Is GVC the one to watch in 2017?

The online gambling industry should always be wary of the quiet man. The history of the sector has repeatedly seen operators achieve a position of dominant scale by focusing on their own business while their competitors are too busy shouting at each other to notice.

Gamesys, PokerStars and bet365 are the most obvious examples, but GVC Holdings is arguably another contender. The acquisition of bwin.party dragged GVC Holdings fully into the bright glare of the public for the first time. Despite being a public company it remains a resolutely low-key operator with information seemingly released on a need-to-know basis, so it’s perhaps understandable there are so many contrasting views on the firm.

The main issue is how its grey market operations impact the value of the business and that’s a circle that’s hard to square. It trades at a multiple just under 10 times earnings, which is way below some of its rivals such as Paddy Power Betfair, but its regulatory profile is decidedly different with 25% of revenues from Germany, 11% from Turkey and its largest regulated market, the UK, at just 9% of the business.

According to a recent investor presentation, the vision is to grow the regulated side of the business. Due to the breadth of its global operations – 17 countries provide 2% or more of revenues – it’s hard to pinpoint exactly where its biggest opportunities lie with operations across Europe and into LatAm. But CEO Kenny Alexander will be wary of repeating old mistakes and expensively spreading its marketing efforts too thinly.

And it’s possibly this global ambition that’s behind its desire to remain active in the M&A market.

Time to grow

GVC’s highly regarded chief exec has made no secret that his ambitions extend beyond the transformative bwin.party deal and a link with a bid for Amaya sent its share price soaring to 750p in the Autumn. Since then its share price has dropped to around 650p, but it would be no surprise to see another surge if it emerges as a bidder for any of a number of high-profile operators in the sector.

William Hill must look like a hugely valuable target for GVC’s board, with the firm seemingly neatly fitting the profile of its previous acquisitions. But Hills has been reluctant to be the acquired party in any mooted deals so far. Although the vacant position at the top of William Hill and the lack of any obvious competitive crossover in the two businesses makes it a compelling combination on paper.

The question is whether it needs the scale a merger or takeover of a William Hill would give it. With circa €900m of revenues expected in 2016 it’s not lagging far behind its major rivals, and it has a lot of spare capacity in its marketing. Marketing as a percentage of NGR was just 21% in H1 and only 18% in sports betting.

Even with the anticipated shift to 24% of NGR in H2 it’s still some way behind most of the sector and suggests it’s keeping its powder dry while it makes more significant changes to its operational model and technology platforms. There is clearly a gear change GVC can undergo once it feels the business is solid enough to warrant the investment.

IT synergies are expected to feel the benefit in 2017 and the firm predicts €125m in total synergies by the end of this year. But what is impressive is how the firm has maintained growth despite all the effort involved in repositioning the bwin.party brands, teams and tech during the previous year. An end of year trading update showed group revenue up 12% in Q4 with growth in both sports and gaming.

The intention with acquiring the bwin.party brands seems to not have been to turn GVC into another public gaming giant, but to turn bwin.party into the GVC model. This means embracing grey markets, increasing operational efficiency and ignoring the wider chatter in the sector to focus on its own vision of how to drive profitability and scale the business. The heavy lifting there seems mostly to be over and what comes next will define not just GVC’s fortunes but the future of the sector too.

Buy or build?

Should GVC choose to focus its attentions on organically growing its powerful portfolio of brands in its core markets and establishing a presence in some of the emerging to-be regulated markets (The Netherlands, Eastern Europe, Germany and even Brazil) then this is likely to be a net negative for many of its peers. A lean and focused bwin operating on a modern tech platform, with ramped-up in-house development, is a competitor all should fear. And that’s not to mention a revitalised Sportingbet, Foxy and PartyPoker.

But GVC should have some fears of its own too. Its grey market profile doesn’t seem to overly trouble investors, and the success of the business in previous years is arguably a major factor in the shift in thinking from investors and analysts towards the value of grey market revenues generally. But it places risk on the business, broadly reflected in its trading multiple, and a shift to more regulated markets will add considerably to its tax burden. The firm estimates a €50m increase in tax costs by 2018, but depending on its market entries and regulatory movements this could be considerably higher still by 2020.

A shake-up in Germany could be very good for a business with such a high-profile in this yet untapped market, but it could also be disastrous depending on the nature of the regulatory progress. Brazil is likely more of a near-term opportunity than a risk, but the regulated shift in Eastern Europe could be a blessing and a curse for a firm with such strong brand presence in most of those markets. And even the UK has the potential for a headache with the shift to a tax on casino and bingo bonuses in H2 2017.

GVC has spent much of 2016 quietly putting its house in order, and it will likely need a chunk of the New Year before it’s ready to begin turning on the marketing taps fully on the bwin brands. There was, after all, an awful lot of remedial work to carry out on that renovation process. But while the upside to that business is clear, what direction it takes is less obvious.

Will it acquire more regulated revenues in the shape of one of its core rivals or continue on its current slower path towards a lighter shade of grey? The answer to this should be causing some sleepless nights in Dublin, Douglas, London and beyond over the coming months. Although you suspect many will be reluctant to learn the lessons from egaming history. It’s always the quiet ones…