Analysis: Around the world with The Stars Group

Having a ‘transformational year’ has become a cliché within an online gambling sector that is perpetually seeking to reinvent itself, but it was certainly the case at The Stars Group (TSG) in 2018. The acquisition of BetEasy and William Hill Australia, followed by the acquisition of Sky Betting & Gaming (SBG), has radically altered the outlook and focus of the operator. From a poker-led business with no country representing more than 12% of revenue at the end of 2017, it ends 2018 with an even split between poker, gaming and betting and 38% of revenues from the UK and Ireland in 2019. This then is an operator transformed. Except, is it really?

The SBG and BetEasy businesses have added scale and depth in key areas and key markets, but the challenges facing TSG haven’t perhaps changed quite as much as you’d imagine. Yes, it’s now considerably more sports betting-oriented, but this was always its direction of trend and the deals have simply slammed the foot on the accelerator. And although it’s now more UK and regulated market-focused, this had long been the aim and there is no denying it still retains a large volume of non-regulated revenues in comparison to many of its peers.

And over the second half of 2018, it became clear the plan was to take the best bits of SBG and BetEasy and assimilate them into the wider international business. In other words, how TSG can use its acquired assets to grow outside of the UK and Australia is the most important part of this transformation process. TSG said the first of its integrations of the Sky Bet brand into the international platform were already live with its Italian operations now offering Sky Bet by Stars and a similar move pencilled in for its German sports betting product and these will be an interesting test case of replicating the model outside the UK.

In some areas, this integration is already proceeding at pace, with TSG stressing to investors it was on course to make $70m of synergy savings from the SBG acquisition in 2019 alone. But there is a sense of not wanting to cause too much disruption simply for the sake of efficiency savings. For now they are both being left broadly to their own devices to run their businesses in the UK and Australian markets, but the longer term plan for the UK remains combining the two ecologies or customer bases with players cross-sold in both directions, but it’s less clear how much these non-UK brands take from the UK model with both Germany and Italy offering widely different betting markets than the UK.

The learning process

This, you sense, will be a learning process for both businesses and weighing it up against the quietly efficient and impressive BetStars business with its differing trading approach will be an interesting consideration for management in the year to come. BetStars posted 61% growth year-on-year in 2018 although from a low base to reach $79.1m in revenue for the full year. The SBG business was up 3.6% on a proforma basis to $502.8m in comparison, although in sterling it was flat year-on-year with SBG having a tough set of comparatives to contend with in the second half of 2018 and a rising tide of more direct competition, not least from William Hill.

The question for TSG is not just how quickly SBG can return to growth, but how easily it can defend its position as the one to aim at in the UK market and how it can retain its unique identity as it becomes more closely entangled with the larger group. How the two sides of the business take from each other will be fascinating to watch over the next year. SBG remains the one to beat though in the UK recreational sector and there should be no reason for investors to panic at this stage, not least with the app reaching number one in the App Store during Cheltenham.

TSG said SBG was taking market share in the UK based on its internal research and key underlying metrics, and it has a few strings it can pull here with a historic weakness in in-play and a lower spending player type. TSG executives said there was a focus on driving up revenue per user and this was up notably in Q4 2018 to $116, and it’s probable there are meaningful gains to be had here among its lower spending player base. What must also be pleasing in light of the issues at other operators is the growth in casino, which was up 16.7% for the full year and 12.4% in the fourth quarter.

Sky Vegas is one of the largest casino operators in the UK and takes a very different approach to the field with a big focus on exclusive content and promotions targeted at a more mid-range spending customer than some of its peer group. That’s not to say it has been immune to wider issues in the market, but with less VIP exposure than some of its rivals and a more positive looking outlook, although growth will need to outpace the 6% rise in remote gaming duty kicking in later this year. But there is no doubt that for the wider business, casino is a real area of focus. In fact, while most of the talk is of betting, it’s casino that remains the brightest star in TSG’s firmament.

Casino growth

Casino continues to grow at a brisk clip, and in many ways it’s only just getting started. Talk of in-house content houses, expanding the live casino offering, new apps and direct marketing as well as the existing cross-sell powerhouse should be worrying to anyone. TSG is now the largest online casino operator in Italy and anywhere it has a poker acquisition source is reasonable to expect it could do likewise. And in regulated markets where downward pressure is constantly being exerted by regulators, a newish business with low-cost acquisition funnels and no VIP-legacy hangover is quite the asset. But it’s crucial to note this all depends on the health of one often forgotten bit of the business: poker.

Poker revenues almost seemed an afterthought despite being $900m in FY 2018 and 35% of proforma group revenues. Revenues from poker were up 1.1% in 2018 with FX changes and some grey market issues a factor there. Poker is the most exposed of all the verticals to grey markets and it also faces renewed competition from the GVC-owned partypoker brand whose own management talked of snapping at the heels of PokerStars in their recent results presentation with continued high double-digit revenue growth from the vertical. While it’s unlikely there are any near-term threats to PokerStars’ position as the clear market leader in poker, it would also be incorrect to dismiss competition as simply sub-scale.

And poker’s importance to the group is neatly illustrated by Italy, which was highlighted as a core growth market by TSG with the operator taking record market share of 12% of the online gambling market in the fourth quarter, albeit this being one where sports betting revenues were down 20% across the board so impacting its rivals far more. But that would be to downplay TSG’s performance in Italy to-date where not only does it dominate the online poker market but has used this player base to gain the largest share of the online casino sector and a growing chunk of the betting one. This should give it some comfort as the market moves towards a total shutdown of gambling advertising in the second half of the year, but along with bet365 will face significantly more challenges in reaching a mainstream audience with its brand compared to rivals with hundreds or indeed thousands of betting shops.

TSG will likely look to utilise its land-based poker tournaments more in the country to keep its profile up, but it will still be a big shift in operating conditions to contend with and Italy is a market it can’t afford to lose. It was 11% of international revenues in 2018 and is a market where it can really combine the advantages of its existing operation with the Sky Bet brand and betting expertise. One similar poker-driven market that looks less problematic in the short term is Spain, which was 8% of international revenues in 2018. But TSG will face increased competition there this year and you wonder if political shifts or increased lobbying from local players could throw a spanner in the works there at some point. Regulated markets it seems just aren’t what they used to be.

Regulated market issues

TSG was keen to talk up the huge increase in revenues from regulated markets for the group, stressing its strong regulatory position and the benefits that brings in terms of a barrier to entry for smaller operators and stabilising revenues. “This is the future of The Stars Group – leading market positions in fast growing regulated online gambling markets,” CEO Rafi Ashkenazi said in the results call. But not all is as it seems with many regulated markets bringing with them some element of cost and regulatory volatility. TSG noted regulatory development would cost $105m over the next two years with $85m of that in FY 2019 as Italian, Australian, Romanian and UK rises kick into gear, but rising costs are only part of the picture.

So-called stable regulated markets are becoming less predictable and subject to sudden change with regulatory pressure rising, taxes rising and acquisition and retention costs not really falling so far. Alongside this, there is the growing specter of slowing growth rates in some of the more mature markets and increased start-up costs in each and every new market the firm needs to enter. Regulated markets provide a sustainable platform for growth, but it’s not clear they present an easy one with Italy likely to be a real test case in the coming year. And it’s not guaranteed grey markets will prove a panacea to those ills.

While TSG will generate 80% of its revenues from regulated markets in 2019, the remaining 20% continues to cause some headaches in the short term. Russia is the most obvious problem market with TSG being forced to take mitigating steps around payment blocking in the latter half of 2018, and the firm also flagged up payment blocking in Norway, and removal of its apps from the iOS stores in other countries as short-term issues to contend with. This cat-and-mouse game is a regular feature of grey markets, but it is one operators can lose at times. And with Germany, Russia, Brazil, the Netherlands and others still a part of the revenue mix, there remains some volatility here for the operator. It’s an intriguing balance between being aggressive in grey markets and by the book in regulated ones, although it seems the new market leaders all have to be capable of pulling off this trick in 2019.

That really is the story of the year ahead for TSG. The regulatory and growth outlook is looking tougher than ever and there is no sense of conditions becoming easier in any of its major markets. There are several markets that could swing from bad to good and back again depending on a number of factors. TSG also needs to maintain a mature poker business, while continuing to grow emerging casino and betting ones at the same time as defending a market leading position in the UK, attacking the Australian market, integrating two disparate businesses in two different continents and launching a US sports betting business.

Nobody ever said it was going to be easy. But in an increasingly confusing international egaming market, there are arguably few better placed to cope with the pace of change.