This issue of the RP iGaming Index sees Paul Leyland cautiously optimistic about an upswing in the performance of igaming stocks. Market consolidation has also boosted a number of constituent companies
The Index has continued to underperform the NASDAQ with depressing consistency. During the period, the index was up 4% versus the benchmark’s 7.4%.
However, constituent performance was more mixed, suggesting a corner might be being turned. Indeed, of the 35 stocks currently in the index, 20 reported gains, including 10 in the double digits: 888, Boyd Gaming, Caesars, Churchill Downs, GAN, GiG, Inspired, LeoVegas, Sportech and William Hill. Some of this is undoubtedly the proverbial dead cat bouncing, with most known bad news already in the price and valuations, even adjusted for downside risk, looking undemanding. A modest market upswing should take most of the sector with it.
REAL DEALS
This period has been a very busy one for corporate activity. As of early July, there have been five deals announced, one rumored deal and plenty of funds raised for consolidation. In other words, fully 20% of the index has been associated with some form of M&A— an impressive feat given that the sector often tends to prefer rumor to action. We will cover the Caesars/Eldorado deal in greater detail over the page, but it is worth highlighting the merit of all the month’s activity:
11 June: Inspired announces the proposed acquisition of Novomatic’s UK B2B business for £95m ($119m). It’s a deal that broadens Inspired’s UK retail footprint and provides some much-needed synergies to offset the FOBT impact, though the extent to which these assets are capable of growth or underlying cash generation remains open to question in our view.
13 June: JPJ buys its former parent and infrastructure provider Gamesys for $614m, returning it to a much more flexible, vertically integrated gaming business.
21 June: Better Collective raises an additional $45m to take its credit facilities for potential M&A (likely in the content and affiliate space) to $90m. Meanwhile, $112m has been invested already.
Post the period in coverage, Flutter Entertainment (formerly Paddy Power Betfair) gained 20% intraday on bid rumors (likely largely driven by short closing) while Sazka announced a bid for OPAP. Stride continues to trade ahead of an already announced takeover by Rank Group. The oftpredicted wave of consolidation is therefore certainly upon us. Tellingly, however, it was not enough for the index to outperform the market.
BRINGING UP THE REAR
The laggards were equally broadly based, though only two in double digits: Kambi, down 21% and at 1.7% of the index (weighted for online exposure) an important constituent for overall performance, and Nektan, down 19% but not a big mover of the index overall.
As we have flagged many times in this column before, what the listed gambling industry really needs is rebuilt trust in management, guidance and risk from a perception standpoint, while a still largely retail or dotcomled online universe needs to show growth and/or strong cash generation in terms of fundamentals. Both are a tough ask and hopes that things can’t get any worse for the sector have a habit of being dashed.
STOCK IN FOCUS: CAESARS ENTERTAINMENT
Strictly speaking the Caesars/ Eldorado deal doesn’t really cut it from an index point of view since the existing online footprint is tiny. Indeed, while Caesars stock was up 34% in the period due to the news, the online weighting meant this hardly moved the index. The deal clearly matters for the future of online, though, especially in the US, since the combination becomes by far the country’s biggest casino operator in terms of both revenue and footprint.
Both Caesars and Eldorado have credible online gaming positions in New Jersey. From a sports betting perspective Caesars has an access deal with DraftKings, and Eldorado with both William Hill and The Stars Group. Neither has really cut it in the sports betting markets that have opened so far, other than driving landbased footfall, but this has not stopped Caesars flagging sportsbook as a key strategic pillar of success. In a way Caesars and Eldorado are lucky: their core market has been protected from channel shift and shielded from widely distributed retail gaming (a few VLT states and high value lottery scratch cards being the exception) as well as sports betting competition.
This has brought about two things: a genuinely experiential development of assets and the ability to continue to service the transactional customer that in many other markets would be turning up less and less frequently. Because of this protection, Caesars and Eldorado’s problem is generational: their concern is in attracting the young, not the attritional problem of channel shift in a dynamically competitive product environment.
However, Caesars and Eldorado have very little online capability and are currently almost completely unsuited to coping with an omnichannel environment, in our view. If such an environment becomes even vaguely likely in the US overall (and there are still many barriers to this), then the next acquisition will almost certainly have to be an online one.
DISCLAIMER :The narrative provided represents the opinions of the authors. Any assessment of trends or change is necessarily subjective. The information and opinions provided are not intended to provide legal, accounting, investment or policy advice, nor should they be used as a forecast. Regulus Partners may act, or has acted, for any of the companies and other stakeholders mentioned in this report.