Deal or no deal: A look at the affiliate M&A landscape

One adjective you could never use to describe the gambling affiliate space in the past few years is dull. The breathless nature of M&A has been hard to keep track of at times as the likes of Nordic-founded Catena Media, Better Collective and Raketech mutated into giants of the space. In fact, Nasdaq Stockholm-listed Catena Media was pretty much announcing one acquisition per month back in 2016 and 2017, such was the hunger to quickly achieve scale, diversify revenue streams and expand its global footprint. It was an almost never-ending shopping spree during the M&A boom.

But while certain affiliates are still active in the M&A department, there has been a noticeable deceleration in the pace of transactions in the past year or so. For some, taking a breather to focus on integrating and optimising previous acquisitions is one explanation. Michal Kopec, head of M&A at Copenhagen-based Better Collective, says: “Acquisitions have for many actors, Better Collective included, been an effective way to either enter a new market and gain local knowledge in-house, or strengthen the position in a given market the business already operates in. When one of these targets has been accomplished, businesses will turn their focus to optimise its operations internally, which will slow down the pace of new acquisitions.”

Increase the pressure

There is no denying that regulatory headwinds buffeting European egaming markets has had an impact on M&A activity. For instance, the re-regulation of the Swedish market in January meant greater compliance and other challenges, such as around limiting player bonusing. Catena Media cited difficulties in the market as a reason for missing its Q1 target and for nudging its €100m EBITDA target back to 2021. Meanwhile, UK-licensed operators are now obliged to undertake more thorough KYC and source-of-wealth checks, which has especially put a dent in the VIP segment.

Operators’ travails in Europe have had a trickledown effect on the affiliate industry, regardless of whether it’s rev share or CPA deals. Indeed, on 23 September, London-listed XLMedia issued a profit warning, blaming regulatory developments across the UK, Sweden, Germany and Switzerland for a 10% slump in revenue to $42.5m for H1 2019. German regulatory uncertainty within online casino caused XLMedia’s revenues from the market to plummet 36%.

“There are regulatory uncertainties that weren’t around a couple of years ago when everybody was just growing all the time,” Christian Hellman, equity research analyst at Nordea Markets, points out. “So, I think, in general, companies are a bit more cautious, making sure they have strong balance sheets and don’t run into trouble.”

In addition, he says Catena Media faces its own fiscal challenges. “Catena Media, which was one of the driving forces in this M&A spree, ran into a bit of a wall in terms of leverage. They can’t go much higher in terms of debt at the moment and they have also been vocal about it since their new CEO [Per Hellberg] came onboard last summer. He basically said, ‘we have got to halt this for a moment and consolidate what we have’. The reason for doing that was the fact that they couldn’t afford to buy anything more at that moment.”

Keeping their powder dry

In stark contrast to a couple of years ago, Catena Media hasn’t acquired any businesses in 2019. In fact, you have to go back to June 2018 for its last gambling-related affiliate purchase: sports news site ASAP Italia for an upfront fee of €12.5m. Meanwhile, Raketech, which has done over 20 acquisitions since its inception in 2010, recently expanded into Japan by buying Casumba Media for €2m (roughly 3x EBITDA for the past 12 months). This followed the purchase of Canada-facing CasinoFever.ca in June, as well as Finland’s sports listing website TVmatsit.com in April, bringing its total acquisitions in 2019 to three. Raketech secured €10m from Swedbank last December to fund future acquisitions.

Elsewhere, XLMedia hasn’t purchased a gambling affiliate since WhichBingo almost 18 months ago, while Gambling.com Group’s last acquisition was March 2018 for Bookies.com and its related assets for an upfront fee of £2m. Better Collective, however, has been busy of late after it expanded its bank credit facility for an additional DKK300m (€40m) to fund future acquisitions. In May, 60% of the US-based RotoGrinders Network (RotoGrinders.com, PocketFives.com, SportsHandle.com, USbets.com and Pennbets.com) was procured for an initial fee of $21m. This was followed by the purchase of VegasInsider.com and ScoresandOdds.com in a $20m deal. Finally, in September, Better Collective obtained UK-facing MyBettingSites.co.uk.

“At Better Collective we have always focused on our organic brands and innovating these alongside integrating new companies as we want to develop our business through organic as well as acquisitive growth”

“The main reason for our IPO [in 2018] was to gain more capital to acquire new companies,” Kopec says. “The results tell us that this was the right thing to do. We have executed on this strategy and managed to successfully integrate several new companies that have contributed to cementing our position in the industry. That being said, at Better Collective we have always focused on our organic brands and innovating these alongside integrating new companies as we want to develop our business through organic, as well as acquisitive growth. We plan to continue this strategy going forward.”

Another company that has been whipping out its chequebook of late is Net Gaming Europe. The 16-year-old affiliate recently acquired MaxFreeBets.co.uk, BettingGuide.se and BettingOnline.co.uk to complement its existing brands, which includes PokerListings.com, CasinoGuide.co.uk and CasinoSpielen.de. “Overall, it gives us more revenue diversification,” CEO Marcus Teilman tells EGR Marketing. “More of our revenues will now come from betting, so we think that is good for us.”

Driving a hard bargain

Another possible explanation for the M&A slowdown is smaller affiliates putting over-inflated valuations on their sites. Perhaps after previously seeing Better Collective shell out up to €30m for Sweden-facing Ribacka Group, XLMedia devour Finland’s Good Game for an initial payment of €7m, or Catena Media’s aforementioned appetite for M&A, they’ve had aspirations of inking similar seven- and eight-figure deals. However, the larger affiliates – particularly the listed entities – are more wary these days of paying over the odds for their quarry.

“The more uncertain market environment has also affected how much the consolidators are willing to pay for targets,” says Mathias Lundberg, equity research analyst at SEB. “So, we are also in a position where the buyers and sellers have a more difficult time meeting on the terms of the acquisition.” Nevertheless, practically all the major players are still regularly approached by owners of smaller affiliate businesses offering to sell their assets. Whether or not it was their aim from the outset, to ‘take the money and run’ is a tempting exit strategy for many in the current climate.

“We get quite a lot of companies coming to us and saying, ‘hey, we are open to sell’,” Teilman reveals. “Of course, they want the higher price, or valuation or multiple, than what we have bought before but we have our clear investment criteria.” He continues: “We have many prospects in the pipeline, but we say no to many that we don’t think fit our investment criteria. Either they are too expensive because they have too high valuation expectations, or the underlying business risk is too high. Or it could be they have a low dependency on revenue from rev share agreements.”

What helped fuel the M&A explosion is the fact bolt-on acquisitions aren’t usually difficult to accomplish, especially when you’ve already racked up a dozen or so previous purchases. It is usually a case of wrapping up a deal on favourable terms, integrating the new site or sites onto your platform and optimising them to increase traffic and revenue. The staff from the acquired business will occasionally stay on as part of an earn-out arrangement, yet it’s not like the buyers are amalgamating vast workforces, offices and different cultures into the group; it’s usually a fairly straightforward exercise.

A natural lull?

Despite many of the attractive targets already acquired in the landgrab of the past three or four years, which is another reason for the M&A slowdown, this is still a fragmented space. Therefore, more M&A in the near future is an absolute certainty. This is especially so if new markets open up and affiliates look to increase their geographical reach. “Following the repeal of PASPA, we realised the need to get feet on the ground in the US to realise the full potential in the market,” says Better Collective’s Kopec.

Affiliates may also need M&A to enter frontier markets to help insulate against regulatory challenges in Europe. Unregulated Japan is a case in point. Or perhaps it is done to further diversify income streams and reduce reliance on one vertical. For example, casino used to account for 98% of Catena Media’s revenue. By Q2 2019, the gradual rebalance meant 56% of revenue was derived from casino and 38% from sports betting.

Furthermore, affiliates will continue to acquire targets with the intention of blocking rivals from getting their hands on those assets. “Either you buy an affiliate or someone else is going to do it,” Hellman says. “I do think that M&A will come back. It hasn’t really stopped; it just kind of slowed down a bit and Catena is sort of in a consolidation mode. I think the ones that still have the balance sheet will continue to do M&A, but perhaps not at the same rate as in previous years.”

Fools rush in where angels fear to tread

It seems there will be a more selective M&A strategy adopted going forward. We’ve seen this with Better Collective as the company tends to prefer to undertake a few large acquisitions rather than swallowing numerous small affiliates. Achieving organic growth is now also more of a priority for the leading affiliates. Catena Media has an organic growth target of 10%+ in order to hit its long-term targets, while Hellberg told EGR Marketing in July that the company is now concentrating more on its core brands and “will only acquire when we believe we can handle it”.

Teilman says: “I think the larger companies will focus more on organic growth, but it is still a fragmented market and I think the larger [companies] will still be interested in continuing to explore M&A possibilities. So, it’s a mix. I think the focus has changed more towards organic growth, but there is still an appetite for M&A activity.”

Of course, most of those at the top of the market are highly professional, well-oiled digital marketing machines with global footprints. In June 2015, Catena Media was a mid-sized business with a headcount of just 30; today, there are around 390 employees dotted around the globe, while sales reached €105m in 2018. Chief rival Better Collective is approaching 400 staff members and boasts more than 2,000 websites and products racking up over seven million visits per month. But how likely is it a duo in the top-five eventually get together in a mega-merger like the big deals we’ve seen on the operator side of the industry?

Lundberg responds: “It has been speculated that some of these are good fits with each other, but I think ownership ambitions might not go hand in hand. I believe many of these companies are being driven and operated by owners who have their own agendas and want to build their own companies and roadmaps. Even though it could look very good on paper, I don’t think management and owners among the large companies will meet in a transaction.”

There are also quite large discrepancies between the valuations of listed affiliates, which means it could be hard for owners to agree on how much of the future entity they would own. “The valuation gap has to close a bit on the stocks for it to happen,” Hellman remarks.

So, while any potential blockbuster deals are on the backburner for now, M&A isn’t going away in the affiliate space anytime soon. The breakneck pace of acquisitions in 2016 and 2017 probably won’t be making a comeback. Instead, a more cautious, selective approach to M&A, combined with an emphasis on organic growth, will likely be the preferred strategy going forward.