RP iGaming Index: Consolidation provides welcome boost

11 July 2019

This month’s edition of the RP iGaming Index sees Regulus Partners’ Paul Leyland cautiously optimistic about an upswing in the performance of igaming stocks. Market consolidation, meanwhile, has boosted a number of constituent companies.

The RP iGaming Index has continued to underperform the NASDAQ with depressing consistency. During the period, the Index was up 4.0% vs. the benchmark up 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 double digit (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 in the price and valuations (even adjusted for downside risk) looking undemanding – a modest market upswing should take most of the sector with it.

However, as well as this period has been a very busy one for corporate activity: including early July, there have been five deals announced, one rumoured and 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 rumour to action. We will be covering Caesars – Eldorado in the stock in focus, but it is worth flagging and considering the merit of all the activity.

11 June: Inspired has announced the proposed acquisition of Novomatic’s UK B2B business for £95m: 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 is buying its former parent and infrastructure provider Gamesys for £490m, returning it to a much more flexible vertically integrated gaming business

21 June: Better Collective raised an additional €40m to take its credit facilities for potential M&A (likely in the content and affiliate space) to €80m - €100m has been invested already

Post the period in coverage, Flutter Entertainment (the stock formerly known as Paddy Power Betfair) gained 20% intra-day on bid rumours (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 oft predicted wave of consolidation is therefore certainly upon us. Tellingly, however, it was not enough for the index to outperform the market.

The laggards were equally broadly based, though only two double digit: 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 dot.com-led 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 disappointed.

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, representing US$2bn in value accretion, the online weighting meant that this hardly moved the index at all. However, the deal clearly does matter for the future of online, especially in the US – since the combination becomes (easily) the US’s biggest casino operator in terms of both revenue and footprint.

Both Caesars and Eldorado have credible online gaming positions in New Jersey (888, Gamesys). 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 land-based 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 largely protected from widely distributed retail gaming (with a few VLT states and high value lottery scratch-cards the exception) as well as sports betting competition.

This has allowed a combination of 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: attracting the young, not the attritional problem of channel shift in a dynamically competitive product environment. But only lucky in a way: Caesars and Eldorado have very little online capability and are currently almost completely unsuited to coping with an omni-channel 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.