Analysis: A Stars full of Sky

As far as most were concerned the Sky Betting & Gaming IPO was on. The notes were written, the investors primed, and the wait felt like it was nearly over. So The Stars Group’s shock swoop to the company up made more than a few waves. The deal artists formerly known as Amaya once more managed to pull off a coup that rivals its purchase of PokerStars in its sheer audacity.

The deal seems on the face of it a no-brainer. The Stars Group (TSG) acquires arguably the hottest asset in online gambling giving it a genuine transformation from sports betting also-ran to market leader, at least in the UK, and adding a sizeable recreational casino user base to boot. It’s everything TSG wanted and a little bit more. But as ever in this industry it’s not, quite, that simple.

At $4.7bn the multiple certainly looks high, but then so did it when CVC acquired Sky Betting & Gaming (SBG) back in 2014 at a valuation of roughly 15x trailing EBITDA. The price back then valued the SBG business at £800m and it’s just been sold for roughly £3.4bn in 2018 so the concept of value in this context is fairly flexible. But could SBG realistically continue its extraordinary growth rates under new management?

TSG will be hoping so, and they have taken two decisions that could be hugely important in keeping SBG’s momentum going. The first is to leave SBG to, mostly, run its own business in the UK with all TSG UK sports betting operations run from SBG’s Leeds offices. The second is to not look to integrate the two sports betting platforms and leave SBG as a stand-alone platform in the UK market.

Making their own waves

Sky Bet’s success has been to an extent powered by its technology. An as we’ve seen from the Paddy Power Betfair merger, any move to limit new development in terms of features, UX and UI can be hugely negatively impactful on the brand and it’s clear both firms want to avoid repeating others’ mistakes. As such the Sky Bet UK platform has been somewhat sandboxed and allowed to continue on its own path.

The implication is that a more international Sky Bet platform will be developed separately, perhaps away from the Openbet-reliance of the UK model. The German-facing Sky Bet site uses SBTech and we could see other iterations for new markets Sky Bet looks to enter.

TSG was also quite clear there were no plans to merge its existing BetStars platform with the Sky Bet one, and so it’s possible the firm could end up with three sportsbook platforms to manage. This seems less than optimal from a resources standpoint.

It also presents a slightly confusing picture. We know that Sky Bet will only be used in a limited number of regulated markets, with BetStars, powered by Sky Bet used in the remainder. To what extent BetStars will indeed by powered by Sky Bet remains to be seen, but it doesn’t appear it will be the same platform. So a BetStars brand on a BetStars platform? It doesn’t seem like a huge leap forward on first inspection.

TSG investors will be hoping it will be taking on the mobile apps and marketing expertise used on the Sky Bet brands at the very least. And this really cuts to the heart of what can make this deal a success. How much will TSG take from Sky Bet, not just in terms of the product and technology but also in terms of positioning online gambling for a new, younger more entertainment-led style of player?

Changing the game

SBG has changed the game in the UK. It has redrawn the idea of what a modern entertainment led sports betting proposition can be and it has done it through a technology focused, responsible UK-only approach. It has invested in its own proprietary front-end, marketing software, customer analytics and has adopted both a customer proposition and a brand position that’s all of its own. It’s unique. And that’s the first issue.

The Sky Bet model works so well in the UK there are obvious questions as to whether it can translate elsewhere. Is it Oasis or Adele? Is it Take That or One Direction? The price tag suggests continued double digit growth is not just desired but expected and to do so it is going to have to find new worlds to conquer, as with 12% market share in the UK and closer to 20% of the fixed odds sportsbook market it is running out of headroom at home.

SBG’s CEO Richard Flint talked of the opportunity of taking Sky Bet to a truly global audience, and that is something TSG can provide in (red) spades. But Sky won’t let the Sky Bet brand be used just anywhere, and the operating platform sat on the ageing Openbet tech stack is not the most immediately obvious integration target, while the marketing and product focus might need a significant revamp when looking at Eastern Europe, Asia and Latin America rather than Eastleigh, Aston and Lambeth.

That’s not to say the combined firms don’t have the skills, the tools and the technology to make this work. In theory the combination of Sky’s market-leading mobile apps, its smart marketing execution and its knowhow with media deals and low-cost acquisition with TSG’s huge global reach, international payments expertise and gaming cross-sell should be a knockout. But then we’ve said this type of thing about egaming mergers before. The devil is in the details.

A business of scale

One thing the new group certainly has is scale. One of the most impressive looking slides from the presentation was one showing the combined group towering above its listed egaming rivals in terms of annual revenues. TSG with a proforma $2.4bn compared to $2.0bn from the post-LCL acquisition GVC and $1.8bn from Paddy Power Betfair. William Hill and Kindred looking almost miniscule in comparison on “just” $1bn. The only operator with a larger revenue base in the sector is the privately held bet365, which reported $3.0bn for the year ended March 2017.

The nature of those revenues are perhaps more interesting than the raw numbers. TSG is now 37% poker, 34% casino and 26% sports betting, compared to a significantly more sports betting biased revenue profile at the other “big three”. PPB for example generated only $350m of that $1.8bn total from gaming in 2017 with the remainder through sports. It’s a similar, if less unbalanced, story of sports dominance at bet365 while GVC has a more balanced portfolio with a bit under half of its $2bn coming through sports.

So purely in terms of sports betting TSG is still the smallest of the four big dogs, albeit one with potentially the most dangerous bite. Sports betting revenues of around $625m or £450m still leaves it behind bet365, PPB (including Australia) and GVC in terms of scale and it will be looking to play catch-up over the next couple of years. In casino, however, it’s already a rival for anyone and could even be argued to now be the market leader, which is actually a fairly curious position.

Stars Casino has done almost no external marketing to build a casino business of its own that already rivalled PPB’s for scale and now far exceeds it with the addition of SBG’s brands. SBG meanwhile has built its business almost entirely from the UK through a mix of direct acquisition and cross-sell. So what really is the combined business it has created? It’s a slightly strange amalgamation of brands and products that are heavily indexed to the UK and Italian markets and dependent on cross-sell for the forseeable future.

The same market dependence could be said of its sports betting operations. SBG is almost entirely UK and almost entirely the sports betting business of the combined group. The clear growth strategy is to expand this from the UK to international with Italy and Germany the first clear targets for the Sky Bet brand to utilise the unproven but theoretically powerful cross-sell from poker. Beyond that the picture is a lot less certain. And it’s that international picture we keep coming back to, as it will be here that the acquisition will prove a success or not.

A cultural shift

But there is one other issue that plays into this and it goes beyond the obvious metrics. Both firms are big on in-house technology, big on customer focus and social responsibility and big on gambling as mainstream leisure entertainment. And despite its large unregulated revenue base there is no doubt TSG is committed to the regulated market model. In many ways their end goal is the same, but the path they have taken to get there has been very different so far.

For all the huge changes made to PokerStars and the launch of the casino the TSG group still operates in a slightly different sphere to most of its egaming peers. It’s poker-led, and as a result more desktop-focused than most with different acquisition funnels and costs and differing CRM challenges to the likes of SBG, PPB and the other less acronym-heavy gambling groups. There is also an historic culture from the PokerStars days that is similar, but also very different to that present in SBG.

Combining a business culture where launching in Germany is seen as a radically bold step with sports betting the only product offered, to one where payments restrictions and DNS blocks are seen as a hurdle to jump and not a barrier to stop at might make for some interesting dynamics. Equally the more aggressive nature of TSG might seem to clash with the more softly-spoken down-to-earth culture of the SBG management team.

TSG CEO Rafi Ashkenazi’s pragmatic approach seems a good bridge between the two worlds and there’s no reason to suspect both cultures can’t learn a lot from each other. SBG could afford a little more swagger in its step, and TSG could afford to let a little more Sky in its blanket of Stars. And it’s this balance that could and should make this deal much more than the sum of its parts.

What’s interesting is this is a takeover that is being billed more as a merger, while most of the egaming mergers to-date have been nearly the exact opposite. There is no pretence as to who is calling the shots here, but TSG seems willing to adapt and learn from SBG as it looks to become as dominant in sports betting as it is in poker. If they can find a balance then the rest of the industry should be more than a little fearful.