By Marcus Falck, Isak Muhr (Stockholm School of Economics) 17/11/2018 |
Overview of the deal
Acquirer: The Stars Group Inc.
Target: Sky Betting & Gaming Ltd.
Estimated value: $4.7 bn
Announcement date: April 21, 2018
Acquirer Advisors: Deutsche Bank, Morgan Stanley, PJT Partners
Target Advisors: Goldman Sachs
The Stars Group Inc. (“TSG”) recently announced that the U.K. Competition & Markets Authority has cleared its acquisition of Sky Betting & Gaming (”SBG”) and they can now begin executing on its integration plans. In April this year, The Stars Group agreed to acquire SBG in a deal worth $4.7 bn, of which $3.6 bn is payable in cash and the remainder is payable in approximately 37.9 mn newly-issued common shares, thus creating the world’s largest publicly listed online gambling company. The deal was announced only two months after the rumors about the majority owner, CVC Capital Partners, had chosen Rothschild to examine a stock market listing (an IPO).
The Stars Group, primarily relying on online poker, has been looking to diversify its operation across different regions and products. ‘In-person’ gambling is illegal or highly regulated in most countries across the world which has resulted in providing significant growth opportunities for the global online gambling industry, which is forecasted to grow at a CAGR of 10 % in the near-term. This is because, let’s say, an online gambling company registered in, for example, Malta can operate in countries which do not allow "normal" gambling.
“This transaction creates the world’s largest publicly listed online gaming company and unites two iconic brand portfolios with strong technology platforms and teams. This significant scale also positions The Stars Group to both secure and expand upon its global footprint” –Rafael Ashkenazi, CEO of The Stars Group
Company details (Stars Group Inc.)
The Stars Group Inc. provides technology-based products and services to gambling and interactive entertainment industries around the globe. They own brands such as PokerStars, BetEasy and BetStars.
- Founded in 2001, headquartered in Toronto, Canada
- President and CEO: Rafael Ashkenazi
- Number of employees: 2,100
- Market Cap: $6.3 bn - EV: $8.6 bn
- LTM Revenue: $1.5 bn - LTM EBITDA: $560 mn
- LTM EV/Revenue: 5.8x - LTM EV/EBITDA: 15.4x
Company details (Sky Betting & Gaming)
Sky Betting & Gaming provides gambling services such as sports betting, online poker, bingo, and casino games primarily to customers in the United Kingdom but also in other European countries.
- Founded in 2001, headquartered in Leeds, United Kingdom
- President and CEO: Ian Proctor
- Number of employees: 1,400
- Market Cap: - EV: $4.7 bn
- LTM Revenue: $925 mn - LTM EBITDA: $294 mn
- LTM EV/Revenue: 5.1x - LTM EV/EBITDA: 16.0x
Note: Figures reported in GBP, converted using exchange rate as of announcement date, at £1:$1.3792
Projections and assumptions
Following the announcement, investors exhibited their positivity and The Stars Group’s stock was trading 14 % higher. Due to SBG’s strength in technology and marketing, investors certainly expects TSG to win a significant foothold in the U.K. as well as a trove of potential new customers for its online casino and poker offerings. SBG will provide TSG with a strong presence in Europe, especially in the United Kingdom, Italy, and Germany, where SBG’s market share growth has been outperforming its competitors. Following the acquisition, SBG is valued at a multiple of 12.8x unaudited adjusted LTM EBITDA, including expected cost synergies, such as SG&A savings and marketing spend optimizations, of $70 mn per annum. The integration commences in late 2018 and the transaction will be neutral to adjusted EPS on a diluted basis in the first full year and have a positive impact thereafter.
Further, TSG has obtained fully committed debt financing, mostly containing first lien term loans but also senior unsecured notes and a revolving credit facility. Deutsche Bank, Goldman Sachs, Macquarie Capital and Morgan Stanley provided the committed debt financing that was used for the cash portion of the transaction and will be used to refinance TSG’s existing first lien term loan as well as repaying SBG’s outstanding debt. Due to the size of the acquisition and the financing characteristics, it may prevent TSG from further M&A activity in the near-term.
The gambling industry has longed for the U.S. Supreme Court to weigh the state of New Jersey’s attempt to have a federal law banning sports betting struck down as unconstitutional. On May 14th 2018, the Supreme Court announced the precedent-shattering decision that opened the door to legalized sports gambling – sports betting operations soon proliferated in many U.S. states and more expansion is expected to follow. A more open U.S. sports betting market, combined with TSG’s technological advantage and SBG’s forefront marketing, enables TSG to integrate their operations in a more scalable manner and expand to new domestic markets. Furthermore, the mobile gambling market is the most cost-effective way to enhance revenue growth due to low marginal costs and wide customer engagement (vs. brick-and-mortar expansion). This positions TSG to benefit from SBG’s advanced mobile offerings in which they have an expected long-term revenue growth of 14-16 % per annum. Thus, the transaction creates significant long-term upsides in respect to market expansion and new gambling offerings.
Except for the growth opportunities, the acquisition provides solid revenue diversification benefits. It helps accelerate TSG’s strategy to decrease reliance on the inherently unstable and stagnant poker business, which accounts for two-thirds of its revenue, as well as diversify SBG’s revenue with over 80 % of its revenue generated from mobile devices. Following the acquisition of SBG, TSG has a revenue mix, by product, of 37% poker and 60% casino & sports gambling – a split far more consistent with its competitors.
Risks and uncertainties
The gambling industry is already highly regulated and there is a considerable uncertainty of future evolving regulatory compliance due to the ethical aspects of gambling. While the U.S. market is becoming more lucrative, some European legislators are showing their pessimism through increased scrutiny, tighter policies and increased tax rates. Most recently, the U.K. Chancellor of the Exchequer, Philip Hammond, announced that the U.K. is set to raise the tax paid by offshore gambling companies. This comes only a few months after the maximum permitted stake on FOBTs, or fixed-odds betting terminals, was decreased from £100 to £2 in the UK. Simultaneously, Italy enacted a law that restricts all gambling advertising and sponsorship and it remains further unclear if more European countries are expected to follow – an act that opposes SBG’s ability to utilize their marketing advantage.
TSG’s stock reached its all-time high two months after the deal was announced and since has been fallen more than 50 %. The catalyst behind this sustained fall lies principally in TSG’s Q2 report which reported $96 mn of acquisition-related costs as well as an incurred net financing charge of $160 mn. These costs are raising questions on TSG’s previously forecasted ability to integrate SBG efficiently.
More, the compounding impacts of growth opportunities, margin expansion and revenue diversification enable TSG, to some extent, facilitate a more rapid deleveraging. Nonetheless, there are concerns about TSG’s post-acquisition LT-Debt/Equity ratio of 130.73, especially compared to the industry average of 23.29. The substantial prevailing indebtedness combined with covenants and restrictions regarding their secured credit facilities requires TSG to use a significant portion of its cash flow to make debt payments. This limits the flexibility of business decisions and its ability for future dividend payments.
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