In social gaming, rising DoubleDown tide lifts all boatsBy Aaron StanleyApril 19, 2017 at 2:53 pmIf you thought last summer’s sale of Caesars Entertainment’s Playtika social casino business to a group of Chinese investors for $4.4 billion was a one-off anomaly, you weren’t the only one.Fast forward nine months, and International Game Technology has become the latest entity to make a fast buck on its social gaming investment with its announced sale of DoubleDown, the struggling social casino unit, to South Korea-based DoubleU for $825 million.The sale appears to answer in the affirmative the question of whether or not social casinos are a profitable and appropriate venture for traditional gaming enterprises to be investing in – at least for the time being.The DoubleDown price is well above the initial $500 million IGT paid to acquire it in 2012, and the unit has generated roughly $440 million in EBITDA for the company in the ensuing years, despite an 11.7 percent drop in revenues in 2016.“While not the same nosebleed price that Caesars sold Playtika for, it’s still a very good valuation at 10.5 times trailing EBITDA, which is in the middle of the range for recent social casino (mergers and acquisitions),” Todd Eilers of Eilers & Krejcik Gaming Research, said in a note to investors.IGT shares closed at $22.18 on Tuesday, up 4.4 percent.In terms of numbers alone, the DoubleDown deal still lags behind the Playtika multiple, which was valued at 13.5 times the $325 million in EBITDA it had generated over the prior 12 months. But the 10.5 times DoubleDown multiple figures to get a nice bump when factoring in the licensing royalties DoubleU will be paying out over the coming years.“We estimate IGT gets an ongoing high margin royalty stream of $10 million to $15 million per year on top of the sale for exclusive access to IGT’s game content making the deal much more attractive on a go forward basis,” Eilers continued.“While IGT has sold Double Down at 10.5 times headline EBITDA, we roughly estimate an underlying sale multiple of 12-14 times when accounting for likely licensing and (research and development) spend,” Cameron McKnight of Wells Fargo Securities told investors in a research note. “Importantly, it suggests the watershed sale of Playtika last year at greater than 14 times may not be a one-off.”This is significant because Playtika and DoubleDown are completely different animals. At the time of last summer’s sale, Playtika was – and remains – the largest social casino with more than 6.5 million daily active users. DoubleDown is the fifth largest with 1.4 million daily active users.What does this mean for other social casinos, such as Churchill Downs’s Big Fish and SG Interactive from Scientific Games? It’s a net positive, analysts say, but the extent to which remains to be seen.McKnight viewed Big Fish as likely the biggest winner, particularly as it also posted a mixed performance in 2016.“Churchill Downs shares could be up 10 percent to 12 percent. Valuing Churchill Downs’s Big Fish social gaming asset at 12 times to 14 times EBITDA yields about 10 percent to 15 percent upside potential to our sum-of-the parts valuation,” wrote McKnight. “The major difference between Big Fish and Double Down is that Big Fish is diversified across different streams of social gaming.”While Big Fish’s overall bookings grew 7 percent in 2016, 40 percent of that came in the free-to-play segment. This was accompanied by a 5.5 percent decline in social casino bookings and a 15 percent drop in premium bookings.On its fourth quarter earnings call, Churchill Downs warned investors that bookings and associated revenue would continue to fall in 2017 as the company recalibrates its social gaming approach.John DeCree of Union Gaming said that 10.5 times EBITDA was the new status quo floor for social casino valuations, but expressed skepticism that multiples would be driven much higher.“We do think market multiples for social gaming businesses were elevated. As a result, we believe 10.5 times will keep the status quo as it relates to valuation for companies with significant social gaming exposure (Scientific Games and Churchill Downs), but we wouldn’t expect to see much of a valuation lift,” DeCree told investors.Churchill Downs shares were up 5.4 percent Tuesday on the news, while Scientific Games gained 2.6 percent for the day.While the DoubleDown selloff was attributed to tightening competition in the social casino segment, the market continues to grow. Social gaming revenues grew 13.4 percent year-over-year for the first quarter to $1.06 billion, and they are expected to grow 11.5 percent to $4.25 billion for the full year, Adam Krejcik of Eilers & Krejcik Gaming told Fantini Gaming Research.