GVC 3.0: Has the latest version of GVC left rivals in the dust?

GVC Holdings has never been one to follow a trend, and while its UK-listed peers were beset by existential worries and cautious in their optimism in their first half results, GVC was a burst of seemingly endless positivity. CEO Kenny Alexander was relaxed as he laughed his way through an analyst call casually talking up everything from Germany, to Brazil, to Ladbrokes, to the potential of the Georgian market. If everyone else is looking over their shoulders at both regulators and the competition then GVC just seems focused on its own path, much as it ever was.

Headline numbers were “extremely pleasing”, although there was fairly modest in real terms with proforma group revenues up 8% to £1.7bn and underlying EBITDA up 11% to £349m. As you would expect, online led the growth with revenue up 20% on a constant currency basis to £895.4m and online EBITDA up 12% to £210.9m. It’s not quite lights-out growth, but against a backdrop of regulatory changes, tax increases, competitive market pressures and a major merger to contend with, you can understand why the CEO is feeling chipper.

While growth in GVC’s legacy brands, bwin predominantly, was most impressive, from an online perspective the continued growth in the acquired Ladbrokes Coral business was also a highlight, with neither brand seeming to feel any ill effects of the merger so far. This industry has not historically seen recently-merged brands fare well in the immediate aftermath as the mix of management and product shake-ups kill momentum and sometimes kill growth at the same time. So it was no surprise then to hear GVC talking up performance in the first half.

Ladbrokes digital division was up just 7% in H1, but “materially” in Q2, and was “significantly ahead of the market”, according to GVC. “Whilst it is only one quarter we take some confidence that the Ladbrokes brand is finally becoming more relevant again in the UK online market after years of underperformance,” Alexander said in the analyst call following the results. Both brands have accelerated through Q3 with Coral.co.uk up 28% and Ladbrokes.com up 19% in the period from July to 2 September. The lag between Ladbrokes and Coral was clearly something GVC was keen to address, however.

No clear blue water

Unlike Paddy Power Betfair, where there is a clear attempt to drive clear blue water between the brands, he doesn’t see this as a battle for differentiation. Alexander noted there is some differentiation in terms of positioning on price, but there is no clear attempt at the brands serving different segments of the market. “They are lookalike brands,” he told analysts. “And there is no fundamental reason why the Ladbrokes brand should underperform the Coral brand. The first target is to get it up to the same level as Coral,” he added.

GVC noted Coral UK growth was 16% for the year to 2 September 2018, with Ladbrokes up 10% in the same period and Gala Brands up 8% and this is slightly ahead of the wider market and ahead of some of their peers. Again it’s not growth to be shouting from the rooftops, particularly bearing in mind Ladbrokes is still in catch-up mode, but the firm noted this was during an intense period where it both adapts to the shift in management and prepares for a more material platform integration. “Crucially, we will always strive to ensure that integration doesn’t come at the expense of product development or business-as-usual operations,” the firm noted in a statement.

A key part of smoothing the integration will be arriving at a compromise agreement with Playtech, and GVC noted discussions were fairly advanced there and “taking place in Hebrew”. Alexander added he felt they could get the deal announced before the end of the year and the nature of the deal will be fascinating to see as it’s hard to imagine a final outcome where either Playtech or GVC hasn’t made some reasonably large concessions.

It’s the tech stupid

The GVC platform was another area being talked up by the exec team. Alexander noted there was still work to be done on its in-house technology not least in bringing it “up to scratch” on some areas, but otherwise called it “incomparable to anything else in the industry”, which while it has merit, is slightly in conflict with discussions around upgrades to its products and mobile apps. Some revenue gains are likely to have come from achieving product parity as much as any other factor.

But under the hood there are not many businesses that can claim to be as self-reliant as GVC will be post-Ladbrokes Coral migration. And it’s not just limited to single product lines or territories. Alexander in particular noted the transformative impact this tech stack can have on newly acquired businesses, showcasing the huge growth seen in its recently acquired Georgia-facing brand Crystalbet. But it’s also a culture within the firm of continued improvement.

Alexander noted there had been an “increased level of activity in launching and enhancing products in Ladbrokes Coral since acquisition” and this is a big part of the GVC story. It’s not just about the transformative deals, it’s about getting the detail right while never taking your eye off the bigger picture. The Crystalbet deal, while relatively small in the general group picture is a good example of both. Taking a large share of a market they previously were absent from was important, while improvements to the business means revenues have doubled since acquisition. It’s also a deal that suggests another shift in GVC’s evolution.

Seeking out more deals

Despite its broad international spread and seemingly endless complex operational strands to tie together, the management team are hungry for more expansion. Alexander said he would love to do two or three Crystalbet type acquisitions a year. And the report noted GVC expected to “enter a number of new territories over the coming 12 months” even though there are relatively few regulated markets it’s not already in. But if there is one territory that was dominating the discussions it was the new world of the USA.

GVC’s deal with MGM was a highlight of the results for the executive team and the point was made a number of times that the combination of market access, brands and technology would mean this joint venture would be the number one operator in what could be the biggest growth market in gaming in the next decade. “The US at the moment is small fry compared to what it will be in five years’ time. It’s going to be a very very big market and we are going to be the market leader,” Alexander told analysts. And it’s certainly a compelling argument even if there are still a large number of hurdles to jump and a lot of unknowns to become known. But if GVC can deliver on even half of what it’s promising this could be transformational for the business.

Closer to home, however, there are other markets giving rise to this optimism. Germany is perhaps one of the biggest reasons for Alexander to feel so positive. In what is inarguably Europe’s hottest grey market, GVC has one of the two largest brands and an enviable position. The firm’s legacy sports brands, which are primarily bwin, sportingbet and betboo, were up 27% in the first half of the year and a big part of that was bwin growth in the German market. Growth also appears to have rocketed through Q3 in Germany with the legacy GVC brands up 42% in the period to 2 September, driven by bwin.

GVC is exceptionally well placed for the upside that appears likely in a market that is still punching way below its weight in online gambling terms. Any move towards more liberal regulation could be a huge boost to revenues in that market and the normally acquisition-hungry Alexander seems content with his lot in the German market. “Germany is a very good market for us and when you’ve got bwin why would I bother buying anyone else?” But if Germany and the USA were positives then surely Italy was a negative in the period? Not for King Kenny.

The Italian job

Italian year-to-date growth was 30% at Eurobet and 21% at bwin and Gioco Digitale, but the looming advertising ban presents serious issues for the growth prospects of the legacy bans. GVC, however, was bullish about the potential in the market. The conceit is that the advertising ban will hugely favour those operators with an established brand and a land-based presence and they will take market share in the new operating environment. It’s a theory that comes with some flaws attached, but it’s one GVC has definitely bought into.

“We anticipate a very aggressive football season in 2018 with all operators keen to defend their share of voice, but once that ban is operative Eurobet will be competitively advantaged,” the firm noted. At 7.5% of group revenue in the last disclosure it could be a material boost to the operator in 2019, and a less optimistic man than Kenny Alexander could also see some downside risk here.

The luxury GVC has, however, is the ability to be fairly sanguine as there is no single market, besides perhaps the UK, that could devastate the revenue base and it is more able to absorb the bumps and shocks of the sector’s progress due to its broad stable of brands and international profile. But what was most interesting was the nature of the geographic diversity. The talk of attacking regulated markets with vigour as if it was the most natural thing in the world for the GVC business.

Alexander noted GVC would aim to be regulated “anywhere in the world we can be regulated” and for a business that was built on a risk-tolerant short-term approach to monetising grey markets it’s really quite the transition. And what’s even more intriguing is it comes at a time when other businesses, including some of GVC’s listed peers, seem to be setting up as GVC 2.0 with a focus on generating cash flow from grey markets to invest in regulated ones while the originators of this strategy are already onto version 3.0.

This new GVC is looking to M&A, partnerships and technology to lock out anyone looking to follow in its upstart footsteps. The very definition of “doing a GVC” already needs to be changed in the egaming dictionary with regulated expansion, bolt-on acquisitions and scale at the heart of everything it does now. While some parts of the industry appear intent on copying the old model, the canny management team already looks like they are moving on to the next version. And that should give everyone a pause for thought.