Playtech B2B feels the Caliente heat

Entain’s first quarter, Playtech’s B2B issues, Better Collective’s M&A commentary +More

Apr 18, 2023

Good morning. First on today’s agenda, we give a quick rundown of Entain’s Q1 numbers, which gives the market a first sighting of BetMGM’s Q1 performance, before dipping into this month’s edition of Due Diligence.

This month, we take a look at how Playtech’s B2B arm might struggle should it lose the boost it has enjoyed from the strategic partnership with Caliente, a situation that might not last given the current legal tussle between the two. Even the much trumpeted new deal with Hard Rock might struggle to make up the shortfall.
Next up, gaming super-affiliate Better Collective gave some insight into its M&A past and future during its recent Capital Markets Day event. After racking up 28 deals in the years immediately before and after its 2018 IPO, Due Diligence looks at how the strategy has evolved and examines one very specific area of future M&A focus for the company – live scores.
Lastly, we take a look at recent analyst takes on DraftKings.

And, there is a reminder about the Earnings+More readers poll.

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Entain’s BetMGM boost

BetMGM enjoys a 76% boost to Q1 revenues as Entain revels in a strong start to the year.

Across the water: BetMGM’s revenues rose to $470m in Q1, in line with guidance for this year of revenues at $1.8bn-$2bn and 76% up YoY. No adj. EBITDA losses were given but Entain said the JV remained on track to deliver adj. EBITDA profitability in the second half.

CEO Jette Nygaard-Andersen was “still happy” with the direction of travel.
“When it comes to market share and medium-term targets, we’re still happy with that,” she said.
“In-play percentage of handle is growing, parlay is growing, same-game parlay is growing.”

Across the universe: NGR across the group rose 15%, or 17% when the share of BetMGM is taken into account. Online rose 16% and retail was up 14%. Gaming NGR was the standout, up 25% YoY.

CFO Rob Wood suggested the “unusual delta” in gaming was down to a variety of factors, including growth in gaming in the Baltics, a fall in German sports revenues and the addition of BetCity in the Netherlands, which he said was largely gaming driven.
He added that Germany remained the problem child, with a lack of regulatory enforcement against the black market hampering the functioning of the regulated market.
More optimistically, Nygaard-Andersen noted the recent moves in Brazil and pointed to Entain’s leading position in that country’s existing gray sports-betting market.

Funnel vision: Recall, at the start of April Entain bought live scores app provider 365scores in a deal worth up to $160m. Nygaard-Andersen said the move was in line with its strategy of “opening up the funnel” for customer engagement.

Without giving any details, she noted the business was “profitable as is” and that its current audience metrics included “very high conversion to real-money gaming”.
Stating the obvious: “Sports apps are really important when it comes to sports betting.”
Further reading: For more on the live scores opportunity, see Better Collective analysis below.

🔇 Entain share price shows a muted response to the Q1 numbers

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Playtech’s B2B profit analysis

The recent strategic partnership with Hard Rock grabbed the headlines but a look at the B2B numbers shows the company’s reliance on Caliente.

I need you: As was discussed in last week’s Deal Talk, Playtech will be hoping the deal with Hard Rock to provide iCasino platform services while also taking a single-digit stake in the business will emulate the commercial success of the deal with Caliente, although avoiding a similar legal mess.

As sources point out, such is the financial contribution of the Caliente partnership that it helps mask what is otherwise a very lackluster B2B financial performance.
According to Playtech latest annual results statement, the B2B business generated €632m of revenue and €160m of EBITDA.
However, the throughput to the free cash flow is, said one source, “incredibly poor” at a mere €49m.

The driver: While the Caliente contribution to B2B revenues isn’t broken out, it can be seen from the geographic breakdown that Mexico – the overwhelming majority of which is likely accounted for by the revenue share with Caliente, with Codere accounting for a small slug – was worth €124m in 2022.

As per the comments from Playtech CEO Mor Weizer during the recent investor day, these revenues are very high margin and pretty much flow straight through to the bottom line.
Take that away from the EBITDA figure and the rest of the B2B arm’s EBITDA figure looks anemic.
Worse, taking into account the free cash flow, it looks like ex-Caliente, the B2B business is loss-making.

Juggling balls: The legal situation with Caliente surrounding the validity of an option for the Caliplay business remains hard to call, with one possible outcome being that Playtech gets paid out of the deal and sells its 49% share of Caliplay back to Caliente.

Though Caliplay is only a part of the relationship with Caliente, as one source put it, when partnerships such as this break down it is “often the case that the client wants to get out from under the yoke”.

In that event, Playtech would likely lose the income stream from the partnership and instead would receive a one-off payment.
But with Hard Rock unlikely to be as remunerative – at least for a while – as Caliente, it would leave a hole in the B2B profit line.

Better Collective M&A

M&A was much discussed during Better Collective’s recent investor event.

Buy, buy baby: M&A past, present and future was a key subject during the super-affiliate’s marathon Capital Markets Day event held in late March. A company that has grown as much via acquisition as organically, since 2017 Better Collective has completed 28 deals worth a combined €589m.

Indeed, make that 29 and €634m with the £45m Skycon deal announced last week.
The deals have been financed through a combination of capital raises, bank financing and from cash flow, as was illustrated during the presentation.

💰 Pay the piper: Better Collective’s funding of its acquisition spree

Roll your own: CFO Flemming Pedersen made the point during the meeting that up until the US opportunity opened up for affiliates, Better Collective had been successfully pursuing a roll-up strategy of European-focused affiliates.

Big numbers: Post-PASPA, however, as can be seen, it has branched out both geographically and in terms of product areas.

$21m October 2019 deal to buy 60% stake in RotoGrinders.
€34m February 2020 deal to buy esports media group HLTV.org.
€44m October 2020 deal to buy paid media group Atemi.
$240m May 2021 to buy US sports-betting media group Action Network.
€105m April 2022 deal to buy esports media group Futbin.

The multiplier: Pedersen gave an example of why Better Collective’s record on acquisitions stands up so well. Pointing to the €9.6m deal for Soccernews.nl in the Netherlands in September 2021 he said that after moving the business to the Better Collective tech stack, increasing the frequency of content and taking over all the commercial dealings it had multiplied revenue by 5x in 18 months.

After 28 deals, Pedersen noted, Better Collective had “built up a big knowledge base on how to do it and also how not to do it because everything is not successful”.

That was then, this is now: CEO Jesper Søgaard laid out what Better Collective is looking for now in an acquisition, which he then broke down into three elements:

A big audience
High proposition of traffic coming direct to the brand
A high level of engagement with that brand.

“When we can tick those boxes, and if it relates to any shape or form of sports, then we’re interested,” Søgaard said. “That’s the kind of brands where we believe we, as owners, will be able to monetize them better and grow that audience, enabling further investments into the business.”

The big sky: Better Collective’s M&A plans need to be viewed from the perspective of its overall efforts to reposition itself as a digital sports media play. Hence, the move for Skycon, which adds display advertising expertise to the mix.

“We would likely still buy an affiliate company but it’s likely not to be the first priority going forward,” said Pedersen.

Keeping score: One area where it sees a gap in its own offering is in the area of live scores. This has been the scene of some activity just recently, with Entain buying 365scores for up to $160m.

It can be speculated that Better Collective might well have been involved in the bidding there.
The number one app in that market is LiveScore, which itself was subject to a £50m strategic investment from private equity group Ringier in September last year.
Other globally renowned live score apps include Flashscore, which is owned by Czech publisher Livesport, which also owns the live score data provider Enetpulse.
Another is OneFootball, a privately owned German sports media company, which in February announced a raft of redundancies following an unsuccessful push into Web3.
Also given a namecheck by sources were Sofascore, a Zagreb, Croatia-based company, and FotMob, based in Norway.

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Analyst takes

DraftKings: New state launches “keep getting better”, with Ohio and now DraftKings’ home state of Massachusetts showing what the analysts at CBERE suggested are better-than-expected customer acquisition and revenue trends in Q123.

In response, the team has increased their revenue estimates for the quarter.
But, at the same time, the accelerated customer acquisition means the team have also widened their adj. EBITDA forecast.
Still, they believed the extra spend is merely a pull forward from Q2, so doesn’t affect the 2023 outlook.

Massachusetts: Staying with DraftKings, the team at EKG noted in its monthly Sports Betting Monitor that DraftKings “appears to have come out strong” when Google search trends are analyzed.

Notably, it appears for once to be in with a shot at usurping FanDuel as the number one sportsbook in the state.

Calendar

Apr 19: Las Vegas Sands

Apr 25: Boyd Gaming

Apr 26: Kindred, Kambi, Churchill Downs earnings

Apr 27: Churchill Downs call, Evolution, Betsson, GLP

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