Is the industry set for a new wave of mega-M&A?

Who can honestly say they saw last week’s Flutter Entertainment/Stars Group announcement coming? It’s pretty rare these days for the national or trade media not to break a story as big as this first. When industry giants such as Flutter and Stars are in negotiations, leaks are inevitably difficult to quell.

So kudos to all parties involved for keeping the deal so tightly under wraps – although the signs were possibly there all along. The Sunday Times reported back in January the two giants had held talks that had since fallen through, while Stars made sweeping redundancies in Malta and the Isle of Man. And of course there was that strange surge in Flutter’s share price back in July.

The last few months have been relatively quiet with regards to tier-one industry mergers. Sure, we’ve seen plenty of deals being announced this year, including the Paddy Power owner itself which took a controlling stake in Georgian operator Adjarabet back in February. William Hill also completed its acquisition of Mr Green towards the start of 2019 and there have been many other examples of smaller operators selling up to their larger counterparts.

However, the makeup of such deals differs substantially to industry mega-mergers we’ve seen in the past like Paddy Power and Betfair, GVC and Ladbrokes Coral and, most recently, The Stars Group and Sky Betting & Gaming (SBG). Indeed, the rationale behind the smaller recent transactions was more about technology and geographic diversification than it was about building scale, mitigating margin erosion and finding synergies.

A lack of mega-mergers – in the UK at least – is not really a surprise. The likes of William Hill, GVC, 888 and Rank have in recent months been trading at near five-year lows on the London stock market ever since their share prices nosedived last year. With stock so cheap and cash deals largely out of the question due to the size/cost of acquiring a rival operator, the financial climate has hardly been conducive for multi-billion pound deal making.

Wheeling and dealing

Could this be about to change though? Flutter’s merger with the PokerStars and SBG owner would seem to make this far more likely.

Firstly, the markets largely welcomed the news with Flutter’s share price soaring approximately 20% following the announcement, albeit the price did level off throughout the week. In addition, a combined Flutter/Stars will be approximately 3.5x net debt to EBITDA – GVC is just under 3x – suggesting the markets are now more receptive to higher leverage in the near term.

The last few months have also seen the share price of all the aforementioned UK-listed companies begin to creep back up once again, potentially shortening the odds on another all-paper transaction taking place soon. However, Flutter had long been in a more robust position to explore potential merger talks given the Dublin-headquartered firm had been trading more strongly in 2019.

Lastly, but arguably most importantly, Flutter and Stars merging is simply a game-changer for the industry. If the deal does indeed clear the regulatory hurdles, the combined group will become the biggest online gambling operator in the world based on the proforma revenues of £3.8bn it would have recorded last year (approximately 30% higher than bet365), while the sheer breadth of its brand portfolio and reach into the US market will be unrivalled. It will certainly make next year’s EGR Power 50 rankings very interesting at least.

This could well force rival operators to follow in Flutter’s/Stars Group’s footsteps. But who are the likely M&A candidates? GVC is clearly the favourite given its long track record. The online gambling juggernaut has spent much of the past year integrating Ladbrokes Coral into the business and with much of the heavy lifting with Playtech now done, it could well be the right time to explore merger talks once again. CEO Kenny Alexander last year alluded to the fact it would be at least 12 months before it would look to complete any big M&A deals.

Would GVC shareholders be supportive of another mega deal in the very near term if it significantly raised debt levels though?

Meanwhile, the likes of William Hill and 888 (which have tried to tie the knot on a number of occasions) will also be strong contenders, although any deal considered by either firm would likely include a significant US flavour.

Whether we do see another round of mega-mergers is by no means a certainty. What is clear, however, is that the rationale for tier-one operators to do so remains as compelling as ever. Regulatory and margin pressures aren’t going anywhere any time soon.

The above article is an extract from the cover feature of EGR Intel 186