Upwardly mobile: Inside Aristocrat's plan to become a mobile gaming giant

You would be hard pressed to find a better bit of business than Aristocrat’s acquisition of Product Madness back in November 2012. The Australian giant paid a total of $27m including earn outs, and the returns have been nothing short of colossal. The firm is now one of the five largest social casino developers in the world, and has annual revenues around eight times the original $27m paid. In Q2 2017 alone, its revenues were $55m, more than double the acquisition price, while Eilers & Krejick Gaming estimate the business is worth around $1bn, based on peer group multiples and recent M&A transactions.

And given that success, it’s hard to begrudge Aristocrat re-entering the M&A fray. After all, it’s been vocal about its position as a growth business, and has been scanning the international market pace for another big deal for the last 12-24 months. In August, it finally found a suitable target, and closed the half billion dollar acquisition of Israeli mobile games developer Plarium.

But can the supplier giant repeat the Product Madness trick and pull similar surplus value out of a more mature business, in a more mature market, where the synergies are far less obvious? Similar revenue-to-cost rations will be hard to match, given the price of $500m in cash upfront, with earn-outs after 2017 and 2018 respectively, based on 10x last 12 months EBITDA less previous considerations already paid.

The price implies a multiple of 10x EBITDA, which comes in at the upper end of recent comparisons, including Double Down Interactive ($825m deal at 10.5x EBITDA), Big Fish ($835m at 8.4x EBITDA), and King Digital ($5.9bn deal at 6.7x EBITDA).

The right price?

Social casino analyst Adam Krejcik suggested it would be “incredibly challenging” for Aristocrat to replicate the same success it has enjoyed with Product Madness, where the parent company’s slot titles powered the Heart of Vegas app into numerous bestseller lists.  Krejcik, for instance, points out the high multiple, Plarium’s “unusually low” level of revenue per employee ($167k, compared to $1m for Product Madness), and “stark differences” in audience for social casino and strategy players.

“The demographic profile of a social casino player is female and 45+ years old, while RPG/strategy [Plarium’s focus] tends to be male dominated and under 45 years old,” Krejcik says. “This will make cross-marketing and promotion between Product Madness and Plarium very difficult.”

And he’s probably right. Luke Bortoli, Aristocrat’s GM of strategy and investor relations, tells EGR NA: “There isn’t really a story here about synergies. The two sectors do have different player demographics and game mechanics, and even different genders that play those games. This transaction is about growth and expanding our addressable market.”

Specifically, Aristocrat is eyeing the $40bn mobile and web-based games market – some 10 times the size of the social casino sector – and sees Plarium as a “beach head” to attack that market. “Plarium provides Aristocrat with an ideal entry point into the high value, fast growing social gaming sector, initially in strategy and RPG and then potentially other areas,” he says.

That said, Bortoli dismisses any idea Aristocrat is getting into an alien business, pointing out that the operational aspects of the companies are broadly aligned. “There’s scaling the games, managing the games, there’s the same KPIs around active users, registrations and, monetizations,” he says. “So we don’t see any issues there. There are similar issues about differences in customer base in social casino with more females playing slots and males playing poker, so we just see the new audience and sector as diversification for us.”

Diversification

So why Plarium in particular? According to Bortoli, Aristocrat was searching for several key attributes, with a “portfolio approach” top of the list. “We wanted a company with a diversified selection of games rather than just one title. Plarium had several games currently monetizing in the market, in a number of segments,” he says.

These include Throne: Kingdom of War, Stormfall: Age of War, and Soldiers Inc. The jewel in the crown though is Vikings: War of Clans, which is estimated to make up more than 50% of Plarium’s $200m revenues. The game ranked inside the iPhone top 100 grossing games for all but a handful of days in 2016, and stayed in the top 100 until March 2017, where it began to slightly decline. As of September 5 2017, it was 161st in the US top grossing charts, while still ranking 13th in Russia, 36th in Germany and 66th in the UK, more than two years after launch.

Secondly, Bortoli says Plarium took a similar approach to game design as Aristocrat, with a focus on segmentation, analytics and targeting high-value players, while the Aristocrat M&A team were impressed by the Plarium management team itself and its obvious aspiration to lead the market.

“They ticked all the boxes, and we’re very happy with the investment case” says Bortoli. He points out there are also some ancillary benefits for the wider business, with Plarium lending Aristocrat some new exposure to European customers and a base in Israel, which is “quickly becoming a fairly important hub for mobile games development,” according to Bortoli.

Light touch

Indeed such is the confidence in the Plarium team, that Aristocrat plans to pretty much let them get on with it in the short term, with CEO Avraham Shalel staying in his role along with his management team. “We’ve told the market we see this as a new operating line within the business,” Bortoli says.

“We won’t be integrating the business heavily and the focus is on supporting their growth plans. We will be supporting where we can and providing financial and resourcing support. There really isn’t a story about integrating it into the core business. Over time we see our social games platform being a new growth division which will stand alone from our existing land-based and social casino businesses.”

And that longer term plan will also see Plarium stretch its wings beyond its current strategy/RPG focus, where the market is valued at around $22bn annually, to the wider market, including action/adventure and shooters, thought to be worth another $18bn annually.

While Aristocrat will be taking a relatively passive role in this expansion, it will be lending its unique firepower (H1 revenues of $1.05bn and net profit of $200m) should it be necessary. This starts with distribution and resources, but as Bortoli puts it: “We see Plarium as a platform to advance into the wider sector, and as an unashamedly growth business we put a lot of effort and resources into investigating new growth pathways, both inorganic and organic. As we’re looking at new market segments like action, there will always be the option for a deal if that provides the highest chance of success.”

Bortoli clarifies that any acquisitions would be in the wider space – action for instance, rather than more of the same in Plarium’s strategy/RPG sphere. The opportunities and the rationale behind the deal are obvious then, but it also raises another question. Does it mean that Aristocrat sees limited room for growth for its Product Madness business in the rapidly maturing, and arguably mature social casino industry?

The Heart of Vegas coffee shop at Product Madness’ London office

Eyes on the prize

Not necessarily. Product Madness saw estimated Q2 revenues reach $69m, up 29% year-on-year and good for fifth place in the social casino sector. FY17 revenues are projected to hit $291m, good for 31% growth. The figures also means it is taking market share with the wider market growing at a little under 15%. Bortoli admits the sector is indeed maturing but adds: “Our land-based business has a track record of taking market share even in flat markets, so we’re confident about doing that here.”

Enter Product Madness. The developer’s success since the Aristocrat acquisition was built on the House of Vegas app (circa 80% of revenues), which repurposed Aristocrat’s slot titles for a social casino audience and topped grossing charts around the world, while more recently the firm has focused on producing a more “complete experience” with Cashman Casino. That means a wider variety of games while trying to mimic a real casino experience with a lobby and more experiential gameplay. The new app also offers a little more room for experimentation, with Product Madness using live and non-player invasive testing to analyze what’s working and what’s not. “Experimentation is built into our DNA,” says Francesca Noli, VP of marketing and UA at Product Madness.

Like House of Vegas, Cashman also benefits from the Aristocrat relationship, with Noli saying: “Cashman was created to showcase the variety of content from Aristocrat, including some VGT games, steppers, progressives, classics and new games alike, with a slightly greater focus on content which is popular in US-based casinos today.”

Noli argues it is this type of content that’s driving what analysts estimate to be one of the highest average revenue per daily active unique (ARPDAU) in the industry. “Games like Lighting Link, the Walking Dead and Buffalo are among the best performing and most iconic casino game titles around the world, so it’s little wonder that we see a link between performance on the floor and performance in digital,” she says.

A screenshot from the Cashman site

Blue ocean

Beyond Cashman, Product Madness also has its sights set on more geographic diversification, with Asia a particular focus after the termination of the FaFaFa Slots JV –  launched in Asia in 2015 in partnership with Chinese arcade games provider IGS.

“We ended that partnership by mutual agreement earlier this year,” Noli confirms “Since we entered into that agreement in 2014, our social digital business has grown significantly. We’re now pursuing a multi-app strategy supported by in-house publishing and developing.  We’ve also proven our market-leading Asian themed content in the social gaming channel, so it’s a natural progression for us to focus on developing a proprietary app which we are doing. We are expecting to launch an Asian themed app by the end of this calendar year, and we’re really looking forward to that.”

And of course, as you would expect with Aristocrat, M&A is never off the table when it comes to tackling growth markets. Noli pointed out the sector is continuously evolving and Product Madness as a result is continuously evaluating “inorganic strategic initiatives on a global level.”

And for those questioning where Plarium can really benefit from the Aristocrat takeover, Noli points out that the support of the parent company extends far beyond content. “Aristocrat has been incredibly supportive of our ambitious growth plans and their commitment has literally powered our progress, while allowing us to run mostly as a standalone business,” she says. “We have key offices in both London and San Francisco, where we can recruit some of the best talent both in games and social casino.”

In short, Aristocrat lets talented and passionate people continue to do what made them successful in the first place, while providing the resources for them to do it on a much larger scale. By all accounts it’s going to be a similar approach for the Plarium business, and although the synergies aren’t as obvious there’s no reason why the Australian firm can’t carry its social casino success into the broader mobile games sector. And with a $43bn market as the opportunity, the $500m entry fee may end up looking like yet another bargain.