Splash the cash: The M&A wave that shows little sign of subsiding anytime soon

If one word had to encapsulate the online gambling industry this past decade, ‘consolidation’ would be many people’s choices. And right now, the M&A wave is picking up speed once again with the value of all major deals in the past 12 months alone amounting to more than $15bn (£10.9bn), driven predominantly by the clamour to seize market share in the biggest opportunity the industry has ever experienced: the US sports betting gold rush. This total would have been markedly higher if MGM Resorts’ takeover bid for Entain at the turn of the year had been successful. As it turned out, Entain spurned the advances of its US partner in the BetMGM joint venture, insisting the $11.1bn offer significantly undervalued the company and its prospects.

Since then, acquisition-hungry Entain has itself ploughed ahead with acquiring Baltic-focused operator Enlabs and Seattle-based esports betting platform Unikrn, yet it does seem – to borrow betting parlance – an odds-on chance that MGM takes another run at the FTSE 100 business. “I think there is no question that MGM buys Entain; it’s just a matter of time,” asserts Jason Ader, CEO of SpringOwl Asset Management.

MGM’s CEO and president, Bill Hornbuckle, played things down during the casino giant’s H1 earnings call in August, insisting in a response to an analyst’s question about M&A plans that its strategy doesn’t rely on one other company (Entain). He added that MGM would “continue to look” by adopting a “disciplined” approach.

If MGM plans to go in again for Entain, it will be trying to acquire a company that has seen its share price climb around 70% since just before the initial offer and has a market cap of £11.5bn at the time of writing. “MGM have a big balance sheet and evidently don’t want to do things incrementally,” says Evan Hoff, the founder of Velo Partners and who specialises in venture capital, private equity and fundraising in igaming.

“They seem to suggest in recent board calls that they won’t be back for Entain, but they obviously want a big bite and there aren’t many of that scale, so one assumes they’ll be back.” While keen industry observers wait to see if MGM tables a more tempting bid, rival US operators haven’t exactly been sitting on their hands of late.

For starters, Penn National Gaming (PNG) announced on 5 August it had acquired Score Media and Gaming (theScore) for $2bn in cash and stock. Three days later, cash rich DraftKings put its financial firepower to good use by snapping up Golden Nugget spinoff Golden Nugget Online Gaming (GNOG) in an all-stock transaction worth about $1.56bn.

These deals came hard on the heels of Bally’s £2bn merger with UK-listed online casino and bingo operator Gamesys Group, not to mention Bally’s acquisition of betting platform Bet.Works and bolt-on buys involving DFS firm Monkey Knife Fight and free-to-play specialist SportCaller. In addition, Flutter shelled out $4bn to up its stake in US sports betting leader FanDuel from 57.8% to 95%, while Caesars completed its takeover of William Hill in April.

The past year has certainly not been uneventful. “It’s very much an old-fashioned landgrab with companies consolidating for the purpose of access,” says Ader in relation to the US. As things stand, there are 26 states plus the District of Columbia (DC) with legal sports betting options, while another six states have passed legislation. It means 60% of American adults reside in a jurisdiction where sports wagering is legal.

But are companies overpaying when it comes to M&A for a slice of the action? “Definitely some companies have overpaid, and we’ll know who did several years from now,” suggests Adam Small, director of affiliate marketing at Better Collective Tennessee. “There’s just no way all of these bets are going to pan out.

“But being aggressive on these kinds of things is really the only way to be in the game here in the US.” Likewise, Ader believes prices have been “too high”, yet he says the infamous report published in June by short-seller Hindenburg Research into SBTech’s practices “spooked everybody” and that was the beginning of a correction. “The prices are high relative to revenue and lack of profits, but the prices are better than where it was six months ago,” he remarks.

“But, in my opinion, there are still pretty high significant premiums being paid. On the other side, the barriers to entry are very high. It is getting harder and harder to come into the US market.”

Jason Ader, SpringOwl Asset Management

Covering all bases

For DraftKings, which anticipates $300m in synergies by eliminating GNOG’s third-party platform costs, the purchase is mainly about targeting a different type of gambler and demographic. DraftKings’ users skew heavily male, while almost 50% of GNOG’s customer base is female. Up until now, much of what DraftKings achieved with online casino since branching out into the vertical in December 2018 has been down to cross-sell from sports betting and DFS. The Boston-headquartered operator revealed earlier this year that 57% of its sportsbook customers in 2020 had placed an igaming bet in New Jersey, Pennsylvania and West Virginia.

Having a successful, casino-first brand like GNOG in its portfolio is a significant boost. “Golden Nugget has done a great job for years building a casino-focused user base and a casino-centric product,” says Small. “They’re probably the most successful US company at doing that and can help DraftKings reach more customers and add revenue on that side of the business. Golden Nugget was also not getting anywhere with its sports betting product and was really at risk of not being able to sustain its position if it continued to lag on entering new states. [It] just seems like both of them will be better off after this deal; it really made a lot of sense.”

Similarly, Eilers & Krejcik Gaming (EKG) agreed with much of this sentiment when the deal was announced. The analyst firm described it as “a defensive hedge against the ascendancy of BetMGM” and the impending rise of Caesars, PNG and FanDuel, all of which are “only scratching the surface of casino customer database potential”.

While the acquisition was widely applauded for the way in which both brands will complement each other, there were certainly more question marks surrounding PNG’s purchase of theScore. Especially the sum involved. “It’s a fantastic strategic asset with great strength in Canada, but the price feels very expensive to me, pointing to a perceived scarcity of these ‘top of funnel’ customer acquisition assets,” says Hoff.

With its sports news and live alerts, theScore is the number one sports app in Canada and the third most popular sports app in North America, PNG said when announcing the acquisition. Expanding into sports betting with theScore Bet (live in New Jersey, Colorado, Indiana and Iowa) hasn’t been plain sailing for the Toronto-based outfit.

The company still holds a minute share of the market in New Jersey two years after its debut, while theScore Bet racked up a C$2m loss in NGR during its fiscal Q3, capping seven consecutive quarters of losses. That said, theScore is expected to be a far more serious player in Ontario now single-event sports betting is legal there (previously accumulators) and what is Canada’s most populous province is set to allow private companies in to be licensed and compete alongside the lottery’s sports betting offering, Proline+.

TheScore is also expanding into igaming and plans to at least double the number of US states it is now present in over the course of the next 12 months. PNG’s acquisition of theScore came 18 months after PNG acquired a 36% stake in sports media platform Barstool Sports for approximately $163m, resulting in the launch of the Kambi-powered Barstool Sportsbook. And you could argue that this deal, which valued Barstool at $450m, now looks pretty cheap in comparison. PNG’s recreational-centric betting brand fronted by divisive Barstool Sports founder Dave Portnoy is now live in seven states after quietly launching in New Jersey at the end of August. The target is 10 states by the end of the year.

However, Barstool Sportsbook has produced a “lacklustre” performance in the US judging on states’ monthly revenue reports after making a promising start. This can be reversed, of course, and this NFL season could be a crucial period for the brand. Barstool and theScore have very different audiences, although there will be some overlap.

And PNG’s latest acquisition means it will have access to two major media content platforms with massive user bases to aid with customer acquisition, and at attractive CPA rates. It is a “powerful ecosystem”, the firm insisted. “It’s another big bet by Penn National that proprietary media outlets can put them in a winning position in the US market,” says Small. “How successful this strategy will be is very much to be determined, but Penn has made clear where they want to plant their flag.”

In the house

A key reason for US operators gobbling up online firms is to get their hands on proprietary technology. This was highlighted by DraftKings when unveiling the GNOG deal, and what drove DraftKings to devour SBTech in a three-way merger with a special purpose acquisition company (SPAC) to develop its sportsbook internally. It’s also partly why Caesars swooped for William Hill and why PNG is buying theScore. Besides delivering a projected $200m+ in medium-term adjusted EBITDA, rising to $500m+ in the long term, Jay Snowden, PNG’s CEO, said the transaction “provides us with a path to full control of our own tech stack”.

The operator suggested the acquisition would lead to greater control over its product development roadmap, reduced costs, an enhanced customer experience, and reduce expenditure on third-party technology and service providers. TheScore is bringing its risk management and trading in-house, overseen by newly hired ex-Ladbrokes and Hong Kong Jockey Club exec Patrick Jay, and is rolling out an internally built PAM and promotions engine. One of PNG’s presentation slides to explain the rationale behind the deal also lauded theScore’s “fully integrated media/betting solution”. There was an important caveat, though, as the small print read: “Currently in development.” The admission prompted Eilers & Krejcik Gaming senior consultant and eternal cynic Alun Bowden to sarcastically tweet: “This goes right into my top 10 for presentation slides.”

Even Kambi’s phlegmatic CEO, Kristian Nylén, couldn’t resist having a dig at theScore’s capabilities in a statement responding to PNG going down the in-house route when he said: “The entity they have acquired has yet to develop a proprietary sportsbook, and certainly not one to a similar high standard as what we offer.” That said, PNG surely won’t be the last company to bring as much of their offering in-house in a bid to compete in what is already an almighty tussle for supremacy at the top.

Therefore, those companies not reliant upon third parties for their sports betting platforms will become increasingly coveted assets as consolidation further shrinks the pool of standalone businesses. For example, one potential target is Australia’s PointsBet, which from its US base in Denver operates on a proprietary platform in seven states and has its unique Points Betting proposition (similar to spread betting). The ASX-listed company also beefed up its in-house and in-play betting capabilities with the $43m acquisition of Ireland-based Banach Technology in March. Fellow tier-two firms like Betsson, Betfred and Betway have toeholds in the US and their own tech.

888 is another possible target, as the FTSE 250 operator boasts a proprietary sports betting platform and internal risk management and trading following the purchase of the defunct BetBright business in 2019 for £15m. In hindsight, this was an absolute bargain. Besides a strategic partnership with Sports Illustrated, 888 also has solid in-house-built casino, bingo and poker capabilities.

Indeed, the word around the campfire earlier this year was that Las Vegas Sands (LVS) was considering acquiring 888 to accelerate its digital ambitions following the death of founder, CEO and fierce online gambling critic Sheldon Adelson. Nothing has transpired so far, however. Ader says that despite LVS being “way behind”, the business now has “very smart” people at the helm, and he expects “interesting announcements” to materialise in the next 12-18 months.

“All opportunities are on the table [as] they have the size and cash to buy anybody. I think it will be a case of whether the prices make sense.” That doesn’t mean LVS has to engage in M&A to make up ground, Ader adds. “It makes it faster, but I don’t think that they do [have to acquire a company]. They have the ability to develop from within.” Another company with lofty online ambitions is Wynn Interactive, the digital arm of Wynn Resorts that is poised to go public through a $3.2bn reverse merger with a SPAC. The operator’s WynnBET online sportsbook is live in seven states and management has pledged to spend $100m on marketing this NFL season alone.

Wynn itself absorbed fairly unknown social betting start-up BetBull last November, creating Wynn Interactive. Craig Billings, Wynn Interactive’s CEO, told Bloomberg in late August that Wynn was “open-minded” to M&A and that, for now, he was waiting to see how the US develops. You also can’t rule out a company the size of Caesars adding another operator to its shopping basket.

With sports betting operations in 17 states plus DC and the debut of its new sportsbook app running on Hills’ tech, Caesars has vowed to embark on a sports betting blitz by spending $1bn+ over the next two-and-a-half years to attract new customers. That’s the cost of playing catch-up. “Caesars has a history of being late to the party a lot, not just online but in land-based as well,” says Ader.

Euro vision

Consolidation across the pond will inevitably alter the landscape here in Europe. For a start, Caesars put William Hill’s UK and European assets up for sale, and just as this magazine was going to press, 888 won the race for those assets, beating off competition from Apollo Global Management and Tipico owner CVC Capital Partners. 888 paid £2.2bn for the non-US part of Hills, creating a “global gaming leader”, 888 said. This means Caesars recouped more than two-thirds of what the casino giant paid for William Hill.

It had been thought that 888, which aims to achieve pre-tax cost synergies of at least £100m per year through the acquisition, would offload William Hill’s 1,400 shops. However, 888 indicated its commitment to the shops when the deal was announced by highlighting the omni-channel opportunities retail offers, as well as a cost-efficient way of acquiring first-time depositors.

With William Hill having been around since 1934, its heritage and brand, as well as two million active online customers, make it an attractive proposition. As does its standing in Italy and Spain, as well the group’s Malta-based Mr Green subsidiary for access into the Nordics.

As for 888’s main European rivals, Kindred Group hinted earlier this year at additional acquisitions, although you have to go back to 2017 for the company’s last significant B2C deal: the purchase of 32Red for £176m.

Meanwhile, Entain is sure to forge ahead with its tried-and-trusted bolt-on acquisition playbook in regulated markets, even if the board caves into the overtures of MGM Resorts and accepts an increased bid. “Entain, especially under [ex-CEO] Kenny [Alexander], was an M&A machine, but they backed it up with very strong execution,” Hoff notes.

Then there’s Entain’s main public rival, Flutter Entertainment, which today has a market cap of £26bn. The Dublin-headquartered heavyweight’s appetite for additional M&A could intensify, especially if the coffers are further swelled by the potential IPO of FanDuel. As for the other European titan, bet365, the privately owned operator stated in no uncertain terms in its New York sports betting licence application that it has no intention of getting involved in M&A.

“We have no plans to sell the company, merge the company, or take the company public… [there is] very little likelihood of a merger or acquisition resulting in the loss of our licence,” the firm wrote. Indeed, bet365 has never acquired another online operator in its 20-year history.

European online gambling remains particularly fragmented, though. Flutter holds (only) a 14% share (all verticals) in Europe, according to Eilers & Krejcik Gaming estimates, while there are hundreds of gaming brands with <1% market share. It is a different story in the US where EKG estimates that the top three brands – FanDuel, DraftKings and BetMGM in that order – have cornered around 70% of the market nationally. Moreover, Eilers & Krejcik Gaming estimates that FanDuel controlled close to half the online sports betting market in New Jersey in May based on GGR. That’s a state with 20 online sportsbooks. Colorado’s count is even higher at 25 digital betting options despite its population being a third less, yet DraftKings seized an estimated 32% share of the market in May based on GGR, data showed.

The need to achieve scale and compete, which BetMGM has done organically after a slow start, and solidify strong positions means further M&A is inevitable. And especially if more states legalise igaming. For instance, it was an open secret a few months back that DraftKings was sniffing around poker operator Run It Once Poker.

Having a standalone, in-house-built poker product gives DraftKings a leg up if more states legalise the game. “I think there is going to be more consolidation over time,” Ader asserts. “There is a big competitive advantage to being bigger, not just for access, but it does reduce your customer acquisition and customer retention economics. So, I expect more deals [and] more consolidation.”

With the long-term TAM in the US pegged at anywhere between $30bn and $40bn, depending on who is doing the forecasting, the latest M&A wave could end up being the largest so far. Small says: “I wouldn’t be at all surprised if five to 10 years from now, many of the big online-only operators in Europe have been swallowed by US firms, whether casino firms or otherwise.

“I don’t really think bet365 will get bought anytime soon, and Flutter would be tough to pull off, but I feel like most of these other European firms could easily get swallowed. Think Unibet, Betway, Tipico and 888.” He also believes MGM will take another run at Entain, “or Entain will buy MGM”.

“It just makes too much sense that it should happen, one way or the other. These guys need each other.” For Small, M&A generally tends to boil down to this point: “When staying in the game requires the ability to raise funds, many companies will simply get swallowed up by a bigger fish.”