Fit for purchase?

The gaming sector continues to be a real M&A hotspot, with sector consolidators such as PartyGaming and Mangas leading the way. Pricing has also held up reasonably well compared to many other sectors.

While a number of deals have been completed in the 7 to 10x EBITDA range, pricing on other transactions has been at higher levels, reflecting the synergistic benefits available to the acquirer, as well as the premium necessary to keep competing bidders out of the market.

We can see this if we take a closer look at a handful of deals featured in Deutsche Bank’s Mergermarket sector report. In February 2009, Mangas purchased Expekt for £97m for a 2.5x revenue multiple and a 7.8x EBITDA multiple. Two months later the same company bought Betathome.com AG for £22m for 0.6x revenue and 12.4x EBITDA.

In July, PartyGaming acquired Cashcade for £96m (2.9x revenue; 8.0x EBITDA). Bwin paid an estimated £101m for Gioco Digitale in November (7.6x EBITDA). In December, Mangas, again, acquired GigaMedia for approximately £102m (1.03x revenue; 7.8x EBITDA). And finally, in February this year Playtech paid £36m for Virtue Fusion (2.9x revenue; 9.5x EBITDA).

So what makes a gaming company an attractive acquisition target? Simply put, there’s got to be a strategic fit, offering one or more than one of your competitors a strategic advantage, such as player profile and quality, player geography or even recruitment channels. It’s important not to be too reliant on a small group of customers. You’ll attract higher-earnings multiples the greater your client base and size of the business.

Bespoke software, a strong second-tier management team, good financial and management systems, a satisfactory tax status and regulatory compliance will also drive up the price. If selling is on your radar, good preparation is key ““ you can never predict when a prospective acquirer will knock with a fistful of dollars.