Cross-border M&A in gambling and gaming

A banker friend of mine was always happy to make long-term market forecasts. Anything longer ten years, he argued, was likely to be well beyond the end of his career, or his current role at least. He was much less confident predicting the short term ups and downs when he’d still be around to justify his valuations.

Even taking this advice to heart, there are still good reasons to predict that the coming period is going to be a busy one in the M&A departments of the gaming industry’s biggest players. There are a number of factors combining to lend weight to the prediction, but first we should briefly examine why 2023 was quiet.

The biggest factor was, of course, the drag of higher interest rates as central banks around the world bore down on borrowing to tame the tiger of inflation. For companies sitting on significant debt piles, the impact on their room for maneuver was considerable. Now, with inflation heading downwards, rates should start to be reduced although the picture is still mixed. Interest and activity from private equity investors was another factor clipping the wings of industry consolidators. Although they faced the same hike in borrowing costs, PE funds were driven to look for opportunities in gaming by a dearth of deals in other sectors. 2023 ended with a bounce back in private equity opportunities elsewhere although the increased investibility of the industry means financial players will continue to be active.

The final fly in the ointment was regulatory uncertainty in Europe. Delays to the UK Gambling Act Review and the looming spectre of affordability checks coupled with the prospect of higher taxes meant gloom in Britain, but that was only part of the picture. Advertising bans and other regulatory tightening around Europe and a stalling of reforms in Germany reduced confidence further. Taken together, these factors combined to bring a malaise to M&A, but that looks likely to change.

Fundamentally, M&A in the gaming and gambling industry is a consistently attractive strategy. Whether the aim is rapid expansion into new markets, access to new technologies or regulatory efficiency gains, acquisitions and other tie-ups can tick a lot of strategic boxes.

Big US players are moving into profitability

Whilst some of the negative factors remain, 2024 has some overwhelming positives. In contrast to Europe’s woes, the mood is increasingly bullish in North America. After being part a landgrab as each US state legalized sports betting, the big winners and their shareholders are starting to see a payback. Draftkings set the early pace announcing adjusted EBITDA for Q4 2023 of US$151 million, a swing of almost US$200 million in the right direction when set against the same period a year earlier. Making the case for an uptick in deals, no sooner had the announcement dropped than Draftkings closed a US$750 million buyout of Jackpocket. At a stroke the acquirer added digital lottery to its other operations in fantasy sports, sports betting, casino, NFTs and technology.

The money tap is set to keep on gushing with predictions from Draftkings that the US market will reach US$30 billion by 2028, a 50 percent jump on 2023. And that is without any more states legalizing gambling. Market leader and FanDuel owner Flutter may have gone quiet, but its move from Europe to a listing in New York gives a big hint as to where it sees future deals will be done. Big players throwing off cash will no doubt generate some deleveraging, especially if interest rates remain high. The temptation to do deals will be strong, however, as those smaller players who have struggled to break through in the US decide to exit the market.

The logic behind acquisitions is further strengthened by low share price valuations that have dogged the industry in recent months. That is making some companies look like a bargain and the big players are likely to back themselves to quickly reap the benefits of a valuation bounce.

Europe similar but different and Latin America is opening up

On the face of it, FDJ’s all-cash offer for Kindred follows a similar logic to the deals in the US. The acquisition, which values the Swedish operator at €2.49 billion, strengthens FDJ’s position in igaming as well as creating the second-largest player in Europe. The deal represents a step change for the former French state-owned lottery, but elsewhere in Europe consolidation is being driven by different factors.

Some company turbulence in the form of a failed buyout (888), CEO departure (Entain) and underperforming share prices seen throughout the industry suggests Europe remains fertile ground for dealmakers. Regulatory headwinds (read advertising bans, other regulatory tightening and tax rises) are encouraging other European players to look outside the EU for their growth, however, and there are some attractive target markets to look at.

Emerging Eastern Europe is firmly on the industry’s radar with some local players looking possible either as predators or prey. 888Africa reportedly hit one million customers across the continent in 2023, barely a year after launch, showing the way to growth in a continent with huge potential. Nigeria’s Nairabet is among the local companies that could be of great interest to international players looking for a quick way to buy in.

One of the most exciting developments in recent months has been the opening up of Brazil as a legal gambling market at the turn of the year. As we reported in January, the technical niceties of the legalization favour acquisition or joint venture as a market entry strategy for international operators.[1] In this issue we look at northern neighbors Colombia where similar dynamics are fuelling M&A activity.

Away from the headline grabbing B2C deals there are significant opportunities behind the scenes. Game developers, sports data providers, platform businesses and affiliates share some common characteristics that make them particularly attractive. They have all benefitted from high B2C growth many having struck lucrative revenue share deals. driven by ongoing market regulation in the US and beyond. As tech businesses they benefit from similar positive characteristics to the wider technology, data and content worlds. They have developed new products tapping into the early promise of AI, and have managed to offset margin pressures from operator consolidation. That is unlikely to make them cheap but, for investors, they present attractive opportunities to ‘buy-and-build’. Add-on acquisitions enable a platform to broaden its product offering to clients and present partnership opportunities to cross-sell to the other’s customers.

Legal, regulatory, technical and cultural challenges

Rising levels of M&A activity and interest in the gaming sector and related transactions should be good news from an advisory perspective. Membership of a network like the IMGL provides access to specialists in most if not all the jurisdictions where transactions are likely to be completed. Many investors have experience in multiple markets, but they will still need to consider the regulatory aspects of such transactions in each one. There are a number of regulatory considerations for M&A activity involving licensed gaming entities in the often heavily regulated gaming space.

First, it is by no means safe to assume that the acquisition of a company and is assets means the operating license will simply transfer to the new owners. Many jurisdictions have strict legal or regulatory prohibitions against the sale or transfer of a gaming license. This, plus the consequent delay to launching operations, are the biggest reasons transactions involving the merger or acquisition of a licensed gaming entity are often structured in a way as to maintains the existence and status of the licensee.

Prior to the awarding of a gaming license, regulators will often carry out extensive background investigations not only involving the applicant company but also its principals and the key executives involved in gaming operations. This will also often extend to individuals or entities with ownership stakes above a certain percentage or a beneficial interest in the applicant company.

In general, a requirement to obtain regulatory approval is the norm where there is a change of ownership, in the financial or equity interest, or in the persons with control or significant influence over the licensee. The precise legal or regulatory requirements will vary by jurisdiction and depending on the specific type of gaming license involved. There are also often differences in when such approvals should be sought. Some jurisdictions will ask simply that they are informed of the change on completion, whilst in others, a merger or acquisition could require pre-approval by the respective regulator and the licensing and investigation of any new owners or persons with control. These processes can be lengthy and onerous and it is important that entities contemplating such deals consider how long it may take to obtain any necessary approvals or authorizations prior to closure. Where an entity holds gaming licenses in multiple jurisdictions, this can have a multiplying effect with varying timeframes related to their approval/licensing processes.

Whilst we may still be some way off the emergence of a few players who dominate the global gambling market, that is not the case in gaming. In the UK, for example, the Competition and Markets Authority’s scrutiny of Microsoft’s acquisition of Activision added months to the approvals process. There will come a point when deals between gambling companies will attract the attention of the various competition authorities.

There has been a great deal of talk in recent years about different approaches to data protection and privacy between Europe and the United States. Whilst this should not be news to any parties looking to do transatlantic deals, the consequences of due diligence failures in this area cannot be understated. The EU sets a maximum fine for infringement of the GDPR at €20 million or four percent of annual global turnover. There are also numerous examples of large fines being imposed for breaches which predate an acquisition or disposal. Entain’s deferred prosecution agreement for £615 million related to a former Turkish subsidiary. It was a first for the UK, but it may not be the last.

Operational pitfalls

Aside from regulatory considerations, there are considerations which fall into three broad areas: culture, technology and culture again. Internal company working practices and culture differs widely around the world. Bolting together staff from already established operations can be a challenge and the amount of work required in this area can be sizable.

Access to ready-made technology is often cited as justifying some mergers and acquisitions the more so in the gaming and gambling space which is so technologically driven. Tech can be a barrier as well as a facilitator of deals as large costs accumulated from developing platforms can be hard to defray. Technical compatibility aside, platforms created for different markets may deal with data and security differently depending on the prevailing regulation.

Finally, there is a tendency to assume that successful products and marketing strategies will translate quickly and easily from one market to another. Cultural differences mean that this is not always the case. Brazil and Africa are good examples of markets with big cultural differences. In Brazil, exciting real money games are as popular with female customer as they are with male changing the kind of entertainment content that works. In Africa, legacy telephone networks are being replaced with a generation shift to mobile meaning data light products for the small screen are much more likely to succeed.

Cultural differences also impact the marketing of gambling and gaming products. For these reasons and wide variations in laws around promotions, celebrity and athlete endorsements and advertising mean campaigns need to be crafted for individual markets.[2]

[1] https://www.imgl.org/publications/imgl-magazine-volume-3-no-1/brazil-scores-a-winning-goal-with-sports-betting-igaming-regulations/

[2] For more see https://www.imgl.org/publications/entering-new-markets-cultural-sensitivity-required/