“Red Roses and Slain Dragons”
A presentation by Tim Stocks, Chairman James Stocks & Co and Partner Taylor Wessing LLP
23 April 2015
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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)
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Others
Playtech PlcIntertain Group William HillLadbrokesBetsson
PE InvestorsAmaya Inc Scientific Games Bally Technologies
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)
BUYERS
Note: 1) The size of the bubble depicts the deal value of all transactions in GBP terms
Source: Thomson One; Capital IQ; Press Search
Sky Betting£720mn
WMS Industries£896mn
Bally Technologies£3,041mn
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
Rush Sports AB£0.2mn
Class One Holding Ltd£116mn
WagerLogic£54mn Betstar Pty Ltd
£12mn
YoYo Games£14mn
Aristocrat Leisure–Lotteries£8mn
NetPlay TV Plc£12mn
Macau Live
Gaming£238mn
Gaming Innovation Group£48mn
Game Lounge£3mn
Betfair Australasia Pty Ltd£6mn
Dumarca Holdings£74mn
Tom Waterhouse£20mn
Dragonplay Ltd£60mn
Pokerstrategy.com£31mn
Diamond Game Enterprises£16mn
Global Betting Exchange Ltd£16mn
Deal Timeline1 (2013–Present)
William HillOnline
£424mn
Sporting bet Australia£459mn
Rational Group£2,907mn
IGT£3,591mn
Gamesys£426mnChelbis Company
£2mn
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The global online gambling market is expected to grow at a CAGR of 10.6% during 2014–2018
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
Source: ‘Global Online Gambling’, MarketLine (February 2015); H2 Gambling Capital; ‘Online Gaming Should Continue Its Winning Streak in 2015’, Dundee Capital Markets (January 2015)
Europe Online Gambling1 Market – by Value2,3
(£ billion, 2009–2018E)
2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
8.49.7
10.8
11.7 12.713.9 14.6 15.5 16.1 17.018.2%
14.7%
11.3%
8.8% 8.7% 9.1%
5.2% 6.0%3.8%
5.4%
Market value Y-o-Y Growth
Global Online Gambling1 Market – by Value2,3
(£ billion, 2009–2018E)
2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
16.5 18.4
20.2
21.8 23.7 25.027.6
30.633.8
37.411.8%
9.8%
7.6%8.6%
5.7%
10.5% 10.7% 10.7% 10.5% Market valueY-o-Y growth
CAGR: +9.4% Expected CAGR: +10.6%
European online gambling industry to grow at a CAGR of 5.1% during 2014–2018, but at declining Y-O-Y growth rates
H2 Gambling estimates the UK online gambling market at £2.44bn2, with a majority of the activity regulated offshore
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Online players have higher operating margins than the retail players
Key Players1 Total Online EBIT2,3
(£ million, FY2012–FY20144)
FY2012 FY2013 FY2014
400.6481.7
604.2
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 PLC2) 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)
William Hill Betsson Paddy PowerUnibet Group Betfair GVC Holdings Average 888 Holdings 32Red Plc Ladbrokes Bwin.party
34%
27%23% 21% 20% 20% 18% 18%
11%7%
1%
Online EBIT Margin – by Operator(%, FY2014)
Average EBIT Margins – Online vs. Retail Operators5
(FY2012–FY20144)
FY2012 FY2013 FY2014
17.5% 17.1%
19.3%
14.3%15.3% 15.3%
Online Players Retail Players
Source: Capital IQ; Bloomberg
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
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Marketing Expenditure1 as a % of Revenue – By Operator (FY2014)
Note: 1) ‘Selling and marketing expenses’ line item has been taken in case ‘marketing expense’ was not available in the company’s financials
Paddy Power
William Hill PLC
Unibet Group PLC
Betsson
Betfair Group
32RED plc
888 Holdings
Bwin.party
10%
13%
24%
28%
29%
33%
35%
36%
On an average, investments in marketing constitute more than one-fourth of online gambling operator’s revenue base
Marketing expenditure contributed close to one-third of online gambling operators’ cost base
Source: Capital IQ
Average: 25.7%
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An increasing number of European countries’ online gambling markets have become regulated with rest considering regulatory changes
January 2010 January 2014
Online regulated Online regulated - monopoly
Online regulation being drafted/reviewed
Online regulation planned/considered
No online regulation
Source: ‘Online betting and gaming regulation 2014’, PWC (February 2014)
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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
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 £274.7 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: £454.3 million)
Source: Legal US Poker Sites; ‘US Online Gaming: Cutting Market Estimates; Downgrade BYD to Equal-weight’, Morgan Stanley (September 2014) (continued in slide note)
Note: 1) Though no direct laws have been launched in New York , debates over maintaining status quo with legalized commercial casinos improves the chances
Nevada(Apr 2013)
NJ (Nov 2013)
Delaware (Nov 2013)CA
PA
IL
NY
Regulated gambling sites exist only for residents of three states—Nevada, Delaware and New Jersey—where online gambling is legal
States where online gambling is legalised (3)
States which plan to legalise online gambling1 (4)
Colour coding
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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)
Total Funds Raised Last 10 yrs Est. Dry Powder
63.7
18.9
42.6
11.6
56.8
13.8
US focused UK focused Europe focused
All PE Funds – US vs. UK vs. Europe(£ billion, April 2015)
Total Funds Raised Last 10 yrs Est. Dry Powder
1,698.3
495.8718.0
183.2
1,519.9
427.3
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, 2000–2014)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 June 2014Dry Powder Unrealised Portfolio Value
480 503 514 580 642827
1,135
1,517 1,5211,655
1,8342,031
2,1922,425 2,538
Source: Prequin Database; ‘2015 Preqin Global Private Equity & Venture Capital Report’, Prequin (January 2015)
The PE industry’s AUM stands in excess of £2.5 trillion as on
June 2014, which grew at a CAGR of 9% during 2009–2014 on the back of growing unrealised portfolio value of PE and VC
assets
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Large land based operators (LBOs) offering e-gaming services to complement their retail operations
2012 2013 2014
83% 84% 81%
17% 16% 19%
Ladbrokes revenue–by segment(£million, 2012-2014)
Land based Online
1,104 1,1481,044
2012 2013 2014
58% 52% 45%
42% 48% 55%
Cherry AB revenue–by segment(£million, 2012-2014)
Land based Online
22 25 27
2012 2013 2014
67% 67% 63%
33% 33% 37%
William Hill revenue–by segment(£million, 2012-2014)
Land based Online
1,4391,3531,245
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
Growth in the share of online revenue indicates its increasing importance and the shift in focus of land based operators
Source: H2 Gambling Capital; Capital IQ
Online Gaming Gross Win as % of Total Gaming Gross Wins – Global($ million, 2007–2010)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
E
2015
E
2016
E
2017
E
2018
E
3%4%
5%6% 6%
7%7% 8% 7% 8% 8% 9% 9% 10%
10% 11%
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UK LBOs focus on high growth Australian e-gaming market due to POC tax
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
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 Sportingbet-Australia Business Australia William Hill UK 459.0 Expanding its operations in Australia
Jan-13 Global Betting Exchange Ltd Ireland Ladbrokes UK 16.1 Increase digital revenues and investment in IP
Jan-13 William Hill Online (JV with Playtech) UK William Hill UK 424.0 Acquired remaining 29% stake in JV, William Hill online, with
Playtech to obtain operational freedom for its digital business
Source: Thomson One; Bloomberg Business; The Telegraph
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Social gaming to be a key growth driver amid rising mobile and tablet penetration
Land Based91% Digital
9%
Source: Eilers Research; ‘Social Gaming’, Morgan Stanley (November 2012); ‘The Mobile Economy’, GSMA Intelligence (2015)
Contributing £1.1billion1 to the total of £23.5billion1 e-gaming market, social gaming is expected to reach £4.7 billion1 by 2015― 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― Social gaming forms 5% of the global e-gaming market, except North
America where it contributes 10% to the total online gaming market
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
7.4%8.4% 8.5%
9.4%10.3%
12.5%
14.3%15.6%
16.6%
Mobile Gaming as % of Global Online Gambling Market2(2007-2015E)
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 2015
Note: 1) All currency conversions are at USD 1 = GBP 0.67 as of 9th April 20152) Global Online Gambling Market has been valued based on the gross gambling yield
Social gaming 5%
Online gambling 5%
Global Gambling Market Revenue – Breakup(2012)
Mobile gaming is forecasted to contribute 81% of social casino’s revenue in 2017
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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 Enter into free-play social gaming part as a of its social gaming push strategy
Jan-12 Double Down US IGT US 326.4 Provide IGT with immediate size and scale in free-to-play gaming industry
May-11 Playtika Israel Caesars US - Caesars initially acquired 51% of Harrah’s social casino with rest being acquired in just a span of few months
Jun-10 Mytopia US 888 Holdings UK 12.4 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
Source: Thomson One; Capital IQ; Press search
“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
“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
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Increased regulation in e-gaming industry has led to a convergence in B2B and B2C online gaming segments
Source: Thomson One; Press search
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
Trend Software Transactions Comments
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
2011–2012: 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
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Amaya and Playtech, the two big suppliers to the online operators, are actively acquiring to diversify their operations
Playtech Plc
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
Amaya Gaming Group
2014-2015: 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 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
Source: Thomson One; Press search
Software Acquisitions Strategy
An example of B2B going B2C
An example of B2B expansion
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Conclusions
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
The wave of M&A activity is prompted by:
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
Outlook
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