Q&A: What now for post-acquisition Cherry?

Eyebrows were raised across the gambling industry in December when Austrian private equity firm EE Intressenter launched a £806m takeover bid for Swedish gambling operator Cherry AG. But observers looking closer at the deal would have seen that the consortium behind EE Intressenter included current Cherry shareholders Pontus Lindwall and current chairman of Cherry’s board Morten Klein, so the company will continue to have experienced heads at the helm.

The business is also well placed to continue in its native market of Sweden having secured eight licences to operate multiple egaming websites. But moving beyond the numbers, what does the future hold for the operator? Kristoffer Lindström of Swedish analysts Redeye casts his analysts’ eye over the deal.

EGR Intel: Does this takeover represent good value for shareholders?

Kristoffer Lindström (KL): With the current harsh investor climate of egaming, I believe that the offer price is relatively fair. For example, the aggregated EV/S (t12m) multiples for the listed Swedish companies has come down from about 3x at the beginning of 2018 to current levels of around 2x; this signals a much lower risk-appetite from investors. Within the private space it has become more difficult in raising money from investors and some of the larger institutions in Sweden, like Handelsbanken Fonder, has sold all their holdings in egaming companies.

We view the offer price as relatively fair given the weak investor sentiment and the uncertainty about the regulation in Sweden, but still below the underlying value we see in Cherry that could materialize in a timeframe of 12-18 months. We can also argue that Cherry has almost always been traded with a discount to our valuation, mainly due to regulatory risks and that the structure of the Group makes it hard for an investor to appreciate the underlying value (a conglomerate discount).

EGR Intel: What do you think were the most attractive qualities for any potential investor in the business?

KL: I view Cherry as a diversified bet on the egaming industry. Cherry is active in almost the whole of the value chain within the industry, so I find that there is a less financial risk in Cherry compared to for example a pure-play operator. The companies within the Group act independently and are often headed by their founders; I believe all these characteristics appeal to investors.

EGR Intel: Do you believe the new owners will choose to sell the ComeOn and Yggdrasil businesses?

KL: Given the history of Cherry with both acquisitions and spin-offs, I would find it likely that could happen. I do also believe that the value of the parts, i.e., Valuing the subsidiaries separately exceed the bid level. I think it boils down to what creates the most shareholder value and is the most beneficial for the companies within the group.

EGR Intel: What should be the big priorities for the new owners?

KL: Cherry has always been a company driven by entrepreneurs, and that has been one of their core strengths. I believe it will be crucial to keep and nurture that culture within the group. Thanks to the new capital structure M&A deals can be accelerated again so that will clearly be a priority. Otherwise I find that it’s business as usual.