View from the City: Investors spooked on Halloween by "frosty" Q3 commentary

There was not much in the way of Oktoberfest for the online gaming sector. There was one new bid, but another one got taken away. And the Q3 commentary was generally frosty. Starting with M&A, the pace of industry consolidation shows no signs of abating. DraftKings spent five weeks discussing a potential $22.4bn bid for Entain, before walking away. It would have been a challenging transaction, given the significant value tied up in Entain’s US JV, and the stock market had attached a low probability of success. But just as DraftKings got cold feet, Aristocrat came in with a $4bn bid for Playtech. This is also a complex deal as Aristocrat is nervous of operating in unregulated markets and said it may exit markets generating as much as 30% of PTEC’s historic EBITDA. This suggests a deep discount for unregulated market risk, which became a key theme for the Nordic Q3 results season. The Nordic operators put the spotlight on a run of terrible sporting results (for the bookies), but the real hit was around unregulated markets. The cost of regulation in the Netherlands has been very material for Swedish B2C operators; and the Swedish-listed gaming stocks have much broader exposure to higher risk unregulated markets, including the likes of Norway, Turkey and China. Back in the UK, Flutter finished off a challenging Q3 season, with a hit from sports margins and the Netherlands. But it was the domestic UK market which was of greater concern. Flutter warned of a ramp up in responsible gambling (RG) initiatives in the UK ahead of the Gambling Act 2005 review (expected in Q1 next year). It sees UK online as unlikely to offer “any real growth” in 2022, as operators make a range of voluntary RG concessions, in the hope of seeing off more costly measures from the review. Not much sign of festive spirit here. But it has still been another year of sector outperformance, courtesy of M&A.

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