Red Roses and Slain Dragons. A presentation by Tim Stocks, Chairman James Stocks & Co and Partner Taylor Wessing LLP.

Transcription

1 Red Roses and Slain Dragons A presentation by Tim Stocks, Chairman James Stocks & Co and Partner Taylor Wessing LLP 23 April 2015

2 Our view remains that the European online gaming sector will consolidate in the near term as falling industry growth rates in the UK/Europe, rising marketing costs, increased gaming taxes and rising competition makes scale a increasing necessity to compete more effectively. Deutsche Bank (February 2015) 2 2

3 There has been a slew of M&A activity in the industry over the past two years with a wide participation (i.e. by most of the key players) Deal Timeline 1 (2013 Present) WMS Industries 896mn Global Betting Exchange Ltd 16mn Sporting bet Australia 459mn William Hill Online 424mn Diamond Game Enterprises 16mn Macau Live Gaming 238mn Pokerstrategy.com 31mn Tom Waterhouse 20mn WagerLogic 54mn NetPlay TV Plc 12mn Class One Holding Ltd 116mn Dragonplay Ltd 60mn Betstar Pty Ltd 12mn Rational Group 2,907mn IGT 3,591mn Bally Technologies 3,041mn Betfair Australasia Pty Ltd 6mn Dumarca Holdings 74mn Sky Betting 720mn Chelbis Company 2mn Aristocrat Leisure Lotteries 8mn Rush Sports AB 0.2mn Game Lounge 3mn Gaming Innovation Group 48mn YoYo Games 14mn Gamesys 426mn Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 BUYERS Betsson Ladbrokes Intertain Group William Hill Amaya Inc Scientific Games PE Investors Bally Technologies Playtech Plc Others 3 Note: 1) The size of the bubble depicts the deal value of all transactions in GBP terms Thomson One; Capital IQ; Press Search 3

4 The global online gambling market is expected to grow at a CAGR of 10.6% during Global Online Gambling 1 Market by Value 2,3 ( billion, E) CAGR: +9.4% Expected CAGR: +10.6% % % % % % % 10.7% 10.5% Market value Y-o-Y growth E 2015E 2016E 2017E 2018E 5.7% Europe Online Gambling 1 Market by Value 2,3 ( billion, E) 18.2% % 11.3% % 8.7% 9.1% 5.2% 6.0% 5.4% 3.8% E 2015E 2016E 2017E 2018E European online gambling industry to grow at a CAGR of 5.1% during , but at declining Y-O-Y growth rates H2 Gambling estimates the UK online gambling market at 2.44bn 2, with a majority of the activity regulated offshore 4 Market value Y-o-Y Growth Note: 1) Online Gambling Market comprises of remote gaming activities by means of internet (desktop-based as well as mobile); market is synonymously referred as online gaming sector Global Online Gambling, MarketLine (February 2015); H2 Gambling Capital; Online Gaming Should Continue Its Winning Streak in 2015, Dundee Capital Markets (January 2015) 4

5 Online players have higher operating margins than the retail players Key Players 1 Total Online EBIT 2,3 ( million, FY2012 FY ) FY2012 FY2013 FY2014 Online operator margins, though higher than the land-based players, are close to 15% implying a cost base that is unsustainable in a rising cost environment With an additional charge of 15% (POC tax) levied on online gambling operators by the UK, operators with low EBIT margins will struggle to exist Average EBIT Margins Online vs. Retail Operators 5 (FY2012 FY ) 19.3% 17.5% 17.1% 15.3% 15.3% 14.3% FY2012 FY2013 FY2014 Online Players Retail Players 34% Online EBIT Margin by Operator (%, FY2014) 27% 23% 21% 20% 20% 18% 18% 11% 7% 1% William Hill Betsson Paddy Power Unibet Group Betfair GVC Holdings Average 888 Holdings 32Red Plc Ladbrokes Bwin.party 5 Note: 1) Nine players included for the analysis are William Hill PLC, Unibet Group PLC, 888 Holdings, Betfair Group, Betsson, Bwin.party, Paddy Power, GVC Holdings and 32RED PLC 2) EBIT figures and margins have been sourced from Capital IQ, which makes adjustments for non-operating and non-recurring items; Online margins have been considered for Paddy Power and William Hill which has both retail as well as online operations (continued in slide note) Capital IQ; Bloomberg 5

6 Marketing Expenditure 1 as a % of Revenue By Operator (FY2014) Average: 25.7% Bwin.party 36% 888 Holdings 35% 32RED plc 33% Betfair Group 29% Betsson 28% Unibet Group PLC William Hill PLC 13% 24% On an average, investments in marketing constitute more than one-fourth of online gambling operator s revenue base Paddy Power 10% Marketing expenditure contributed close to one-third of online gambling operators cost base 6 Note: 1) Selling and marketing expenses line item has been taken in case marketing expense was not available in the company s financials Capital IQ 6

7 An increasing number of European countries online gambling markets have become regulated with rest considering regulatory changes January 2010 January 2014 Online regulated Online regulation planned/considered Online regulated - monopoly No online regulation Online regulation being drafted/reviewed 7 Online betting and gaming regulation 2014, PWC (February 2014) 7

8 While three US states have legalised online gambling for its residents, there is a big question mark on whether other states will follow suit or come a federal regulation Regulated gambling sites exist only for residents of three states Nevada, Delaware and New Jersey where online gambling is legal NY PA NJ (Nov 2013) Colour coding CA Nevada (Apr 2013) IL Delaware (Nov 2013) States where online gambling is legalised (3) States which plan to legalise online gambling 1 (4) Quite unclear and complex gambling-related regulatory framework While gaming is legal under federal law, there exists a state-by-state regulation wherein each state is free to put restrictions within its borders; also, all forms of gaming are not legal across all states Residents of non-regulated states can use websites licensed in an online gambling jurisdiction outside of the US The existing intra-state gambling severely limits the pool of players; hence, a move towards inter-state online gambling regulated at the federal level which increases liquidity with a larger number of players will be looked for as a major growth catalyst Morgan Stanley estimates the US online betting market at million by 2017, one-third its initial estimate of 0.9 billion on the back of lower-than-expected revenue from US in 2014 (actual: 93.1 million; estimated: million) 8 Note: 1) Though no direct laws have been launched in New York, debates over maintaining status quo with legalized commercial casinos improves the chances Legal US Poker Sites; US Online Gaming: Cutting Market Estimates; Downgrade BYD to Equal-weight, Morgan Stanley (September 2014) (continued in slide note) 8

9 More than a trillion pounds of cash funds available with the PE funds, a portion of which can go to the increasingly lucrative online gambling sector Gambling focused PE Funds US vs. UK vs. Europe ( billion, April 2015) ,698.3 All PE Funds US vs. UK vs. Europe ( billion, April 2015) , Total Funds Raised Last 10 yrs Est. Dry Powder Total Funds Raised Last 10 yrs Est. Dry Powder US focused UK focused Europe focused US focused UK focused Europe focused US focused PE funds have raised the maximum amount in the last 10 years, followed by the Europe-focused and then UK-focused funds The estimated cash-like Dry Powder amount of committed capital that have not been called for investment by the GP of above 10 billion in each of the three regions (US, UK, Europe) with gambling focused PE funds indicate at a large wall of money that can come in gambling sector Private Equity Assets Under Management (AUM) Global ( billion, ) 827 1,135 1,517 1, June 2014 Dry Powder Unrealised Portfolio Value Prequin Database; 2015 Preqin Global Private Equity & Venture Capital Report, Prequin (January 2015) 1,655 1,834 2,031 2,192 2,425 2,538 The PE industry s AUM stands in excess of 2.5 trillion as on June 2014, which grew at a CAGR of 9% during on the back of growing unrealised portfolio value of PE and VC assets 9 9

10 E 2015E 2016E 2017E 2018E Large land based operators (LBOs) offering e-gaming services to complement their retail operations According to H2 Gambling Capital, e-gaming sector is expected to constitute 11% of global gambling gross wins by 2018 The growth in e-gaming has complemented and not substituted traditional retail gaming Different player profile (new-age customers for online gambling) ensures that importance of LBOs has not decreased Increasing clarity in global e-gaming regulations has further encouraged land-based casino operators to enter or diversify their presence in digital space Well-established players have a competitive advantage given they do not have to spend huge marketing expenses Absence of any physical cost in online operations enables ease in expansion of services to more geographies Online Gaming Gross Win as % of Total Gaming Gross Wins Global ($ million, ) 3% 4% 5% 6% 6% 7% 7% 8% 7% 8% 8% 9% 9% 10% 10% 11% Growth in the share of online revenue indicates its increasing importance and the shift in focus of land based operators Ladbrokes revenue by segment ( million, ) William Hill revenue by segment ( million, ) Cherry AB revenue by segment ( million, ) 1,044 1,104 1,148 17% 16% 19% 1,245 1,353 1,439 33% 33% 37% % 48% 55% 83% 84% 81% 67% 67% 63% 58% 52% 45% Land based Online Land based Online Land based Online H2 Gambling Capital; Capital IQ 10

11 UK LBOs focus on high growth Australian e-gaming market due to POC tax Announced date Target Target Nation Acquirer Acquirer Nation Deal Value ( m) Rationale Aug-14 Betfair Australasia Pty Ltd (JV with betstar) Australia Crown Resorts Ltd Australia 5.6 Acquired remaining 50% stake to revive the loss making business Apr-14 Betstar Pty Ltd (Eskander) Australia Ladbrokes UK 12.4 Expanding its operations in Australia Aug-13 Tom Waterhouse Australia William Hill UK 20.4 Expanding presence in Australia Mar-13 Jan-13 Sportingbet-Australia Business Global Betting Exchange Ltd Australia William Hill UK Expanding its operations in Australia Ireland Ladbrokes UK 16.1 Increase digital revenues and investment in IP Jan-13 William Hill Online (JV with Playtech) UK William Hill UK Acquired remaining 29% stake in JV, William Hill online, with Playtech to obtain operational freedom for its digital business Most of the recent transactions saw large British LBOs expanding their operations in other regulated markets, primarily Australia, amid concerns over rising costs of operating online betting businesses in the UK (anticipated POC tax) Australia leads global online gambling market in terms of per person gaming and sports betting Due to ambiguity in e-gaming laws, US LBOs are not inclined towards expanding their operations in global e-gaming market 11 Thomson One; Bloomberg Business; The Telegraph 11

12 Social gaming to be a key growth driver amid rising mobile and tablet penetration Contributing 1.1billion 1 to the total of 23.5billion 1 e-gaming market, social gaming is expected to reach 4.7 billion 1 by 2015 Global Gambling Market Revenue Breakup (2012) Basic feature of virtual money has constrained monetisation of social gaming Free from shackles of legislature, social gaming is expected to flourish in geographies where real-money online gambling is restricted North America has the largest share in total social gaming market (40%), followed by Europe and Asia Land Based 91% Digital 9% Online gambling 5% Social gaming 5% Social gaming forms 5% of the global e-gaming market, except North America where it contributes 10% to the total online gaming market Mobile gaming is forecasted to contribute 81% of social casino s revenue in 2017 According to GSMA intelligence, global mobile connections increased from 4.1 billion in 2008 to 6.9 billion in 2013, moving at a CAGR of 11.3%; the industry is expected to reach 8.5 billion in 2017 with Asia Pacific forming more than 50% of the connections Globally, mobile penetration is higher than internet penetration With high growth in mobile and internet industry, mobile gaming is expected to reach 16.6% of the total e-gaming market in % Mobile Gaming as % of Global Online Gambling Market 2 ( E) 8.4% 8.5% 9.4% 10.3% 12.5% 14.3% 15.6% 16.6% 12 Note: 1) All currency conversions are at USD 1 = GBP 0.67 as of 9 th April ) Global Online Gambling Market has been valued based on the gross gambling yield Eilers Research; Social Gaming, Morgan Stanley (November 2012); The Mobile Economy, GSMA Intelligence (2015) E 2013E 2014E 2015E 12

13 Players ranging from online gambling operators to gaming software providers are trying to grab a piece of social gaming space Announced date Target Target Nation Acquirer Acquirer Nation Deal Value ( m) Rationale Jun-14 Dragonplay Israel Bally Technologies US 59.5 To help position Bally Bally at the forefront of social casino gaming Dec-12 Buffalo Studios LLC US Caesars US 31.4 Widen the social and mobile game assets Nov-12 Product Madness Inc US Aristocrat Leisure Australia - Strengthen its online business by entering into social gaming May-12 Orneon Ukraine Bwin Party Gibraltar 14.7 Jan-12 Double Down US IGT US May-11 Playtika Israel Caesars US - Jun-10 Mytopia US 888 Holdings UK 12.4 Enter into free-play social gaming part as a of its social gaming push strategy Provide IGT with immediate size and scale in free-to-play gaming industry Caesars initially acquired 51% of Harrah s social casino with rest being acquired in just a span of few months Giving 888 entry into social games and provide exposure to different online gaming platforms Social gaming market helps online gaming companies to offer their services in unregulated markets, such as Asia and the US, acting as a driver for the ongoing consolidation Majority of the recent transactions involved US companies At the end of the day social becomes the early funnel for real-money. In other words, people who are playing Zynga Poker are not necessarily going to play real-money poker, but their propensity to play real-money poker is probably about 50 times higher than the general public Gigi Levy, Playtika Investor 13 Thomson One; Capital IQ; Press search 13

14 Increased regulation in e-gaming industry has led to a convergence in B2B and B2C online gaming segments Trend Software Transactions Comments B2B diversifying in B2C segment December 2014: Contagious Gaming acquired Malta based Chelbis Company Ltd, an online gambling operator for 2.3 million June 2014: Amaya acquired US based Rational Group, owner of Poker stars and Full Tilt poker brands for 2.9 billion With the disposal of Ongame and Cadillac Jack, the company seems to be entering into B2C segment and plans to launch in-house sports betting February 2015: Nio Inc. acquired Gaming Innovation Group (GiG), owner of Guts.com and igaming Cloud platform developer, for 47.9 million Online gambling software providers are acquiring e- gaming operators in regulated geographies B2B expansion September 2014: Playtech acquired Aristocrat s Lottery business, providing gaming platform for VLTs and casino markets in Norway and Italy, for 8.3 million August 2014: Scientific Games acquired Bally Technology, a US based slot machine manufacturer for 3.0 billion July 2013: Amaya acquired Diamond Games Enterprises Inc, primarily operating in North-America lottery industry, for 15.9 million GTECH Spa acquired IGT, a US based gaming machine and online and mobile gaming solutions provider for 3.6 billion : Playtech s European acquisition of betting and e-gaming software providers Geneity Ltd, Ash Gaming Ltd, Mobenga Ltd for the total of 54.9 million Acquisitions of companies in similar business helps firm achieve larger geographical footprint, greater product offerings and increased customer base of online as well as land-based gambling operators Snapping up affiliates January 2015: Cherry AB acquire 51% in Game Lounge, a Malta based affiliate marketer for 2.6 million July 2013: Playtech acquired Pokerstrategy.com Ltd, a Gibraltar based online poker affiliate site, for 31.4 million Ramping up marketing affiliates would help company increase their customer base and expand marketing opportunities 14 Thomson One; Press search 14

15 Amaya and Playtech, the two big suppliers to the online operators, are actively acquiring to diversify their operations Software Acquisitions Strategy Amaya Gaming Group An example of B2B going B2C : Disposed off Cadillac Jack and Ongame Network Ltd, both acquired in 2012 June 2014: Acquisition of Poker stars and Full tilt owner, Rational Group, for 2.9 billion June 2013: Acquisition of US based online software provider, Diamond Game Enterprises Inc for 16 million Amaya s CEO on Rational acquisition This is a transformative acquisition for Amaya, strengthening our core B2B operations with a consumer online powerhouse that creates a scalable global platform for growth ; to complement the transaction, the company looks to launch an in-house developed sports betting Playtech Plc An example of B2B expansion April 2015: Seeking acquisition of Trade FX Ltd, a UK based trading platform and payment services provider for 336 million January 2012: Acquisition of Geneity Ltd, a London based bookmaker and lottery software provider 2011: Acquisition of various online gambling software provider such as Ash Gaming Ltd, Mobenga AB and Intelligent Gaming Solution Playtech has been on an acquisition trail for past four years snapping up several e-gaming and betting software targets; the company looks to spend 536 million towards future acquisitions leveraging on evolving betting industry over mobile and tablet 15 Thomson One; Press search 15

16 Conclusions The wave of M&A activity is prompted by: Online gambling sector becoming increasingly established and regulated; hence, investors and lenders ready to inject capital into the sector Companies are seeking to position themselves as leaders in regulated territories which increases valuations; thus, acquiring several online brands to expand their customer base across different gaming categories With increased costs of customer acquisition, competition and changes in the taxation environment (an increased tax burden) scale is increasingly important and those without scale will struggle to fund marketing expenses over time, eventually losing market share Technology and platform providers have also shown interest in launching in-house gambling websites, acquiring B2C companies to scale up their operation and bring revenue growth Outlook Europe continues to dominate the global industry but the anticipation of further legalisation on a state-to-state basis in the US presents a significant growth opportunity; any new regulations in currently unregulated high-population Asian markets (China and India) can also bring a change in the industry scenario The UK POC tax is likely to be a game changer, as other countries might pursue a similar model to earn more tax The push for inter-state and international liquidity sharing contracts can further boost the growth of the industry Mobile and tablet platforms will be increasingly used for online gambling The wall of money attracted to the sector will drive deals and valuations 16 16

17 6 Agar Street London WC2N 4HN James Stocks & Co Registered address 5 th Floor, 6 Agar Street, London WC2N 4HN Telephone +44 (0) info@jamesstocks.com Website An appointed representative of Culver Financial Management Limited