Big, bigger, biggest – gambling’s consolidation game

8 October 2019

Flutter Entertainment's mega-merger with The Stars Group is likely to be the first deal in the latest wave of industry consolidation, with investment bankers eager to spearhead more M&A activity. While this may disrupt the growth trajectories of some of the sector's leading lights, it's unlikely to stop any time soon, writes Scott Longley.

Take a look at the long list of the financial advisers involved in the Flutter/Stars Group all-share merger and it becomes obvious why there is such momentum behind consolidation within the gambling sector.

Top of the list is Goldman Sachs and its own M&A 'kingpin' and chief rainmaker Anthony Gutman, followed by Flutter's corporate broker Goodbody and financial advisory firm PJT Partners.

Then on the Stars Group side we find Barclays, Moelis & Company and BMO Capital Markets all named.

That’s without listing the law firms that were in on the joint ticket, a tear sheet that runs to 11 firms in total including various magic circle and White Shoe names.

None of this advice comes cheap. The list represents a lot of mouths to feed and it goes some way to explaining why the wave of consolidation within the global gambling sector isn't finished yet.

The names of the likely candidates for further deals reel off the tongue - William Hill, DraftKings, GVC, MGM and Caesars to name just the most obvious.

There is an absolute logic behind consolidation in any sector, from gambling to pharmaceuticals. Product diversification, geographic expansion, the ability to buy market share and the much-mentioned synergies, whether this is costs (job cuts) or revenue (cross-sell) are all vital elements to how any deal is sold the shareholders.

In this instance, added impetus comes from the expansion of US sports-betting in the wake of the nixing of PASPA. Notable among the names of the various executives plugging the deal was that of Lachlan Murdoch, executive chairman and chief executive at Fox Corporation.

This is a global deal – from Russia to the UK, Georgia to Australia – but it is the welding together of FanDuel and FoxBet that catches the eye. The state-by-state openings in the US may be in its formative stages but the competitive landscape is already taking on a settled and consolidating aspect.

Such are the pull factors. But as one corporate lawyer who wasn’t involved in putting this deal together but has been involved in many others both within and outside of the sector, there is also one important push factor that should be considered.

“A lot of investment bankers are sitting around trying to create deals,” he says.

The managements of the firms mentioned above will either already be involved in or will be more than aware of plans being discussed and proposals being drawn up for every potential combination.

The bankers will ensure it – after all, if deals don’t get done, their fees (and bonuses) dry up.

This is regardless of whether, as the lawyer suggested, Flutter/Stars achieves the necessary “fabulous execution” that will be needed to make the merger work. In fact, the incentives when it comes to M&A are (some might say) perversely weighted towards those that do the deals versus those that are left to execute them.

The talk in the days following the deal has focused on what will happen now at Flutter/Stars. The integration of two already large organisations will take years to complete and the scale of the task certainly won't be underestimated.

The disruption from any merger should never be underestimated. Morale within the companies involved can be tricky to maintain – think about those synergies again. Questions of cultural fit will dominate internal discussions as management attempts to pull together disparate parts of the business into a cohesive whole.

The combined entity may well underperform in the short-term and the entity might end up being less than the sum of its parts. The sector has numerous examples of just such post-M&A disappointments and certainty the recent history of Flutter itself and the merger between Paddy Power and Betfair provides an example of how tricky the merger transition can be. No one would claim that these two businesses together have been performing anywhere near as well as they did when they were separate.

Yet for the investment bankers, this is beside the point. They do their job and move on. By the time the verdict is in on Flutter/Stars, they will likely have already sealed the deal on the next merger down the track.

This is why the momentum for further deal-making within the sector is all but unstoppable and why the inevitable end result will be even bigger multi-jurisdictional, multi-product and multi-brand beasts with tentacles reaching into every corner of the gaming and gambling world. How the rest of the sector responds, whether that is competitors or suppliers, will be the story for after the goldrush. But for now, the M&A bandwagon will just keep rolling on.