Big Debate: Will industry consolidation slow down significantly in 2023?

Yes

Ben Robinson, co-founder, RB Capital 

M&A activity typically declines in both cadence and quantum in a recession. Conservatism ushers in and deals are paused or jettisoned for fear of being over-leveraged in a weak economy. Despite markets rallying (at the time of writing) to the news that the Federal Reserve will slow interest rate hikes, we must be cognizant of the Fed’s intention to lower inflation.

Jerome Powell, the Fed’s chair, has insisted that loosening monetary conditions prematurely would be a mistake. Expect “higher (interest rates) for longer”. This rhetoric and several indicators outlined below point to a recession. However, unlike previously, we may not be saved by the familiar whirring of money printers due to the risk of hyperinflation.

First, yield curve inversion (long-term interest rates < short-term interest rates) is a leading indicator of a recession; we’ve been in negative territory since October. Second, the last five instances of negative yields have led to recessions.

Also, despite a strong labour market, the recent spate of staff cuts in big tech is likely just the beginning of a sharper rise in unemployment. Soaring inflation has stymied consumer spending, directly impacting earnings reports and fuelling a decline in global stock markets. Finally, at no point in modern monetary history have we witnessed inflation over 5% without a subsequent recession.

Expect adverse earnings reports to be the narrative of 2023 and, if this is the case, it will likely hold us in a structured bear market until at least Q3 2023. A recession is imminent and quantitative tightening/high interest rates don’t make for a conducive M&A setting.

But igaming is recession-resistant and while gaming will continue to perform better than other sectors, curtailed consumer spending will have an impact. Nevertheless, I must concede that businesses and private equity groups that buck the trend will reap the rewards, as these conditions offer fantastic medium to long-term ROI opportunities.

No

David Isaacson, SVP, Spectrum Gaming Capital

We are not likely to see a slowdown of industry consolidation across digital gaming in 2023. After four years of market expansion of sports wagering in the US, we can make a distinction between operators that have a long-term future in the business and those that are on less solid footing.

Since the stock market valuations of digital gaming operators have cratered, there is a growing sense of scepticism from the investment community and industry observers alike as to how operators can run a profitable business focused on sports wagering. In mature European markets there are also areas for concern, specifically around ongoing ‘re-regulation’ of digital gaming in countries including the UK, the Netherlands, Finland and Germany, among others.

This creates business uncertainty for operators and suggests that continued industry consolidation is likely to occur. Consolidation typically happens in two ways. First, due to an uptick in M&A and, second, because of a downturn in the business cycle.

As 2022 comes to an end, we are seeing consolidation due to both catalysts. Sports wagering upstarts MaximBet and FuboTV recently announced they would cease their sports wagering operations.

Meanwhile, land-based gaming conglomerate Churchill Downs rebranded BetAmerica (a sports wagering brand) to TwinSpires (a horseracing brand) and entered a partnership with FanDuel across all of its digital lines of business.

In the US, FanDuel, DraftKings and BetMGM are by far the dominant players across sports wagering and online gaming market share (~70%+). Such an unbalanced competitive environment makes it extraordinarily difficult for second- and third-tier operators to operate with scale, much less generate meaningful profit.

Therefore, I project the aforementioned market dynamics will continue to spur the continuing consolidation across the industry.