the tune of £43m. Prior to the pandemic, CEO Segev was asked if retail acquisitions could be considered a realistic possibility.

“Digital is where we want to grow, e-commerce is growing faster and we want to be a double-digit business,” he replied. “We do see some value in retail, it can be essential in some regulated markets, but digital is our focus. We might acquire something with retail elements to accelerate the digital business, and the UK was a good example of that as retail is a strong developer of omni-channel.”

The events of 2020 are likely to have accelerated that digital focus as retail businesses battle to keep outlets open, despite huge expense being spent on securing gambling premises as ‘Covid secure’.

“Covid might change things in terms of how operators view businesses with extensive retail networks,” says McLeish. “There are companies that will look to diversify their revenue into more markets or different products because obviously the impact of Covid on sport was very extreme. There may be a resurgence in operators looking at businesses with core offerings on the gaming side as opposed to sports. I also think people may be looking at opportunities which focus online more than on retail, but there are still deals to be done out there,” he adds.

Buhagiar agrees that the sector’s appetite for M&A is insatiable. He believes that regulation is the key driver of diversification and will play an even bigger factor in the future than Covid-19. “I don’t think Covid has that much of an impact on buying assets, particularly because sportsbook seems to be resilient and casino is flourishing,” he says.

“The dynamics are changing more because of Europe rather than Covid. There are fewer revenue opportunities in Europe because regulators are clamping down. If would-be buyers have a UK presence, they will need to offset that by acquiring elsewhere.”

UK-centric operators have considered the same. The government’s imminent review of the 2005 Gambling Act will create even harsher operating conditions, that even the cream of the crop could struggle to cope with. Building a bolt-on presence in more lenient markets could prove the key to future success.