Full house: Inside The Stars Group's meteoric rise

Monday 23 April 2018 was an iconic day in the short history of The Stars Group (TSG). The firm’s shares reached a record high of C$43 on the Toronto stock exchange in the first trading since announcing its $4.7bn deal to acquire Sky Betting & Gaming (SBG).  On the very same morning, about 500km from Toronto, former group CEO David Baazov’s insider trading trial got underway in Montreal. It’s a jarring contrast, and one that underlines just how far TSG has come from those dark days of March 2016 when Baazov was first accused of the charges, and Amaya’s stock price and reputation hit the floor.

Former Playtech COO Rafi Ashkenazi was appointed to lead the company out of the Baazov era, and the contrast in styles was clear. EGR noted at the time of the appointment how Ashkenazi was seen in the industry as an understated, efficient and capable operator. And so it proved, with Ashkenazi eschewing the splashy deals that Baazov favoured and turning “operational excellence” into the most commonly-used phrase in Amaya conference calls. However, in the past year, with confidence in the company restored and revenues booming quarter after quarter, the prospect of a big deal crept back on the table.

The $433m double acquisition of the majority stake in CrownBet and then William Hill Australia appeared to be just that deal, but that turned out to be just an appetiser for the $4.7bn acquisition of SBG, creating the world’s largest listed online gaming company. The deal immediately prompted coos of delight from around the industry, with the combined firms possessing an unparalleled combination of verticals, markets and technology. As David Jennings, an analyst at Irish broker Davy, put it: “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.”

Cenkos Securities analyst Simon French added: “We think there is much TSG can learn from SBG and that combining these two businesses could create a global, purely online, market leader.” But those who don’t learn from history are bound to repeat it and the recent history of mega-deals in the egaming sector is hardly a blueprint for success. Just ask Paddy Power Betfair what a tech migration can do to new product development and subsequent market share. So can TSG succeed where others have failed and integrate three different businesses in multiple jurisdictions around the world, while still maintaining its core momentum?

Heading west

As with seemingly every major deal announced in 2018, many of the initial questions centred around the US and whether TSG had made the acquisition with one eye on that market. In fact, some analysts even suggested the multiple paid (around 15.6x LTM EBITDA) meant TSG would need to be able to tap into a fresh market.

“The price tag suggests continued double-digit growth is not just desired but expected,” said Eilers & Krejcik Gaming analyst Alun Bowden. “And to do it SBG is going to have to find new worlds to conquer, because with 12% market share in the UK and closer to 20% of the fixed-odds sportsbook market it is running out of headroom at home.”

Italy and Spain will be the immediate targets for international growth, but the US is undoubtedly an opportunity down the road. Ashkenazi noted in a conference call after the deal: “The key trigger for the acquisition was not the US… we will be very strongly positioned for every regulated market that opens up, US included.” He went on to add separately that TSG/SBG would be poised to take advantage of the liberalisation of the US sports betting market.

Indeed, TSG shares leapt 12% when the Supreme Court struck down PASPA, suggesting investors are expecting TSG to have a strong hand to play in the development of that market. French foresees one path forward for the firm: “Sky Bet could easily be ‘reskinned’ as ESPNBet or equivalent for the North American audience under a licensing deal.” Media partnerships are one of the two main reasons for the Sky Bet brand’s success in the UK, according to CEO Richard Flint, so a similar relationship with ESPN in the US could make sense.

The US Supreme Court Credit: iStock

However, beyond that, it’s unclear how the acquisition really improves TSG’s hand for US sports betting. The firm already possessed an omni-channel sportsbook platform via the CrownBet acquisition, which could be used to service a US casino partner. Indeed, SBG doesn’t have experience of land-based sports betting, so is arguably less suited for the market than TSG’s existing platforms. One industry executive speaking off the record told EGR: “I’m not sure exactly what Sky Bet gives TSG in the US.

“They’ve already admitted the platform is no good, their US sports coverage is average, they’ve yet to have success outside of UK and there’s no Sky TV to leverage. I suppose they have the experience of working successfully with a sports channel, so if Comcast buys Sky then there could be a little intro to be made there for ESPNBet, but that’s a big if. I think Crown probably amounted to more US yards gained for TSG than Sky Bet.”

On the continent

Of course, despite the media furore and share price bonanza that followed the repeal of PASPA, the US was not the key rationale for the Sky Bet deal. Instead, the initial gains will be targeted in Italy and Germany where the existing BetStars brand has made little headway. The plan of attack is two pronged – use Sky’s UK model of media partnerships to build the customer base, and cross-sell TSG’s existing poker players into the theoretically superior sportsbook of Sky Bet.

The plan sounds simple on paper but may not be so when it comes to execution. “I’d be wary of just assuming they’re going just make gains in those markets,” Investec analyst Alistair Ross tells EGR. “They’ve been pretty tough for Sky so far [less than 1% estimated market share] and I’d be cautious about assuming they can replicate the UK model to such a degree.” Sky Bet is also on the SBTech platform in Germany, adding another layer of operational complexity.

The presumed cross-sell from poker players into Sky Bet is also more of a theory at this point than a reality. Will PokerStars’ desktop players flood onto a mobile-first sportsbook in their droves? It hasn’t exactly been the case with BetStars, which launched in 2015, despite the product being available to around 65% of PokerStars customers. Whether that’s a structural issue or simply because the product is behind rivals is still somewhat up in the air.

Strength to strength

Where TSG may have more cross-sell success is from sports and poker into casino. The firm built one of the largest online casinos in the world by active users, almost entirely via cross-sell, and sees Sky as yet another acquisition channel for that vertical. As Ashkenazi puts it: “The combination of the sportsbook and our core poker offering will allow The Stars Group to move from strength to strength, becoming one of the only operators capable of leveraging two low-cost acquisition channels.” Calling sports and poker mere “acquisition channels” emphasises just how much of a money-printing machine the casino is compared to the volatility of sports and the low margins of poker.

Ross, the Investec analyst, sees material upside in the plan, adding: “What’s interesting here is that when William Hill was trying to merge with Amaya, they were also shouting about how they could cross-sell 2.4 million Amaya customers into sports betting and Hills’ casino content. The fact there was so much support for that deal internally gives me confidence in the idea they can cross-sell customers. “If you look at the likes of 888 and other poker shops, they all shout about how poker is a cheap acquisition channel. Sky Bet also gets cheap customers through the Sky Sports apps, so they have two uniquely low-cost acquisition channels.”

Land down under

The SBG deal, transformational as it is, was not necessarily a bolt from the blue. TSG had been shouting about its desire for regulated sportsbook revenues for months, and SBG was touted as a likely target given TSG CFO Brian Kyle’s history of trying to acquire the top-performing asset in a given sector. What was far more shocking was the double acquisition of CrownBet and then William Hill Australia a couple of months earlier, which catapulted TSG from market outsider to one of the largest sports betting operators in Australia.

To reach that position from a standing start took a hefty chunk of cash – around $433m all told – and grand strategic vision. “It was a very impressive bit of business,” suggests Yaniv Sherman, SVP and head of commercial development at rival firm 888. So just why did TSG drop close to half a billion dollars on entering a brand new market where its core poker vertical is banned? The simple – if a little unsexy – answer could be that TSG sees CrownBet and Hills as bolt-on acquisitions that can deliver value in their own right, especially when combined.

TSG said the business will generate gross synergies of $39m per year from 2019, enough to overcome the looming threat of nationwide Point of Consumption (PoC) taxes in Australia – the existence of which is why William Hill decided to offload the business in the first place. Hills sold up at little better than 6x EBITDA, and if TSG can mitigate that risk with scale, it already counts as a win.

Waiting in the lobby

While the opportunities Down Under could be enormous in their own right, the acquisition also carries several ancillary benefits, as one would expect from a firm with an executive dedicated to M&A in the form of chief corporate development officer Robin Chhabra.

The first of these is increased sway in Australian political circles, thanks to a team of CrownBet lobbyists. Poker was banned last year in Australia, but the vertical stands a fighting chance of being re-regulated at some point. Indeed, Australian communications minister Mitch Fifield has said the government is supportive of licensing online poker, although no movements have yet been made in 2018.

TSG could feasibly use its new-found presence and lobbying experience to push that agenda forward, with CrownBet CEO Matthew Tripp noting in a recent interview: “They [TSG] are keen on Australia as well with the potential for the ban on online poker to be lifted here.” If that ban is indeed lifted, the potential for cross-selling between the verticals would give TSG a major edge over its competition.

Top-tier team

Beyond the moving parts and operational intricacies, it should not go unnoticed that TSG has assembled a formidable team of executive talent over the past two years.  Beyond the hiring of high-profile names like COO Guy Templer, the aforementioned Chhabra, CMO Christopher Coyne, Casino MD Bo Wänghammar and more, the firm’s recent acquisitions have brought Tripp and Flint into the corporate fold.

Eilers and Krejcik Gaming noted Tripp was considered “something of a rock star in his native Australia, having previously founded, scaled up and sold the Sportsbet business owned by Paddy Power Betfair.” Flint is equally well respected in the UK, having overseen SBG’s rise from relatively humble beginnings into the juggernaut it is today, and according to Bowden, that talent could have a vital role to play going forward. “My view is gambling, more so than many other industries, really benefits from execs who have a deep knowledge and feel for the nuances of the business,” he said earlier this year. “These seem to be in reasonably short supply at the moment.”

All these acquisitions and deals around the globe are also helping to obscure the fact that the core TSG business is still in rude health, with revenues up 12% again in Q1 2018, despite the myriad distractions. Crucially, poker grew at 2.3%cc, buoyed by the ground-breaking Stars Rewards programme and the advent of pooled liquidity in certain European markets. With around a 72% market share of the vertical, a growing poker sector provides a very stable foundation for the group. Elsewhere, casino continued its extraordinary expansion, while even the maligned BetStars sportsbook had a record quarter, recording its first million-bet week and its first $20m week in turnover during the quarter.

And as the various acquired businesses are integrated, TSG will continue to invest in BetStars and PokerStars Casino, ramping up marketing spend around the World Cup in an effort to avoid the type of stagnation that has plagued other consolidating rivals. This time next year, post-integrations, TSG could feasibly generate (a pleasingly symmetrical) one-third of its revenues from each of the three main verticals (it was 37% poker, 34% sports betting and 26% casino on a pro-forma basis in 2017). The firm will also enjoy unmatched geographical diversity, with dominant positions in key regulated markets like the UK, Australia and potentially the US down the line.

“It is not my nature to look backwards,” said Ashkenazi after Q1 results in May, in a rare moment of reflection. “Especially given the steps we have taken to distinguish Stars future from its past. “However, it is important to note only a few years ago, our company was in a challenging position. Since that point, we have transformed our business. Our 2018 acquisition represents the next phase of our transformation.

“Upon completion of our acquisition of Sky Betting and Gaming, The Stars Group will be the world’s largest publicly listed online gaming operator with leading positions in the United Kingdom and Australia – the world’s two largest online gaming markets. These leadership positions are merely the first goal in a greater game to come. The Stars Group will soon possess unprecedented scale that will afford us not only new opportunities for revenue growth, but also the ability to realise our vision of becoming the world’s favourite iGaming destination.” It’s a lofty goal, but given Ashkenazi’s track record in driving PokerStars’ parent company to new heights, you wouldn’t bet against him achieving it.