Second quarter notches up $2.8bn of deals

Transaction tracker details for Q2, what to expect from the second half of 2024 +More

Jul 11, 2023

Welcome to the latest Deal Talk. In this issue we take a look at the activity in the past three months as well as run the rule over the potential activity that might take place later in the year.

Quarterly review: Deals are still being done within the sector despite clear signs of stress when it comes to financing.
Strategic reviews are ongoing at Kindred and IGT, which points to where we might see activity in the second half.
Meanwhile, analyst talk continues to suggest MGM and Entain will have to resolve the ownership of JV BetMGM one way or another.

You've got to spend money to make money.

Q2 review

Deal flow continued into the second quarter with the highlights including Entain’s bid for STS and Fanatics second-bite winning bid for PointsBet US.

You keep on knocking: The monetary value of the deals announced in the second quarter amounted to over $2.8bn as the sector appeared to shrug off worries over accessing finance in a tightening rate environment.

The total number of deals matched that from the first quarter, with 16 noted by the Earnings+More transaction tracker.
However, the ticket value of the headline deals was far in excess of Q1.

🍆 Money flowed in the second quarter

* Rumored sale price

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Big beasts

Game, set and match: The most high-profile deal of the quarter – if not the biggest by value – was the sale of PointsBet’s US business, which engendered a bidding war between eventual buyer Fanatics and rival DraftKings.

The initial $150m bid came in May and was seen as being something of a firesale given PointsBet’s failure to establish much more than a bridgehead in the US.
A rival offer came from DraftKings, which submitted a non-binding $195m bid in mid-June.
After some public gnashing of teeth from Fanatics CEO Michael Rubin about DraftKings trying to nobble Fanatics’ OSB push, his company subsequently upped its bid to a knockout $225m.
The second Fanatics bid was unanimously accepted by PointsBet’s shareholders in late June.

Rich pickings: However, the biggest deal of the quarter was the $1.2bn acquisition of NeoGames announced by Aristocrat on the same day as the initial Fanatics/PointsBet US news broke.

The deal gained plaudits from the analysts, who suggested it marks Aristocrat’s bold and belated entry into the online supply arena.

Spit and Polish: Less welcomed, by investors at least, was Entain’s addition of Poland’s leading bookmaker STS to its portfolio of brands for €750m.

Despite following the local hero strategy that has enabled Entain to buy and build its way to prominence in a number of markets globally, it was the structure of the deal that caused the furore.
Eminence Capital issued an open letter saying it was “outraged” at the rights issue used in part to finance Entain’s portion of the deal, which was done under the auspices of its Entain CEE JV with EMMA Capital.
Questions over the local hero strategy were amplified at the start of July when it emerged that it had pulled out of a bid to buy Slovenian lottery operator Športna Loterija for a reported €50m.

A new GIG: On a related issue, the latest news regarding the owners of STS, the Juroszek family, shows that they have now amassed an 11% stake in Gaming Innovation Group.

In a statement this week, Mateusz Juroszek – who will remain as CEO at STS post- the Entain buyout – said GiG is an undervalued business.
The family has been building up its stake in Gig for the past few months.
Juroszek said both elements of the GiG business were attractive; the affiliate arm and also the soon-to-be demerged sports technology backend business.

To be decided

Two ongoing strategic reviews will help define the landscape going forward.

Waiting room: The other action in the second quarter revolved around still unresolved strategic reviews at Kindred and IGT. At least with the latter, there is an indication of which way the cards will fall, but in the case of the former the future is as clouded as ever.

Breaking up: The review at IGT centers on the likelihood of a sale of the gaming elements of the business, including both the machines and the online arms, while the continuing IGT will concentrate on its lottery operations.
Analysts noted the prospective split was the mirror image of peer Light & Wonder, which has gone through a transformation in recent years by selling its online supply business OpenBet to Endeavor and the lottery arm to PE outfit Brookfield.

Gordian: A harder task would appear to confront the advisers attempting to sell Kindred. Having suffered a number of high-profile C-level departures, including CEO Henrik Tjernström, a sale appears to be no nearer a conclusion.

Sources suggested the issue with Kindred remains its position in Norway and the extent to which its profits are exposed to that market.
While it is thought MGM could be one buyer, the degree to which it would want to pay for a business where it would have to shut one of its major markets is the subject of much industry chatter.

Joint is jumpin’

Speculation over the future of the ownership of BetMGM continues.

A note from Jefferies earlier this week suggested that “among the most active discussions” for the analyst team was what the “recent deceleration” on BetMGM’s performance might have on the future for the JV partners MGM and Entain.

“With the six-month waiting period under UK merger law expiring on August 8, the debate over whether MGM would pursue acquiring ENT again and how the market would receive such an event is activating again,” the team added.
“Our impression is that it should remain topical for the near term and it could be a strong positive for all concerned, depending on terms.”

No means no: Of vital importance here is the extent to which the market should believe MGM Resorts’ official line that it is no longer interested in acquiring Entain, as articulated by MGM CEO Bill Hornbuckle at the start of February.

But that hasn't stopped speculation over the future of the JV, given MGM’s not necessarily contradictory statements about wishing it could obtain sole ownership of BetMGM.

Such hopes might be accelerated by a downturn in the performance at BetMGM. The deceleration noted by Jefferies relates largely to online casino where BetMGM’s early dominance in iCasino is being challenged.
For instance, in Michigan BetMGM’s iCasino share has fallen from ~39% last summer to 31.5% in May.

☹️ Brewer’s droop: BetMGM’s declining MI iCasino market share

Yes, but

No easy games: A resolution to the ownership of BetMGM might help with refocusing the company, although, as one source pointed out, with DraftKings and FanDuel both recently upping their respective games when it comes to iCasino, it is by no means a given that BetMGM can regain that early gaming dominance.

Moreover, with the overhang of the HMRC investigation into Entain adding extra uncertainty, the potential for a ‘clean’ acquisition by MGM seems if anything even more hard to negotiate than was the case when Hornbuckle publicly said ‘no’.

Money tree: Yet, as one source put it, there “clearly needs to be a resolution” to the ownership of BetMGM because “these two just don’t get along”. Or as Chris Grove, partner at Acies Investments, pointed out, the logic that some kind of deal is likely is what’s keeping the flame alive among the multitude of corporate advisors who would see a mega-merger as a payday like no other.

“Given the gaps in execution on both sides, the benefits of scale and the difficulty in securing organic growth, I believe that mergers between leading retail and online gambling operators are all but inevitable,” he suggested.
“The existing relationship between Entain and MGM makes them a more obvious candidate than some other pairings, but the broader dynamics apply to any number of combinations.”

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M&A chatter

Kickabout: One of the stranger ways to announce a piece of corporate news came courtesy of an appearance on the online gaming streamer Gamers Update by Stake.com’s co-founder and CEO Ed Craven.

Talking freely, Craven appeared to suggest an acquisition for the largely crypto-based Stake.com was on the cards.
The company was, he claimed, primed to make a “very big move into the USA with a very big acquisition”.
A source pointed out that while Stake.com would appear to have the money for the deal, any due diligence process by a regulator would make the completion of a deal “problematic”.
“Also, why would Stake want to enter heavily regulated markets in the first place?” the source added. “Why would you expose yourself to the licensing process?”

What we’re reading

Plastic fantastic: The New Yorker on how a need for newer materials for billiard balls spurred innovation.

“Hyatt’s brother and business partner dubbed the substance ‘celluloid’. The resulting balls were more popular with players, although, as Hyatt conceded, they, too, had their drawbacks. Nitrocellulose, also known as guncotton, is highly flammable. Two celluloid balls knocking together with sufficient force could set off a small explosion. A saloon owner in Colorado reported to Hyatt that, when this happened, ‘instantly every man in the room pulled a gun’.”

Calendar

Jul 20: Betsson
Jul 25: Kindred
Jul 26: Kambi, VICI (e), Churchill Downs (e)
Jul 27: Churchill Downs (call), VICI (call), Boyd Gaming, GLP (e)
Jul 28: GLP (call)

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