Analysis: What does Playtech do next?

Playtech’s proposed €864m acquisition of Italian operator Snaitech is a bit of a paradox. It feels at once very aggressive and very defensive as the supplier responds to a significant shift in market conditions and a reassessment of its place in the value chain.

Acquiring a huge retail-focused business that doubles its annual revenues, turns Playtech into a major retail operator and places it in the middle of a regulatory overhaul in Italy is certainly not playing it safe. This is a transformative deal and it’s notable Playtech talked up the fact its revenue mix is now 52% B2C and 78% regulated.

In the face of a shifting investor view of the grey market and a casino supply sector going through its own quiet revolution it makes a lot of sense as a growth strategy. But it can be seen as a defensive move too, particularly when viewed against a potential restructuring of its Ladbrokes Coral partnership following the GVC takeover. It’s a deal that allows it to repeat a trick its performed with much skill in the past, in overhauling an operator with a pre-made sales opportunity for its technology.

Playing the online game

It feels like the online piece is the most immediately compelling. Playtech’s proven strategy of combining its technology and affiliate network with acquisition and CRM skills to drive up online casino revenue is not really in doubt. That said Italy is not a straightforward market and it is perhaps one of the most congested in Europe with every major player fighting for share. Snai is underperforming in casino compared to its sports betting share, however, and some easy gains should be achievable here.

But the extent that this new focus places Playtech in direct competition with some of its largest customers creates an interesting dynamic. It would be foolish and incorrect to think the appeal of Playtech games and platform technology will diminish in the short-term, but as its B2C business scales it would be also wrong to think that won’t create some competitive tensions. Being in direct competition with the likes of William Hill, Paddy Power Betfair and The Stars Group will be something that needs to be carefully managed.

This is not exactly a new situation for the supplier, but it’s never quite been this distinct and obvious before. And it’s arguable if the major firms will be keen to drive closer links and to share ever more data with one of their larger competitors in a key European market. Italy is already a difficult enough nut to crack for many of them.

The Italian Job

But the opportunity for Playtech is bigger than just online. It is taking a predominately retail-focused strong local brand and turning it into a modern technology-led omni-channel operator using Playtech solutions on VLTs, SSBTs, online and back-end. Playtech calls these operators “Local Heroes” and amusingly it cites both Ladbrokes and William Hill Online as fitting this “local hero” turnaround model, alongside Marca and Caliente. So just how big can this be for Playtech?

Playtech noted Italy was the largest gaming market in Europe with €20bn of annual revenues, and just 7% of this generated online compared to 41% in the UK. But it’s worth noting these numbers are slightly illusory, with some €7bn coming from the lottery and close to €10m coming through land-based gaming terminals. Land-based sports betting in comparison is a relatively small component of the Italian market on a revenue basis.

That’s not to say there isn’t headroom for growth in the sports betting or specifically the online casino sector, with the machines sector showing a clear appetite for gaming from the Italian market. Playtech needs only to capture a small slice of that to have an meaningful uplift on its Italian casino business, but that will require a significant cultural shift. And it will also be in competition with itself to a degree as Snai is one of the major machine operators in the market.

The machine market is also going through a major regulatory revamp in Italy with numbers reduced by 35% to 265k total across all operators. For Snai that means a cut from 54k to 36.6k this year, although Playtech note the overall impact on EBITDA is expected to be minimal. But it’s worth noting the direction of trend if nothing else. And as the market declines in size, the competition to supply the remaining AWPs, VLTs and the newer style of AWP named VLT-lite is heating up.

The changing retail market

Both IGT’s Lottomatica and Novomatic, which also operate large B2C businesses, are major players in the market, and the likes of Inspired are hoping to steal market share where they can. With Playtech now wearing both supplier and operator hats, and in some cases competing against potential clients on both fronts, it’s going to potentially face a very competitive market. Snai clearly offers a substantial opportunity in its own right, but beyond this it may find the going a little tougher.

Omni-channel is also not quite an open and shut case, despite the obvious comparison to the massive gains made by Coral in the UK, not least due to Snaitech needing to rebid for its retail licences with a potential €60m outlay to secure them in 2019. Beyond this it’s worth noting Snai already has a strong cross-sell network in place and talk is more of enhancing cross-sell and revenues from SSBTs than creating a new revenue stream. But again you sense Playtech should be able to drive synergies and use its expertise here to ramp up revenues.

Playtech also mentions the introduction of its virtuals solution into the network, which is a market like the UK dominated by Inspired at the current time. And with so many moving parts it seems highly probable Playtech’s expertise will improve performance, and a move to a single wallet and customer view should lead to material benefits. The ability for Playtech to provide a major proof of concept for its VLT, SSBT and potentially virtuals technologies shouldn’t be underestimated either as it looks both for more M&A and more supplier deals internationally.

What Playtech does next

And that is perhaps the most interesting aspect of the deal. Not what it does for Playtech in the short-term, but how it repositions it for the longer-term. Because to call Playtech an online supplier in future will be fairly misleading. What’s less clear is what it will become. Is this the creation of a new omni-channel operator giant, or the next stage of the firm’s transformation into a genuine omni-channel supplier?

The deal comes against a backdrop of a change underway in the general egaming supply sector with major operators taking more in-house and seeking more modular solutions with the all-in-one product that made Playtech the giant it is today becoming less in fashion. The supplier appears to be well aware of this, however, and it’s notable Playtech was promoting its RGS style solutions for content in a recent presentation. It’s more than capable of evolving with the market, but are there bigger opportunities elsewhere?

With the breadth of its technology the options are huge. Does Playtech focus more in future on the land-based sector or does it have the appetite in the B2C world? There are plenty of potential B2C targets in the land-based environment if Playtech really wants to evolve and there are some major online firms that could benefit from its egaming expertise. For all the talk of this deal, and its transformative nature for one of the giants of the egaming sector, it’s what Playtech does next that will be the most interesting.