Come together: Consolidation is the name of the game By Andrew Tottenham, Managing Director, Tottenham & Co May 18, 2018 at 1:55 am The once-fragmented – and, hence, competitive – gaming sector has seen an increasing number of mergers and acquisitions in recent years, and the velocity has only increased in the last twelve months. The fever for consolidation started quietly a few years ago, in 2011, with BWin and Party Gaming’s merger, a move that left 888.com with nobody to dance with. GVC then went on a bit of a buying spree, acquiring one company after another, with each transaction more audacious than the last. Bookmakers began merging, as well: in 2015, Paddy Power merged with their arch enemy, betting exchange operator Betfair, and Ladbrokes joined up with Gala Corals in November of the following year, a move which created Ladbrokes Coral, who were then subsequently themselves acquired by GVC. I think it may have been Ralph Topping, the former CEO of bookmaker William Hill, who once said of Betfair that “they come across like choirboys, but really they are the Devil.” Betfair’s lobbying in the UK, ably and successfully led by Marc Davies, has fought off several attacks from the big bookmakers. Betting operators believed the way in which betting exchanges were taxed allowed people to act as bookmakers on the exchange without paying the tax that licensed bookmakers pay. Accordingly, the bookmakers wanted people who laid bets on the exchange to pay the same 15% tax on GGR that UK betting operators pay. The supply industry, for its part, has seen an increasing number of transactions. Sci Games has hoovered up (a British colloquialism) virtually everything in sight. WMS was one of the first in their current spree, followed shortly thereafter by Bally Technologies. Not satisfied with slot machine manufacturers and distributors, and with an eye to increasing their content portfolio and platforms, Sci Games went on to acquire a number of development companies, most recently NYX. Even the once-mighty IGT eventually succumbed: the Lottomatica-owned GTech acquired IGT, and then proceeded to fold all three of the businesses into a UK plc under the IGT name. International consolidation makes sense in the iGaming sector, too. Economies of scale can add significant value to an iGaming business, but if you want a lesson in how not to do it, just study how the retail banks have consolidated: retaining multiple brands and sticking legacy systems together with band aids and chewing gum, a situation that generally ends in tears and with reputations in tatters when upgrades are attempted. If you are going to consolidate, do it properly: take the pain and migrate your customers to a single platform early on, rather than making different systems “talk” to each other. Many of the fines imposed on iGaming operators by the British Gambling Commission are because, post-acquisition, one part of a recently aggregated company did not know what the other part was doing and was, for example, sending marketing material to people who had already been excluded. Recently, there have been a few transactions in the land-based operator sector, with Blackstone’s acquisition of Cirsa being the largest; that deal followed their purchase of the French casino operator Groupe Joa in November of last year. Waterland, a Dutch-based private equity company, attempted an international consolidation strategy, acquiring two Belgian casinos, the Dutch arcade operator JVH Gaming, and a number of other businesses in the gambling sector. They were proven unable to execute the strategy and are now attempting to sell JVH. Baltic casino and slot arcade operator Olympic Entertainment Group was acquired by Novalpina Capital in March, after quite a few months with a ‘for sale’ sign hanging over it. No doubt, Novalpina see OEG as a platform on which to bolt additional businesses. Similarly – and also in March – Trans World Corp, the operator of three Czech casinos and five hotels, was acquired by a Hong Kong-based investment group, FEC. I think it’s fair to expect further acquisitions of businesses in this sector from these and other private equity and investment companies. International consolidation strategies are driving these transactions, but I question whether there is any value to a strategy such as this in the land-based, retail gambling sector. In the gambling machine manufacturing-and-distribution business, an international strategy makes sense; manufacturers are able to take advantage of economies of scale and squeeze out costs. An aggregated business can source components centrally and operate a single site for game design, assembly and distribution, as opposed to having to maintain multiple manufacturing centres, all of which can lead to a significant reduction of costs. In other words, synergies: that wonderful word used to rationalise many a takeover or merger. Although I seriously doubt there are many takeovers that realise anything like the value of the synergies touted to shareholders pre-transaction. It may be that some of these acquisitions are ‘strategic’. The late Peter George, the straight-talking ex-CEO of Ladbrokes and SVP Development Caesars, once said, in response to someone’s claim that their acquisition of a company was a strategic investment, “So it doesn’t make any money, then?” Consolidation within the retail gambling sector can make commercial sense within a single jurisdiction, but can it be justified if the target is beyond national borders? Let’s take a moment to examine the advantages of an international retail gambling business. Within a single jurisdiction, or perhaps in neighbouring countries – for example, the Netherlands and Belgium – cost reductions are possible. This is also the case if the company has operations in a number of countries and is adding a business in a country where it already has a presence. A single administrative centre is then able to direct and control the businesses. A larger company can also leverage its purchasing power with manufacturers, especially of gambling machines, and other suppliers to get cost reductions. Slot machines and electronic gaming tables are international products, so central purchasing can be cost effective. Remember, though, that many of the individual business units are comparatively small and, therefore, there is little leverage with other suppliers such as food and beverage distributors. (As an aside, there is one aspect of globalisation that does annoy me: when I see slot machines in casinos in France – or Germany, or any non-English speaking country – that have the games, belly glass, prize tables, instructions and buttons written in English. It shouldn’t be that difficult or expensive to customise a game with different languages. Imagine the response if you installed a slot machine on a Las Vegas casino floor with everything written in French and expected your customers to “learn” how to play it?) But where are the other economies of scale? A single head office, maybe. Any reasonably-sized target will still likely need an administrative presence within its home country. Locally-based marketing, compliance, legal, accounting, HR, purchasing, and other functions will still be required and need a base of operations, and the business will have to pay its share towards head office overhead. One could argue that being part of an international conglomerate could well add cost, rather than reduce it. Perhaps the sharing of best practise within the group is an argument in favour of consolidation. Yes, best practise can and should be adopted across the estate, but it will need to be adapted for local conditions: regulations, laws, and, most importantly, culture. For me, the jury is out on whether a strategy of international consolidation in the retail gambling sector is a commercial proposition. Time, as always, will tell.