Playtech LON:PTEC reports its results this Thursday (23rd March).
The Armchair Trader has followed Playtech for a while, writing about the technology provider’s potential GBP2.7bn acquisition by Aristocrat Leisure [ASC:ALL], the Australian slot machine manufacturer, which fell through in February last year when only 55% of shareholders approved the deal – the minimum threshold was 75%.
The Aristocrat deal was one in a series of bids, with Hong Kong-based fund Gopher Investments trying to snare Playtech’s financial trading arm a few months earlier, and former F1 mogul, Eddie Jordan, also heading a bid from JKO Play consortium, but pulling out at the 11th hour after it appeared that shareholders would reject his offer.
Hot property
After the Aussie deal fizzled out, TT Bond Partners, a Hong Kong-based investment firm, that had previously advised Gopher Investments threw its own hat into the ring, backing an MBO, but withdrew last July before formal bids were made.
The rejection of the offers last year doesn’t mean that shareholders are against selling; it’s just that they see a lot more value in the Playtech business than the cash that was brought to the table, and the suitors still circling the FTSE250-listed company has not gone away.
Playtech, if not a unicorn is a bit of a hippogriff, in that it is a gambling/gaming company and a software developer and technology provider. Based on the Isle of Man, Playtech specializes in developing software and technology solutions for the online gaming and gambling industries. The company was founded in 1999 and listed in July 2012.
Playtech’s software solutions are used by online casino operators to power their games, sports betting platforms, poker networks, bingo rooms, and other gaming-related products. Playtech’s products are also used by lottery and gaming operators, as well as by land-based casino operators who want to offer their customers an online gaming experience.
The company has operations in more than 20 countries around the world and employs over 6,000 people. Playtech has won numerous awards for its products and services, and it is considered to be one of the leading companies in the online gaming industry.
Industry consolidation
Playtech’s adventures last year are part of a bigger picture across the gambling industry. The gaming industry is going through a period of consolidation unseen before. And buying a place at the table – in an industry that yielded more than GBP14bn as at March 2022 – has become a priority for many international investors.
Due partly to the coronavirus pandemic, the share of the public who gambled online in Great Britain increased from 2020 to 2021. As of March 2022, the number of new online gambling registrations in the UK was approximately 32.5 million. Meanwhile, the yields of the remote betting, bingo, and casino gambling industry in the country peaked between April 2020 and March 2021 according to Statista.
The following year, to March 2022, the yield of the remote betting, bingo, and casino gambling industry totalled GBP6.4bn. Despite the increased popularity of online gambling during the pandemic, the share of the British public that agreed that gambling was conducted fairly and can be trusted reached its lowest point in 2020. In 2021, that figure was 30.1% according to Statista.
Accelerated growth
But that last statistic hasn’t put off investors looking for ways to get into the game. The gambling market in the UK is poised to grow by USD2.8bn between 2022 and 2026 accelerating at a compound annual growth rate of 5.25% during the forecast period.
2022 was a phenomenal year for M&A activity in the gambling industry but 2023 will likely see that record year surpassed, as the general state of the economy and increasing regulation drive the search for economies of scale. As at the end of the last financial year 77% of total business-to-consumer gross gambling yield was from just 10 operators in the UK. It is predicted that the three biggest betting companies in the UK will this year capture at least 50% of gambling revenue.
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However, the most febrile area for M&A in the next few years is going to be business-to-business, and it’s at the centre of this web that Playtech sits, especially in the US which currently has less exposure to regulatory and responsible gambling risk than the UK and greater revenue stability.
And its not just one bookie buying another bookie’s pitch. The big players coming into the sector are financial services companies. Last June global private equity shop, Blackstone completed a USD6.4bn acquisition of Australia’s Crown Resorts, its largest acquisition to date in the Asia Pacific region. The June bid was the third one that Blackstone had made for Crown Resorts, which has echoes to Playtech’s shareholders teasingly putting up a ‘Not For Sale’ sign.
Blackstone’s Crown deal was only marginally larger than Light & Wonder sale of its lottery business to Brookfield Business Partners for USD6bn. In the online space 888 Holdings LON:888 purchased William Hill’s [LON:WMH] non-US assets from Caesars Entertainment for GBP1.95bn in July.
Value accretion
Playtech has spent the last year increasing the value of its business. It made a CAD12.3m strategic investment in NorthStar Gaming, an Ontario-based online casino and sportsbook operator. The investment was made through a convertible debenture that would convert into equity and warrants in connection with NorthStar’s proposed reverse takeover of Baden Resources.
Earlier this month, NorthStar’s RTO got approval and listed in the TSX. Playtech’s investment meant that it held approximately 16% of the newly-listed company’s shares and a set on the board, with further warrants giving it the right to increase its stake potentially beyond 20%.
Playtech also made a strategic USD85m investment in Hard Rock Digital, the interactive gaming and sports betting portal for Hard Rock International and Seminole Gaming.
Day in court
The company also zoned in in the Hispanic community south of the border in a strategic partnership Mexico’s Grupo Caliente to break into the US market through the Caliplay vehicle. However, this partnership started to sour at the beginning on the year over options for ongoing services and fees, and is currently being heard in an English court
As interest rates in the UK rose in the second half of 2022, Playtech refinanced EUR530m senior secured notes and its revolving credit facility, both of which were due mature in 4Q23. The company agreed a new EUR277m revolver and redeemed, at par, EUR330m of its EUR530m senior notes due October 2023 in October 2022 from its balance sheet. This left EUR200m on its balance sheet but saved EUR12m in financing charges. The company still has EUR350m of senior debt due 2026.
Playtech had a strong 2022. The first half of the year was ahead of expectations, mainly driven by its B2B stream, with earnings up 64% year-on-year to EUR203.8m. in volume terms American growth led the way, up 50% y-o-y, but in its B2C segment, earnings appreciated 143%. Reported profit was EUR71.4m
Increased earnings
The first-half performance is expected to be followed on by a strong 2H22, with full-year earnings expected to be at least EUR400m.
The company opened trading today (21st March) at 549.5p and has offered a year-to-date return of -7.96% and a one-year return of -12.8%. The 52-week price swung between 360.8p and 636p. Playtech has a market capitalisation of GBP1.6bn.
The company arguably still remains undervalued in a global sector that has a lot of overvalued players. The management isn’t under pressure to sell anything, as the core business remains a strong cash-generating machine. However, with recession lurking around the corner, one is not too sure how the gambling sector will perform – especially the digital part of the business that has not historically experienced a full-blown economic downturn.
That said, the way that consumers interact with gambling companies has changed since the 2008 recession. The die-hard gambler in a queue outside a betting shop come rain or shine is becoming anachronistic, and increasingly gambling is something done over a coffee, on the sofa, on a bus or even sat on the toilet, at the click of a screen on a mobile. The digital consumer may prove to be more resilient than the physical consumer, but only time will tell.
The other risk that comes from recession is greater regulation, as the state, worried about citizens gambling uncontrollably to get themselves out of a financial pickle, often stages an intervention in times of financial stress. Playtech has made steps to diversify itself geographically and across gaming sub-sectors and is growing its B2B over its B2C offerings.
Undoubtedly there will be more suitors that come knocking, so today’s share price might be a discount on the company’s future potential, not only in terms of revenue and growth but as an acquisition target.
