Five big questions for the Sky Betting & Gaming IPO

Sky Betting & Gaming’s (SB&G) on again, off again IPO finally appears to have got the green light, and even set against the backdrop one of the biggest deals in online gambling history it is likely to create some major buzz. One of the fastest growing brands in the UK sector, it has assumed a leadership position in both tech and marketing over the past 12 months. Where Sky Bet goes others, quickly, follow.

But the leap from private to public is far from a simple one. And while SB&G has built a business that challenged the sector norms and redefined what a modern entertainment-focused betting business is about, it has done so from a position of relatively anonymity. Now squarely in the public gaze it will face some exacting scrutiny and some tough questions over where it goes from here.

Is the price right?

While we await an official prospectus, the initial reports suggest a valuation of £2.5-3bn, which on the face of it doesn’t seem outlandish. SB&G reported EBITDA of £145.8m for the year to June 17, up 38% on the previous 12 months, and assuming continued slightly lower double-digit growth through H2 17 this suggest a multiple in the 15x range. Compared to sector averages this is no more than mid-range and arguably makes it an attractive price to investors given the growth story.

A growing, highly profitable, cash-generative business is a fairly attractive proposition. Although it’s important to note debt repayments have increased since the last set of results, through a refinancing in August 2017 that raised total debt to £820m and allowed shareholders from the CVC acquisition to effectively cash out their initial investment. But it could be argued this has perhaps mitigated the need to shoot for the stars with the IPO valuation and it feels instinctively like this one is priced to sell.

Will they be looking to buy scale?

The biggest question for investors, however, will be why list now? Management had gone cool on the concept of an IPO in 2017 talking down the possibility and there were rumours SB&G was trying to line up a big deal of its own in the period. Whether they were unable to find the right target or there was a shift in strategy is unknown, but it does raise the question of what SB&G does next and if it will use the IPO as a springboard to dive into the M&A sector.

While SB&G is one of the fastest growing companies in egaming with £516m of revenues in FY17, it remains sub-scale to the likes of Paddy Power Betfair and the soon-to-be behemoth of GVC Ladbrokes Coral. It is big enough to take on any challengers in the UK market but arguably lacks the firepower to become a truly international brand and could be vulnerable if further, deeper technology investment is required.

What is far less clear is who SB&G could buy or merge with at the present time. Management may also be of the view that M&A in the online gambling industry often creates a monster that is less than the sum of its parts, and organic growth remains a far greater opportunity. But either way the next five years is a much more interesting and important story to tell than the past five.

Where does the future growth come from?

Near-term growth appears readily available in SB&G’s core UK market (more on this later) but how it pushes on from there is the big questions the operator needs to answer. SB&G has dipped its toes into international waters of late but things haven’t gone entirely to plan so far. Italy has not been easy and the firm has less than 1% share of the sports betting market and is finding growth there hard to come by.

Germany is a more attractive market, however, with a profile much more similar to the UK in terms of brand crossover with Sky and its notable the German version of the Soccer 6 app is performing well in the market. But Germany is a market fraught with regulatory issues and tough competition from the likes of CVC-owned Tipico and the GVC-owned bwin brands, although bet365 is far less aggressive in this market than others.

Outside of Germany and Italy it’s tougher to see where SB&G goes next. It doubtless has its eyes on the potential US market and it would be no surprise to see it make a move in Australia at some point, while areas like LatAm and Africa may present greenfield opportunities if it can find similar media partnerships in those regions. But none of these, including Italy and Germany, are slam dunks and for now the UK market remains incredibly important to its growth prospects.

How much capacity is there left in the UK market?

So in the initial period what SB&G does in the UK will remain the most important aspect and here the picture is decidedly muddy. In terms of growth SB&G has been outstripping the market with 38% revenue and EBITDA growth in FY17, well ahead of its peers and the wider market. It now has around 10% UK market share, according to Eilers & Krejcik Gaming estimates, with 17% of the sports betting market and 7% of the casino market.

But is SB&G reaching a cap in terms of the UK? Looking at the market dynamics in various regulated nations it’s ambitious to expect a single brand to take more than 20% of the total market and casino seems resistant to market shares much above 10% in the long-term. While the wider UK market should continue to grow at a high single-digit rate for the mid-term and SBG should take a disproportionate share of that there are also challenges ahead for Europe’s largest egaming market and for SB&G itself.

The UK is in the midst of a huge regulatory shake-up and the full outcome of this is still unknown with both the triennial review and the CMA enquiry yet to complete. Alongside this we have the continued creep of sports rights and anti-gambling lobbying placing additional downward pressure on revenues and marketing freedom and it’s fair to say the operating environment of the next five years will be challenging for all. But that said SBG appears better placed than most.

It is a business aimed squarely at the recreational leisure sector and has the benefit of strong links to Sky, a trusted mainstream brand and almost zero reliance on affiliates and third-party marketing. And while it’s far from clear what the outcome will be from the potential hit to FOBT staking levels, its knock-on effect on the high-street could lead to a further shift to online and can only benefit SB&G’s lower-staking, mass-market, online-only proposition.

As one industry veteran noted: “The next five years will be harder but they’ve invested well and will innovate, deliver and get on with doing the basics well. I would say they have the maturity and leadership to navigate the next 5 years which look like a period of increased regulation, and increasing influence of sports federations on betting.” Although this does raise one final, crucial, point.

Can it retain its unique corporate culture?

Tucked away in Leeds away from the glare of the City, SB&G has been able to construct itself in its own image as a modern technology company. A big part of this has been its low-key, analytical and inclusive leadership led by CEO Richard Flint. SBG’s modern offices are stuffed with pool and table tennis tables, break-out rooms and X-Boxes while management sit out on the floor and there is a big focus on the company culture.

The concept is collaborative and people and technology-led and feels instinctively at odds with the cut-throat world of the financial markets. Without doubt the biggest issue in retaining the culture that has made SB&G so successful will be retaining Flint and his management team post-IPO. As much as Breon Corcoran and Kenny Alexander have shaped their respective businesses, you sense he will be vital to ensuring the next five years is as successful as the previous five.

But it’s about more than Flint and his team. Sky’s involvement in the next phase of SBG will be even more significant, particularly with the looming takeover by the notoriously anti-gambling Disney corporation. SB&G are locked into a 25-year rights deal to operate under the Sky brand with a 10-year media partnership to use Sky’s talent and content due to expire in 2025. How this plays out under new ownership remains to be seen, however, and there is a big difference between willing and contractual participation from a media partner.

But it’s just one of several major questions the firm needs to address as it sets out its case for investment in the coming months. SB&G is a business that has stood apart from the me-too online gambling sector and its future success will depend on its ability to continue to do so while pushing on for growth in new markets. That’s no small ask of a firm that has experienced rocket ship uplift in recent years and how it addresses these concerns will be fascinating to watch as we move closer to its long-awaited IPO.