Tottenham Report: Cheap money drives acquisition frenzy By Andrew Tottenham, Managing Director, Tottenham & Co August 16, 2021 at 10:00 pm The summer months in Britain are usually referred to as the “silly season”. Since there is not a great deal of serious news around, journalists report soft-news items. However, this year in the gambling world, there is a lot going on and certainly in the M&A area. Quite a few deals have been announced recently. Romanian Superbet has acquired Belgian-based Napoleon Games. Silverpoint Capital has acquired Caesars UK, which includes their operations in Egypt and South Africa. Troubled private-equity group, Novalpina, owners of Baltic operator Olympic Entertainment, acquired Romanian company MaxBet. Swedish-based online operator, Bettson, has acquired South American Inkabet. And Entain, seeking to expand its total addressable market and its demographic spread, is acquiring Unikrn, a content and esports betting company. And there are many more. What is driving this acquisition frenzy? Mainly cheap money. U.S.-facing online-gambling companies are leveraging their extremely high multiples to hoover up technology, consumer-facing, and content companies. They need to maintain a news momentum before anyone realises that the current business model is unsustainable. Essentially, because their money is “cheap”, the operators are buying market share with what appears to be little concern for medium-term profitability. The problem with throwing money at customers is that it is like a drug, similar to VIP cash rebates and coin giveaways in Atlantic City. These customers are not loyal. As soon as you stop, they will move on to the operator that continues to give away the store. It is a game of “last man standing” and along the way, some operators will run out of cash and will not survive or will be snapped up by their rivals. Caesars UK was bought by Silverpoint Capital; the price was not disclosed, but likely it was less than £20 million. As soon as Eldorado’s CEO, Tom Reeg, announced that the merged company would be focussing on its domestic business, it was pretty obvious that Caesars UK would be for sale; Caesars UK is a pimple compared to the U.S. business. A number of companies showed interest, including Monaco-based SBM and Canadian Sonco, which had purchased Maxims Casino from Genting in 2019. Neither of these companies was able to close the transaction. I believe that with SBM, getting to an agreed price had proved difficult, while with Sonco, debt providers were proving unwilling to fund the transaction. The difficulty lay with the liabilities sitting in Caesars UK: a pension deficit that could be quantified and the potential risk of further fines from the Gambling Commission. Superbet’s purchase of Napoleon Games made good sense. Superbet is a retail betting operator with a strong online presence (betting and casino) in Romania and Croatia. Napoleon Games, owned by private-equity firm Waterland, is one of the top three online gambling companies in Belgium., where online gambling licenses are tethered to land-based licences. In other words, to offer online casino games, you need to operate a land-based casino, for sports betting a retail betting outlet and arcades games a land-based arcade. Napoleon Games started as an arcade operator and quickly added betting and casinos in order to capitalise on the online opportunity. With this acquisition, Superbet neatly adds scale in another geography. Recently, I was talking to a financial analyst at one of the major investment banks about multi-country strategies for gambling companies. Specifically, a few land-based companies, apart from markets where they had a significant presence, had a single casino in another geographical area. The question was whether this made any sense. From my perspective, there are two reasons to expand into other jurisdictions. One is to replicate what you have and do well in another market and, two, to reduce regulatory or tax risk. Being too dependent on a single geography can make your results too dependent on things staying the same in that country. One regulatory change or an increase in the gaming tax can have an outsized impact on your results. However, there is little point in acquiring or developing a business overseas that does not have scale and will represent only a small part of EBITDA, unless it has the potential to be a steppingstone to larger things. For example, a business that represents 5 percent of total EBITDA is not going to do much to reduce risk from tax or regulation changes if 80 percent of EBITDA is coming from two jurisdictions. Additionally, the regulations in each jurisdiction differ and there are few economies of scale with a business that does not support its own compliance function. The structures you have to put in place, along with the amount of management focus, to ensure regulatory compliance do not make sense when acquiring or developing a relatively small business. The acquisition becomes a distraction and removes management attention from where it is best focussed. Companies looking to expand overseas need a rational growth strategy. Acquiring a company just to plant a flag is rarely a good idea.