Regulus: Betting M&A – preparing for better times

Regulus Partners Sportsbetting merger and acquisions
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The Covid-19 pandemic might be preventing the vast majority of mainstream sports around the world from taking place, but it has not stopped significant progress on three sportsbetting-related M&A transactions – Regulus Partners writes.


Flutter shareholders overwhelmingly (99.2 percent) approved the combination with Stars, so completion is on track for this quarter. OPAP has taken a majority stake in the Greek and Cypriot elements of Stoiximan. Draftkings has also completed its acquisition of SBTech and it’s now trading on NASDAQ (shares were up 10 percent in early trade). Each of these deals have been a relatively long time in the planning (Homeric in OPAP’s case) and have both funding and rationale that the crisis fortunately does little to undermine. Nevertheless, they are all of fundamental importance to how the ‘post-Covid’ world will look and perhaps point to a further round of consolidation. The Flutter – Stars merger was not designed to cope with the Covid crisis but it is nevertheless a very powerful solution, underpinning the underlying logic of the deal. The combination has a more balanced mix of sports and gaming, stronger liquidity, much better global reach and becomes by some margin the world’s biggest B2C online gambling business – in a post Covid world which will look even more digital in consumer behaviour and policy outlook than previously. Perhaps most importantly the combination creates the scale and need to look to the longer term (it will be a significant FTSE100 player with all the scrutiny that entails) to shift the overall industry culture of online gambling even further away from its origins of operational ‘dark arts’ and regulatory avoidance. What Flutter – Stars represents is the future of domestically regulated gambling of any scale, in our view, and that future has become much more immediately relevant.

OPAP lost 99 percent of its immediate revenue to the Covid-19 lockdown in Greece, reflecting its inability to organically develop any sort of meaningful online presence. It was good fortune therefore that it had for some time working on a deal to buy one of Greece’s online gambling leaders: Stoiximan vies with bet365 for #1 spot in a highly consolidated ‘temporary’ licensed environment (it is currently in the lead). It is unclear how much of OPAP’s retail business will return as the lockdown eases and Greece is also likely to face another searingly difficult economic situation. Both of these issues are likely to drive further channel shift and now that c. 15 percent of OPAP’s pre-Covid pro-forma revenue is digital it has a fighting chance. Other almost entirely retail businesses globally will be exploring digital options as a matter of urgency. However, in this context, the fact that OPAP had a domestically regulated Greek leader to acquire with very limited exposure to other markets (which could be easily hived off into a minority structure) and a clear regulated footprint (Portugal and Romania are its biggest markets outside Greece and Cyprus) should not be overlooked – from a strategic fit and regulatory risk perspective Stoiximan is close a remote gambling merger and acquisition unicorn.

DraftKings’ acquisition of SBTech fairly obviously highlights the emerging importance of online sports betting in the US, although it has provided only a small short-term hedge from an operational perspective given the disruption to US sports as well as casino venues. Online sports betting is nevertheless likely to have something of a V-shaped recovery in the US given the pent up demand where regulated, the clear (Presidential-down) willingness to get sports up again and the less complex data environment (see last week’s WP). However, the biggest lesson of the SBTech acquisition is control, in our view: DraftKings was highly exposed without a scalable platform and almost complete reliance on a third party for an existential product (not just in terms of winning betting market share – failure to do so would risk crumbling the DFS base without the upsell). The risk/reward might be extreme in the case of DraftKings – SBTech, but Covid is also likely highlighting critical exposures within the supply chain to a number of operators. When most of gambling is switched off, this is merely an important observation, but as things are switched back on again the levels of disruption, the requirement to prioritise and especially the need to innovate will be profound, in our view. In the post-Covid environment, having effective control (whether owned or not) over critical elements of infrastructure is likely to be at least as important as geography, product or channel mix: those which can innovate will thrive, those caught up in a dwindling, distracted or (conversely) increasingly ruthless supply chain will see their problems compounded.

We should also consider what isn’t in the mix. While we buy into the idea that the crisis will drive consolidation as weaker and smaller operators struggle, these are not always obvious from an merger and acquisition perspective, especially if ‘opportunistic’ (but relatively blind) capital is scarce. Much of the consolidation in the months and years to come is likely to be alliances of the strong, in our view, with the weak being on the wrong end of a more organic consolidation process.

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