Regulated markets represents opportunities for M&A


Russell Mifsud

Associate Director & Head of Gaming at KPMG Malta.

What’s driving Mergers & Acquisitions (M&A) in the iGaming industry at the moment?

The iGaming industry is experiencing structural changes. Operational costs are rising due to increased compliance costs, higher taxes, new licensing regimes and the like, which are squeezing margins for operators and fuelling M&A activity. I do believe that Sweden’s new licensing regime, which requires operators to pay 18% tax on gross gaming revenue, will lead to an increase in deal-making activity as many smaller operators may struggle to shoulder the consequences of the new legislation. The planned restriction on reload bonuses and loyalty credits within a market that is considered to have relatively low levels of player loyalty and a high player churn rate, will also likely spur on deals with entities that can leverage traditional game mechanics in line with the new legislation.

We are also seeing big UK faced and based operators looking at acquisitions as part of their Brexit contingency plans, in order to tap into new markets (that have historically been more difficult to penetrate successfully) and as a means of diversifying their reliance on the FOBTs capping. The recent announcement about William Hill acquiring Mr Green may be the beginning of a trend.

We are also seeing a wealth of land-based gaming operators seeking to broaden their offering into the online gaming space, whether it is to close in on the knowledge gap between land-based and online or as a means of allowing themselves to hit the ground running in a newly regulated market alongside a digital offering.

What type of companies are hot acquisition targets?

Traditionally, we have seen larger operators acquiring other, mostly smaller operators, while affiliates used to acquire other affiliates. This model has further evolved and broadened: operators are acquiring affiliates to capitalise on the value chain and maintain an element of control and vice versa, which has given rise to a number of large gaming groups with a very diverse portfolio. In recent years, we have also seen operators buying and investing in smaller tech companies to help them develop insight on the user journey and UX in order to be a step ahead of the game and to capitalise on heightened player engagement techniques. These tech companies might be active in various industries and are not necessarily linked to gaming, but they offer solutions that could be transferred and implemented in a gaming environment, similar to that of e-commerce. I believe that this is a development that we will continue to witness.

The industry is swaying towards automation and is striving to optimise processes in order to broaden the ever shrinking margins and maintain an element of control in light of hefty fines being waved at operators’ assumed shortfalls. Technology plays an important role in achieving just that. I believe innovative tech companies will remain hot acquisition targets for the foreseeable future especially oscillating around compliance requirements and potential automation of repetitive tasks.

Savvy tech companies in the DLT space are also bringing about new waves of innovation. Entities that can integrate a blockchain solution that offer a true benefit to the end user, will be planting new seeds of imagination in the eyes of potential acquirers, whereby an operator may be able to raise their head above the water in a sophisticated and cutting edge manner.

How would you describe the nature of the current deals?

The nature of the deals space has definitely evolved. Rather than outright buy-outs, we are now seeing more buy-ins. There is a desire to retain proven top management and the founders within the organisation as their skills and experience are being seen as valuable assets in growing the company further and taking it to the next level. Another noticeable trend is the emergence of start-ups with deep pockets that are looking at acquisitions to grow and scale fast in the hope of establishing a brand in their target markets and going for an IPO. The spectrum of deals and manners in which to structure a deal has become more open and flexible. Perhaps this new stance compared to traditional deals may be influenced by the increased deals activity and ever heightened multipliers (be it justified or merely perceived). It is an exciting time.

The US has opened up its sports betting market. Do you think this will impact M&A activity?

I think the US is the market to watch in the next 12-48 months. Just this week we have see bet365 buy up $50 million of Empire Resorts shares in New York, making them Empire’s second largest shareholder.  We have seen and will continue to see some European based iGaming companies getting close to the US giants, such as William Hill, GiG and Kindred through joint ventures. Over 2018 we have also witnessed Paddy Power Betfair acquire Fanduel and DraftKings shift part of its DFS focus in the US to sportsbook in New Jersey. The shift is in play.

Nonetheless, I suspect that the majority of significant deals that are on the horizon will primarily stem from the US based operators themselves (rather than vice versa). Even some of the largest European based are considered small compared to the conglomerates that are dominating the land-based gaming sector in the US, which is showing an interest in iGaming and looking to arm itself with the know-how for the next wave of legislation that is expected to come into play in the US.

In terms of iGaming, US companies are facing a knowledge gap. For them acquiring a European company would be a great opportunity to gain experience in operating in an online regulated environment in preparation for the wider opening of the US market. Perhaps one trend we may see is further consolidation in Europe, whereby the mid-tier EU based operators merge with one another in order to become a sizeable head turner for the US heavyweights in the years to come.

What’s your outlook for the coming 18 to 24 months?

There are more taxes and regulations being rolled out across Europe, so benefitting from economies of scale remains key, as well as trying to capture emerging markets (as well as grey), I suspect that this will continue to be a likely strategy. I expect the current pace of M&A activity from UK-based operators to continue as a result of Brexit as operators will also have to act quickly to develop a contingency plan. I also believe that we are to see a fair amount of consolidation amongst the Nordic operators as it will be more difficult for the existing operators to be able to survive and thrive under the new conditions. Overall, I’m expecting 2019 to be another exciting year within the deals space.