View from the City: Would a PE buyout make sense for Flutter?

What’s £5bn worth these days? To be honest, not much, at least not when you’re in leveraged private equity. Rumours of a Flutter Entertainment buyout pushed the share price as much as 22% higher than its most recent low a few weeks ago. The share price has settled to a more reasonable two-month high, still commanding very respectable share price and roughly £5.2bn in market capitalisation.

Notwithstanding, these figures still pale in comparison with some of the larger PE buyouts on record. The largest buyout of all time remains KKR’s takeover of RJR ‘Oreo’ Nabisco (which led to the penning of the seminal book ‘Barbarians at the Gate’) at $60bn when adjusted for inflation. Add that to the buyouts of Boots, Caesars, Hilton, Dell, Heathrow and Heinz, some of the largest buyouts on record and all in excess of $20bn, and a £5bn buyout of the former PPB conglomerate may seem minuscule in comparison.

That said, an attempted buyout of one of the largest gaming operators deserves some special attention, at least in the gaming markets. First off, it’s important to understand why buyouts happen. Free from shareholder and public pressure, and importantly from any attempts to short-sell stock (see: most hedge funds in gaming today), a privately held company is more subject to internal (as opposed to macro/external) pressures to reach its quarterly targets. As a result, a privately held valuation is less volatile and susceptible to sentiment as opposed to logic.

Secondly, buyouts are a by-word for control and conquer. Witness the more famous PE buyouts and their aftermath; the board and executive team is rapidly interchanged for a more amenable team in place that is aligned with the new parent’s ambitions. This isn’t always successful. Caesar’s takeover, for example, ultimately resulted in a bad bet; the group is still operating perilously close to insolvency. On the other hand, Hilton’s takeover and subsequent facelift netted at least $12bn profit for its acquirer, making it the most profitable buyout of all time.

So, are we witnessing an emerging dynamic in gaming M&A? Hardly. The (relatively) high value of such public assets; coupled with their (relatively) negative stock perception outside of gaming makes it challenging for any would be contender to justify higher price tags than the stock market currently offers. Moreover, the larger companies would need to be significantly adjusted for what PE’s like to call ‘operational efficiency’ (a euphemism for radical downsizing), and unless stock markets and/or cultural values embrace such a dramatic acquisition. Not without the regulatory forces getting involved anyway.

Where PEs (and more pertinently, VCs) are interested is in the acquisition of small to medium privately-held operators; companies that are running at a higher efficiency (read profit margin) than their larger counterparts, are prepared to take on a good influx of risk with new products and territories, and don’t have significant resistance at board level due to the cultural alignment of the leadership team. The first wave of private investments has already begun; some very exciting acquisitions are to be announced soon.

Finally, who could be the potential buyers for Flutter? It is likely to be only a handful of usual suspects; ones that understand the risks and rewards of the gambling market, and – more pertinently – have done this a few times already in this space. That really leaves only two key players; CVC and Blackstone. May the best PE win…

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has lead investments, M&As and exits to date totalling more than of $340m