There was no real surprise when the Stars Group announced the purchase of Sky Betting and Gaming (SBG) over the weekend. The company has been openly seeking a major acquisition for some time.

But a purchase price of $4.7 billion, let’s give it the respect it deserves: a huge amount of cash upfront with only a small component from a new share issue is one big mouthful of a deal to digest.

With this deal, The Stars Group’s CEO Rafi Ashkenazi has shown his mettle and demonstrated to investors that he has the corporate deal chutzpah that his predecessor, David Baazov, appeared to have when tiny Amaya first bought PokerStars.

When the gloss of acclamation has faded from the financial pages, Ashkenazi faces a monumental task to integrate the companies and generate the expected synergies and future growth that provide the deal rationale.

SBG’s owners, UK venture capital company CVC, have made out like bandits on the deal. They bought SBG for £800 million ($1.14 billion) in 2014 and have just exited for a gross profit of $3.7 billion in less than four years.

Can Rafi Ashkenazi match that kind of growth?

Growth is the aim for Stars Group

Trying to grow an online poker business is a challenging occupation. PokerStars had to pull out of Australia last year, giving up a little under three percent of revenues in the process, after new laws unintentionally handed the market over to offshore operators.

A new launch in India may well be enough to compensate, and will provide future growth but only for online poker – online sports betting and casino are not permitted for regulated companies. Even so, the India strategy is a long-term play, with early year revenues likely to be fairly low.

Sports betting and casino are where the Stars Group is really seeking opportunities. During the group call to investors explaining the deal, the company said that taking account of all this year’s acquisitions, including SBG, the company revenues would be split:

• Poker – 37 percent
• Sports Betting – 34 percent
• Casino – 26 percent

While this was presented as a greater “balance,” that is slightly misleading. While the company’s revenues are better balanced, in terms of total market revenues, a balanced revenue split would have a much higher participation from sports and casino.

In this case, the good thing about the new “balance,” is that it leaves plenty of headroom for growth in sports betting and casino.

The immediate opportunity in sports betting is the imminent opening of a substantial part of the US market assuming a positive ruling from the US Supreme Court, and the passing of legislation in a number of US states.

Sky Betting and Gaming can ramp up Stars Group sports betting revenues

SBG is particularly strong in sports betting. The company has strong technology, a player base that is heavily biased to the recreational player, and has developed strong marketing techniques combining TV sports coverage in partnership with former owner Sky TV.

• The strength of SBG’s technology can be seen in the fact that 82 percent of its revenues come from mobile users.
• 84 percent of players lost less than £250 in 2017, a metric indicating the high proportion of recreational players.
• SBG CEO Richard Flint told investors that the contractual relationship with Sky TV enabled the company to offer sports bettors a much more engaging experience while watching TV sport. He pointed to the company’s Super Six game, which attracts over a million players every weekend.

The skill set that has created these characteristics significantly enhances the Stars Group’s sports betting competence, which should feed through into better revenues in all its markets, especially the new US markets.

On April 24, Stars announced that it had closed the transaction to buy 80 percent of CrownBet Holdings Pty Limited and in turn CrownBet has successfully completed its acquisition of William Hill Australia Holdings Pty Ltd.

SBG expertise and technology plus CrownBet and William Hill Australia’s contribution cannot but be a major enhancement to the potential of the Stars Group’s BetStars brand.

The impact on Stars’ poker business

The deal PR states that:

“The development of sports betting as a second low-cost customer acquisition channel, complementing The Stars Group’s core poker business and enabling more effective cross-sell to players across multiple verticals.”

All in all, there is little emphasis on the deal from the poker point of view. Nevertheless, there will certainly be an impact on Sky Poker players, and some benefits should accrue to PokerStars players too.

Ashkenazi told investors that there were no plans to merge the Sky and Stars platforms, but this was in the context of sports betting.

Based on the way Stars handled the acquisition of Full Tilt, it’s entirely possible that the Sky Poker player base will migrate to the PokerStars poker software within the next year or two.

Merging the player pool adds even more liquidity to the largest player pool in online poker, and liquidity is often the deciding factor in whether new games can be offered.

A larger player base makes for a much broader product offering and this will be good for poker.

A larger player base also makes for larger tournament guarantees, and this cycles into more attractive marketing propositions. PokerStars tagline is “PokerStars Makes Millionaires,” and the larger player base means more millionaires.

Another assumption is that the recreational player base of SBG will strengthen the player pool ecology.

The split between grinders and recreational players should improve, making for a more enjoyable playing experience for the recreational player and perhaps more profits for the online poker pro.

Sky’s VIP scheme is also likely to be adjusted to fit the PokerStars model, something that may irritate some regulars, but have a positive effect on the company’s bottom line.

The $4.7 billion price tag sets a high hurdle

The deal press release explains that “The transaction values SBG at a multiple of 12.8x unaudited adjusted LTM EBITDA, including expected run-rate cost synergies.”

12.8x sounds good. CVC bought SBG at 15x EBITDA back in December 2014, however, the press release states that EBITDA for 2017 was only £202 million ($281.4 million) on total revenues of £624 million.

A note says that the 12.8x figure is based on the higher figure of the year to March 31, 2018, which was £213 million ($296.75 million).

Taking 12.8 times $296.75 million equals nearly $3.8 billion, $900 million short of the $4.7 billion purchase price. On the last 12 months EBITDA alone, Stars is paying not 12.8x, but 15.8x.

The difference is made up of the “expected run-rate cost synergies” of “at least $70 million per year.”

Fair enough, but the high price firstly means that Ashkenazi is under pressure to make certain those cost synergies are not illusory and secondly, he needs to see revenues continue to grow faster than competitors to show the growth rate investors expect from such a large deal.

The pressure is now on.