Five key questions following Aristocrat’s £2.7bn Playtech acquisition

Playtech, a long-term target for M&A activity if the rumour mill is to be believed, was snapped up by Aristocrat on Monday morning in a £2.7bn deal. While the deal faces several hurdles before its completion, Australia-headquartered and US-focused Aristocrat has already agreed irrevocable undertakings and signed letters of intent with Playtech shareholders representing 20.47% of the firm’s voting stock, including the entire Playtech board. The deal looks set to create a new B2B gambling powerhouse with truly global reach, but there are still several unanswered questions relating to the combination, five of which we have outlined below. Under the hood Aristocrat would not commit to any immediate changes to the Playtech business but did suggest that its priority was a regulatory review into each of the supplier’s operating territories, some of which demonstrate obvious risk and are susceptible to headwinds. According to the cooperation agreement, Aristocrat’s review of the Playtech business is expected to take 12 months post-acquisition and will focus on the following:

• Each of Playtech’s divisions, their product ranges, segments and customers
• Better understanding the existing capabilities within the Playtech business, including management and employees, the technical and product capabilities, policies, process and systems
• Identifying existing and new growth and development products and services which might require additional investment
• Understanding the regulatory environment
• Identifying and formulating priority integration plans to capture synergies

“Given the high priority the combined group will apply to regulatory compliance matters, the intention is to complete an initial assessment of the jurisdictions as soon as practicable and in any event within three months following completion of the acquisition” Aristocrat explained. Head start Given Playtech’s broad international footprint, Aristocrat’s desire to complete a jurisdictional review within three months seems ambitious. However, Aristocrat previously made three approaches for Playtech dating back to April 2021, the last of which saw Playtech open its books on the wider business. After picking through those documents, Aristocrat believes the jurisdictions soon-to-be under regulatory review contributed EBITDA of approximately €50m to €80m (£42m-£67m) for the financial year ended 31 December 2020. In particular, the regulatory review will focus on identifying any business segment which puts at risk any existing licence of the combined business, or any new licence from an RMG perspective, as well as anything which does not align with the “risk strategy, profile and appetite” of Aristocrat. The supplier would likely explore the sale of any business in any jurisdiction where these factors are identified, but who would be willing or able to buy? Payday Playtech’s directors and its key employees could be set for a bumper payday if the deal goes through. Aristocrat has agreed to a retention kitty of up to a maximum of £10m to entice employees “whose retention is considered by Playtech to be of importance for its business”. Awards shall be in excess of 100% of the named individual’s base salary, with a proviso for a 2023 repayment timetable. In January, Playtech CEO Mor Weizer agreed a £200,000 (20%) reduction in salary from his base remuneration of £1m to £800,000, which he may regret in hindsight. One beneficiary of the acquisition is investment bank UBS, which is set to earn a whopping A$16m (£8.6m) pay packet for arranging the discretionary financing of the multi-billion-dollar deal. Other fees payable include a A$5m ‘takeout underwriting fee’, as well as annual fees of $75,000 and A$55,000 in respect of Aristocrat’s term loans. Inevitable exits Subject to the results of its wide-ranging review into the Playtech business, the Aristocrat co-operation agreement anticipates certain operational changes. Aristocrat has committed to finding “alternative opportunities” for any affected employees working in those businesses which may be at risk of closure. “Any such actions may change the balance of the skills and functions of the remaining employees and management of Playtech within the combined group,” the cooperation agreement explains. “The implementation of any changes will be subject to comprehensive planning and appropriate engagement with stakeholders, including any employee representatives,” Aristocrat added. Playtech’s non-executive directors have agreed to resign their positions upon completion of the acquisition. Aristocrat said it has no desire to change either businesses main offices, or to “redeploy the fixed assets of Playtech”. In addition, Aristocrat has pledged to retain Playtech’s London-headquarters post acquisition. B2C retention While the B2B synergies of the combination are obvious, the benefits of retaining Playtech’s B2C arm are unclear. However, page 60 of the co-operation agreement seemingly put doubts to rest about the future of this business segment, which is heavily reliant on Snaitech in Italy. “Aristocrat will continue to operate Playtech’s B2C gambling business and believes it will bring benefits to the combined group,” Aristocrat explained. “Aristocrat will benefit from the opportunity to sell its existing content into Playtech’s B2C gambling business across both online and retail channels. “As consumer preferences and the gaming industry continue to evolve, Playtech’s B2C business will enable Aristocrat to effectively deliver convergent experiences and improve Aristocrat’s ability to innovate,” the firm added. Despite this statement of intent, Regulus Partners analyst Paul Leyland hinted at a likely sell off what will likely become non-core assets for Aristocrat. He said: “Aristocrat is unlikely to want ongoing exposure to Asia (€90m revenue, high contribution). “Aristocrat is also unlikely to want to keep Snaitech (€1.6bn revenue including above the line tax, with strong online momentum mitigated by considerable retail uncertainty); the same likely applies to the much smaller German business HPYBET (now ‘part of’ Snai). “Aristocrat can probably accelerate the collapse of rump .com services for regulatory risk reasons without anyone noticing much and may gain a small profit from selling (although the ongoing relationship with PT might be complex here). “Aristocrat’s relationship with key partners such as Caliplay (Mexico) and The Sun (UK) will depend upon change of control terms, but a big, bureaucratic new owner is unlikely to faze either partner too much; the c. €150m being generated from these contracts are a key part of PT’s value, however (and has been substantially all the recent growth), which is a different operational proposition to pure B2B,” Leyland added.