Will egaming consolidation continue unabated?

The last couple of years have seen the industry landscape change with a number of high profile transactions including the Paddy Power Betfair and Ladbrokes Coral mergers, GVC’s acquisition of bwin.party and CVC’s acquisitions of Sky Betting & Gaming, Tipico and Sisal.

There have also been a series of potentially large deals that have not taken place for a variety of reasons involving Intertain, Amaya and William Hill. A number of these companies are likely to remain firmly in the limelight as potential consolidation candidates going forward. So what is driving this consolidation?

Current drivers of consolidation

Gaming is one of the most dynamic global sectors of the world economy with operators being required to adapt to changes in the political, regulatory, fiscal, technology and payment landscapes, not to mention responding to economic and currency changes.

The underlying factors are in place to support further consolidation in the online gaming across both the B2C and B2B sectors:

Continuing pressure for scale: The cost of customer acquisition, regulatory and fiscal compliance and, for certain operators (e.g. PPB, GVC, 888), maintaining and developing their technology infrastructure increases the pressure on operators to amortise costs across a larger revenue base to maintain margins.

Geographic expansion: Where next? Whilst striving to be the local market leader might be an initial objective, operators and suppliers are seeking to take advantage of evolving regulation to be present in a number of markets.

Product expansion: Specialist or generalist? The strategic question is whether to be a jack of all trades or master of none. There is no right answer. Some specialist operators and suppliers command a very strong position in a vertical – NetEnt, Evolution and Amaya, for example – but are always exposed to the risk that their customers will want more and will go elsewhere.

Technology leadership: In egaming, the relentless drive to innovate and offer clients a complete solution means new companies emerge and incumbents often acquire to maintain market leadership. For example, we are seeing companies such as Bede emerge as a platform provider and demonstrate the ability to win tier one clients whilst traditional incumbents such as OpenBet are under pressure to invest to maintain their market leading position.

The right environment

There are other factors likely to support continued M&A activity going forward:

“Unstable” ownership: There are a number of companies owned by private equity, including the CVC investments referred to above as well as a number of Italian operators. The nature of such ownership is unstable and their investments are always available, it is merely a question of pricing.

Capital availability: There is significant capital available for investment by private equity and other funds. The move to regulation, attractive growth characteristics, plus the potential for further industry change during the investment period, and not to mention IPO as a credible exit option, has resulted in increasing acceptance of gaming as an investment sector. In addition, debt providers, both banks and alternative funds, have an increased understand of the sector and are attracted to the cash flow dynamics. They are willing to support companies and financial buyers contemplating transactions.

Transaction activity breeds transaction activity: When activity takes place, company executives, their board members and their shareholders all re-evaluate their position in the market. Confident companies want to be seen to do deals; the less confident are concerned at missing out or being left behind. For public companies, the pressure to participate can be strong with analysts looking at consolidation as merely a spreadsheet exercise and seeing the near-term equity price appreciation due to bid premia. There are many examples across numerous industries of deals being done because doing a deal was better than being seen to be inactive.

Looking ahead?

Notwithstanding the above, consolidation is not inevitable. There are many reasons why deals do not take place – pricing, personalities, imperfect opportunities and deals ultimately being far more complex than some people think. My expectation is that there will be further activity, across both B2C and B2B in 2017 but it won’t be quite the free for all that some commentators would have you believe.

George Fleet is a managing director at Houlihan Lokey, a leading global investment bank, and leads the firm’s coverage of the leisure and gaming sector.