Five talking points from Kindred's takeover of 32Red

The most obvious conclusion from the today’s announcement is that the cost of doing business is going up when it comes to M&A, as the number of viable targets declines. 32Red was frequently highlighted as the most obvious viable mid-size target in the UK market and it’s possible there was more than one interested party in acquiring the operator.

Certainly an offer that equates to a 20%+ premium on the share price at 2.8x 2016 revenues and around 17x 2016 EBITDA (11x 2017 EBITDA) seems aggressively priced. The message to the industry is pretty clear: key regulated market assets are only going to get more expensive in the future as firms look to buy market share when entering them. But it’s also obvious 32Red brings a lot more to Kindred than purely incremental revenues.

1) A major UK player?

Without doubt the major rationale behind the deal will be to boost Kindred’s UK profile. We estimate Kindred will have around £75-80m of UK revenues following the acquisition of 32Red, giving it a circa 2% market share. In the UK casino sector it will gain around 1.5% market share, but in the huge and fractured UK casino market that is not an inconsiderable amount.

It will also inherit one of the more established and trusted brands and a real point of differentiation with the Microgaming-dominated offering. Kindred has already shown its ability to rapidly grow and existing brand with Stan James and the iGame Group deals and anything resembling a similar performance with 32Red could quickly become a sizeable player in arguably egaming’s most important market.

The willingness of Kindred to reinvest in growth in the UK means it can no longer be ignored as a minor player.

2) Multi-brand future

With the addition of 32Red, Kindred now has three major co-existing brands in the UK in the shape of Unibet, 32Red, Stan James, as well as its female-focused Maria brand. There is a case for keeping all four, as they arguably all serve slightly different markets, but this may be a test of Kindred’s commitment to the multi-brand strategy it’s only recently pivoted towards.

Marketing costs are high and likely to rise further in the UK if we see the imposition of TV advertising restrictions, and building and maintaining the brand strength of four brands with a sub nine-digit revenue base is a big ask for any firm. At the very least we’d expect to see some synergy around the casino offerings.

It’s also less obvious what the core brand should be with 32Red having its own sportsbook brand that has invested fairly heavily in horse racing sponsorship and brand building in recent months.

3) Simple synergies

As with any bolt-on acquisition, the question will be how quickly and easily Kindred can drive synergy value from its existing platform and marketing strengths. One easy integration should be on the sports side where 32Red already uses the same Kambi platform as Unibet. The, until recently, exclusively Microgaming casino offering from 32Red may prove more of a challenge, although it’s a platform Unibet also has considerable experience of operating with.

What will also be interesting is to what extent the 32Red senior team is integrated into the Kindred Group with the marketing abilities of the UK casino operator a core strength of the operation. If Kindred can retain the expertise and knowledge of the UK market, this would seem to be a huge advantage for the group. Although this may be harder to achieve with a cash acquisition for any significant option holders on exit.

4) Add-on value

While the focus is undoubtedly on the UK-facing part of the business there is also a smaller Italian operation and a predominately grey-market focused side of 32Red that also needs to be considered. Unibet has a modest operation in Italy and this won’t substantially increase its market share in the country, but acquiring a growing casino brand in the market is another plus.

What’s more interesting is how Roxy Palace will fit into the Kindred Group. The addition of grey market revenues won’t be troubling to the group and may give it exposure to new territories and a brand Kindred can use as a temporary cash cow in the dot com sector. And perhaps more interestingly is whether Kindred will look to add more Roxy Palace style operators to the fold in the near-future.

5) More M&A to come

The acquisition of 32Red in some ways increases Kindred’s potential in the M&A market.

The Microgaming network hosts a number of small to mid-size operators that exist very much under the radar and face increasing tax and regulatory pressure in markets such as the UK. With the 32Red business presenting an easy integration opportunity, it’s not beyond the realms of possibility for Kindred to mop up one or more of these firms in the coming months. And beyond this we should expect to see Kindred remain active and hungry for more regulated market opportunities.

This is unlikely to be its last deal in 2017. The question that does remain is does it have the appetite and interest in a major deal at the William Hill end of the scale or will it continue to profitably mine the mid-scale territory? There is no clear answer here, one thing Kindred doesn’t lack is ambition.