Analysis: Has JPJ Group hit the jackpot with Gamesys?

Jackpotjoy’s (JPJ) first quarter results were a mixed affair with 13% revenue growth and a business struggling in its core market. At its Vera&John subsidiary, growth in Asia and Latin America saw revenues rise 62%, but Jackpotjoy declined 7% and you wondered just where this business was going to go next to address the problems. As it turned out we didn’t have to wait long for an answer. Just under a month later JPJ announced to the stock market it was acquiring Gamesys in a deal worth £490m taking on Virgin Games, Monopoly Casino and the platform and marketing business that had been supporting JPJ up to this point.

Management were keen to stress this wasn’t about synergy, but about creating an independent end-to-end business at scale. One way of describing the deal is JPJ has acquired (most of) the other parts of Gamesys it didn’t already own. Another would be as a vehicle for taking the core Gamesys business public. Neither are correct but neither are hugely far from the truth either. The resulting business is combining the old and the new of Gamesys to create a larger, potentially more powerful operator that is capable of taking on international growth, the challenges of the regulated markets and the pure scale plays of some of its peer group.

This deal will see JPJ pay a combination of £240m in cash and 33.7 million new shares to acquire the entire business of Gamesys, with the exception of the newly launched Virgin Bet and its associated assets including Livescore and the non-bingo games studio. The new company will be called Gamesys Group and Gamesys’ current CEO will become CEO of the enlarged group with current Gamesys COO Robeson Reeves taking over as group COO. JPJ executive chairman Neil Goulden and CFO Keith Laslop will remain in their roles and the deal is expected to close in Q3 19.

On the face of it the price looks favourable to JPJ at 7.3x adjusted EBITDA for CY18, although that doesn’t really put it into context of prior transactions. These are, after all, two businesses that are intimately entwined. JPJ acquired the brands and customer databases of what at the time were Gamesys crown jewels in Jackpotjoy, StarSpins and Botemania in 2015 in a deal that comprised an initial purchase price of £425.8m and a series of earn-outs. Those earn-outs comprised a £150m pre-payment in 2016, a £94.2m payment in June 2017 and a final payment of £63.5m in June 2018 over the Spanish business Botemania as well as some smaller milestone payments.

During this time Gamesys retained all platform, technology and marketing expertise in-house and JPJ took the lion’s share of the revenues. It was effectively the ultimate white-label deal. What was never really clear was what added value JPJ was providing to the Jackpotjoy brand assets. The change in management that came with the listing in London gave them more depth of gaming expertise and there was talk of taking back more control and this deal certainly provides that in a way. For a relatively low incremental cost they gain, as a combined group, full control of platform and marketing and a number of high-growth brands in complementary sectors. But what comes next?
Not a synergy story
For both sides it’s genuinely transformational. For Gamesys it takes it from a mid-tier private business into a very public one, while for JPJ it takes them from a hands-off brand owner into a true end-to-end operator. What is less obvious to see on first inspection is what advantages this combined business has now that it didn’t as its constituent parts. The obvious answer to this is scale, which is without question the word of the moment when it comes to the online gambling industry and it was the key benefit laid out for the future combination by JPJ.

Source: JPJ Group

The new management team drew attention to the broader depth of brands in the portfolio, and the possibility for share of wallet gains as customers move between them. New CEO Lee Fenton also pointed out the combined group will have “well over 1,000 employees” and drew attention to the strength of the executive team and wider talent pool across both firms.  But the most interesting point was about using this new scale to enhance not just its tech capability and user experience improvements but its marketing.

“Increasing our active base can unlock more rapid optimisation and personalisation capabilities due to more customers flowing through the platforms, enabling us to create an improved experience through community and real-time campaign targeting,” Fenton said in the presentation. He added, along with increasing marketing efficiency it would “accelerate the virtuous cycle of using enhanced liquidity and enhanced data analytics to target reinvestment in the business”. That is somewhat heavy on the management speak, but in essence it means more data leads to better modelling leads to lower acquisition costs and increased yields. And it’s a compelling argument.
The elephant in the room
Gamesys comprises Virgin Games, Monopoly Casino and Heart Bingo in the UK and Virgin Casino in the US. For the nine months to December 2018, the firm generated £137.8m in revenue from 239,400 average active customers per month with an adjusted EBITDA of £49.4m. Revenue growth has also been substantial with revenue up 18% from the prior nine-month period and up 63% year-on-year for the FY to March 2018. Growth is clearly slowing but it’s still a healthy-looking business. It owns some very attractive brands with a similar demographic profile to the JPJ business albeit slightly younger and slightly more mobile, with 85% of customers using the mobile platform. It’s hard to find two more complementary businesses, but that does raise its own issues.

In contrast to this “more of the same” problem, perhaps the biggest issue is what to do about Vera&John. The old Jackpotjoy business focused on the heavily regulated UK, Spain and Sweden markets with a bingo-led product, and the Vera&John business focused on grey market growth and casino on a separate platform. It always seemed a little at odds and hard to integrate and the addition of Gamesys can only increase that divergence. While there is a clear strategic benefit to operating Vera&John as a grey market cash cow, the cost of maintaining two platforms will be an increasing burden as Vera&John continues to scale.

An interesting aspect of the deal is what wasn’t included. With this being JPJ’s second bite at the cherry, you’d be forgiven for thinking they wouldn’t want to leave anything behind, but Virgin Bet and the main content studio will remain independent.

Exclusive content is clearly a huge part of the past and present growth story at Gamesys and some level of exclusivity remains. Gamesys Group will have content exclusivity for three years, with the Tiki franchise and Double Bubble named as the two key parts of this and on most of the other content for two years.

The content business seems to be set up to scale-up independently of the Gamesys business, with a new content house set-up within Gamesys presumably with the intention of finding the next Double Bubble.

Although it’s a nascent business at the present time, the omission of sports is also extremely interesting. When all of JPJ’s rivals are heading into sports at a rate of knots, both as a cheaper acquisition channel and a more resilient marketing and CRM tool in restrictive regulated markets, to not take on board Virgin Bet seems odd and could even lead to a third acquisition in later years.

The US is going to be a hard market to break without sports, and other regulated markets are beginning to look tough nuts to crack without the cheaper acquisition channel and stealthier brand building capabilities afforded by sports betting.

The intent, however, appears to be to keep both platforms for at least the medium term, with Goulden adding that while they may want to share liquidity in bingo “I don’t think that you would merge them in totality”. Vera&John was described as an agile internationally focused platform, while Gamesys was a robust high-transaction volume regulated market platform. Goulden added “I think we’ll take the best in both over time, but the truth is we’ve got a way to go before we can look at exploiting those opportunities.” The question would be, however, how would you really be able to combine two such disparate and different platforms and businesses effectively?

The potential regulatory minefields Vera&John is dancing over on a daily basis also seem like a reasonable notable long-term reputational risk to what is now a large-scale UK gambling business. While management have given no indication that they plan to dispose of the asset, and indeed quite the contrary as it seems a key part of their expansion plans, it does seem a viable opportunity not least when the industry views grey markets with such a casual air of acceptance. That may not always be the case. Would you be better off funding the continued expansion of Gamesys through a trade sale of Vera&John? It’s a reasonable question to ask because for Gamesys to grow it needs to think big and think internationally and that doesn’t come cheap.
Platform for global growth
Organic international expansion has proved costly for big operators in the past. Gamesys Group will have some significant advantages in its Virgin and Monopoly brands, which have cut through in certain markets as well as the learnings of Vera&John to take on board and with its own platform and content production a little more control over its localised products. So just where does Gamesys go for future growth? There have been no discussions yet as to markets considered, but Laslop did mention the success Vera&John has had internationally, and separately those markets were mentioned as Asia, Germany and Brazil.

None of those feel like markets primed for a heavily regulated brand-led entrance, although both Germany and Brazil are making moves towards regulation. The US looks the land of opportunity and there are some clear marketing advantages with its brands there, but a lot there will depend on friendly regulation and market access partners. So ultimately, perhaps it’s the UK market that remains the heart of this combined business growth story as management said domestic growth was a key factor behind the deal.

The thinking is the two firms “can combine forces, take market share” in the UK against a backdrop of regulatory neutered competitors. “We’re very positive and optimistic about the UK market. It is still the biggest regulated online gaming market in the world at this stage,” Fenton said. The question is how well placed a well-established firm on a legacy platform is to deal with the new environment and the possibility of further changes to come. Fenton seemed confident on the call but it’s no small challenge, not least if we see any change in bingo marketing.

And this confidence against an uncertain backdrop is the pervading feeling surrounding the new Gamesys Group. A mix of big potential and big challenges, both at home and abroad. In many ways this deal feels less of a turning point for JPJ and more a brand-new start with all the positive and negatives that brings. This is the full Gamesys business beginning life as a public company with big bold international ambitions, and it will have to face the full public glare as we find out if it can take that challenge head on.