The science of the deal

Scientific Games became the latest land-based giant to flex its M&A muscles in September, acquiring platform and technology provider NYX Gaming Group for the princely sum of $631m. The deal will be financed with cash and debt and represents a 112% premium on NYX’s market price, at CAD$2.40 per share. While it’s a hefty premium to pay, Kevin Sheehan, Scientific Games’ president and CEO, hailed the creation of a “global gaming and lottery powerhouse.”

Sheehan said his bolstered company would be a “stronger industry leader offering one of the broadest end-to-end portfolios of engaging content, innovative technologies and digital products and services across gaming and lottery.” But was the real prize a vertical outside gaming and lottery, and was that 112% premium money well spent?

Arguably the most obvious reason behind the deal is the looming prospect of US sports betting – one which Scientific Games itself was quick to point out.

“Scientific Games will now be perfectly positioned to capitalize on future regulatory developments in real-money wagering and sports betting by adding NYX’s industry-leading OpenBet Sportsbook,” the firm said. “NYX’s digital Sportsbook can be seamlessly delivered throughout Scientific Games’ global gaming and lottery networks in existing and future regulated US and global markets.”

NYX CEO Matt Davey has previously told EGR that NYX is uniquely suited to take advantage of US sports betting given its existing partnership with US casino brands, European sportsbooks like William Hill, and sportsbook technology in the form of OpenBet.

The solution

And Eilers & Krejcik Gaming analyst Alun Bowden agrees, pointing out there are very few sportsbook solutions that can operate at large scale on a multi-channel basis and that are proven in the global market. “OpenBet is one of those, and already has existing deals with the BCLC in Canada…the ultimate prize for SG is very significant indeed.”

US sports betting market may not drift into the hundreds of billions as some estimates have predicted, but Eilers & Krejcik calls for a base case by 2023, of 32 states to offer regulated sports betting, with varying approaches to availability and the land-based/mobile question, resulting in a market worth $6bn in annual revenue.

And while European companies like William Hill, Paddy Power Betfair and more recently supplier SBTech are looking to tap into that market, none of them have the land-based gambling links of SG and NYX. The prize is indeed significant.

So significant in fact, that it had analysts suggesting other European firms with sportsbook technology could be next in line to be acquired by US giants. Simon French, an analyst at Cenkos Securities, noted: “To see a major US headquartered business acquiring a UK sportsbook suggests UK online companies with proprietary sports betting technology are firmly on the radar of their US land-based peers as they grapple with the potential regulatory reform of US sports betting.”

“It’s hard to escape the sense that the Americans are coming,” French added.

Beyond sports betting though, there are some significant benefits for both SG and NYX to be had in the gaming vertical. Scientific Games hailed NYX’s industry-leading suite of products, adding that the firm was the “leading digital casino and account platform in North America.” NYX is indeed a heavy-hitter in New Jersey, with its games offered by most operators, while it also provides the platform for Caesars Entertainment’s sites. That type of pedigree could be important if and when Pennsylvania comes online or if Michigan completes a Hail Mary this year.

But it might be NYX that actually benefits more, by adding Scientific Games’ tier one slots content to its OGS network. It’s the type of content that is currently missing, according to Regulus Partners’ Paul Leyland, and it’s the type of move that has proved successful before. Product Madness’s success in the social casino sphere when distributing Aristocrat’s slot titles is a decent analogue, albeit in the real-money sphere, while the European success of SG’s slots like Rainbow Riches shows that its content can indeed translate anywhere.

Downside risk

But as with any deal that crams two enormous companies together, the integration will come with a good degree of risk. Leyland says that for the perceived positives to take effect, the integration and operations management “will have to be strong across disparate and culturally diverse businesses, long on legacy issues.”

He points out the historical track record of large principally-US businesses integrating and growing their egaming capabilities via acquisition is “beyond poor”, pointing to GTECH with Finsoft and Boss, IGT with WagerWorks and Entraction.

Bowden also points out that demand for the type of end-to-end platform solution that SG is looking to build is falling out of favor across the egaming industry.

“The move from black-box style platforms to modular solutions, taking in elements from a number of suppliers, has been the direction of trend in the egaming sector for some time now,” he says.

“Suppliers are increasingly not competing for broad contracts with major suppliers but fighting harder for ever smaller parts of the value chain as operators begin to more closely resemble technology firms.”

Taking Paddy Power Betfair, a key NYX/OpenBet customer as an example, its analyst presentation showed very few components of its technology stack as third-party supplied, with the customer facing gaming content, the sportsbook and gaming “modules” the only components not dealt with in-house.

It means SG could face a long road to building a unique end-to-end gaming, lottery and sports platform, but the market for that solution may have disappeared by the time they’re done.

Ripples

Finally, beyond the main protagonists in the acquisition, the deal had some significant ripple effects, with William Hill perhaps an unintended casualty. Hills had notably invested £80m in convertible notes and £10m in equity in NYX last year to help the supplier buy OpenBet.

The rationale for the deal was that Hills would have greater control over its main sportsbook supplier and be top priority in any product development roadmaps. It promptly embarked on a three-year £30m project to develop a new global platform in partnership with OpenBet. However following the SG takeover, Hills loses that priority position and becomes simply another customer. The operator confirmed its contract remains in place, but Cenkos’ French pointed out it “raised questions” over Hill’s sportsbook strategy given it “invested in NYX and became its largest shareholder to have more influence over building out a global sports betting and trading platform in the coming years.”

Of course Hills may have done a lot more than lost a premium partner; it also gained a powerful new rival in the battle for the regulated US sports betting market.