M&A: making the stars align

As consolidation in the industry continues apace, M&A processes can become frenzied. The buyers who combine capital to deploy and adopt an agile commercial approach with clear redlines around legal and regulatory risk generally emerge as the successful acquirers.
Over and above deal considerations, which apply regardless of the sector, the gambling industry has some distinctive features in terms of risk and this article highlights some of the key legal and regulatory issues which buyers of a B2C gambling operator should focus on when putting a transaction together.

Regulatory consents – with operators typically holding multiple regulatory licences, plotting a way through any approval process is critical. No one is keen on the uncertainty that a long gap between signing and closing creates, so establishing what is required at an early stage and agreeing an engagement process with regulators has the advantage of aligning expectations and expediting completion of the transaction.

Regulated versus unregulated revenues – there continues to be a divergence of views over how to value regulated and unregulated income streams. However, it is important not to overlook key differences in the regulatory risk rationale of your existing business and that of the target business and to give consideration in that context to:
• the sustainability of .com revenues in the context of the applicability and enforceability of local laws;
• restrictions imposed by key suppliers or “home” regulators;
• market closures which may be required based on the location of personnel and equipment of the enlarged group; and
• the impact of the current or historic approach of a target business towards certain markets on suitability for licensure in the future.

Technology ownership – it is not uncommon to find that operators that assert they have proprietary technology do not always have the rights they think they do. Where development is outsourced, it is key to vet the legal agreements to validate ownership.

Key supplier arrangements – synergy planning often focuses on rationalising the number of suppliers across an enlarged B2C group. Over and above their economic terms, agreements with platform and content providers are often complex and must be looked at in the context of exclusivity, change of control and termination.

Compliance – the increasing complexity of regulation (whether directly related to gambling or in areas such as AML, data privacy and advertising) together with more regular regulatory interventions means that compliance should be a key focus of any diligence exercise. Regulators have recently shown a willingness to hand down tougher sanctions so unearthing any skeletons in this area may be crucial.

Brand protection – fast growing businesses often do not have time to focus on protecting their brand in the context of future international expansion (for example in newly regulating markets). Some relatively simple and early checks can help uncover any major gaps in a trademark portfolio and the potential for registration.

Talent incentivisation – as with other creative and tech-focused industries, acquisition structures involving B2C gambling companies often need to cater for the retention of founders or key management. Earn-outs and long-term incentive plans are often used to deal with this, but the real trick is ensuring that the KPIs by which performance is measured align the interests of the acquirer and the talent within the dynamic nature of the sector.

Although deal pricing and cost savings are often the first gating items in establishing if a potential deal for a B2C operator has got legs, the legal and regulatory issues highlighted above shouldn’t be too far behind if you want the stars to align.

David McLeish is a partner and a member of Wiggin’s Corporate and Betting and Gaming groups. He advises clients on a full range of corporate and commercial matters, principally across the gambling and technology sectors, as well as providing general strategic advice.