The shifting sands of M&A

The buy and sell landscape in the gaming industry continues to surpass expectations. Recent changes in regulation continue to create ripples of threats and opportunities in every direction meaning there are strong contenders on both buy and sell-sides. This, in turn, continues to intensify M&A activity and we are witnessing several key trends as a result.

First-mover advantage

Ratified legislation in both new and existing regulated markets is providing many cash-rich acquisitive businesses with significant opportunities to either strike new partnerships or take over established local brands, such as in the case of Paddy Power Betfair and FanDuel. We expect a handful of equally large deals to follow in the coming months, but are also mindful of several smaller, local US technology focused businesses that will be approached, strengthening large operators’ state-wide sports betting strategies.

Uncertainty drives opportunity

While regulation could mean significant opportunities for some players, particularly those with large (liquid) war chests, we expect many other small to medium sized suppliers and operators to struggle and consider opening routes to acquisition while short-term revenues remain favourable.

Traditionally regulated markets were viewed as a safe haven for more risk averse operators and investors, however the UK and Australian gaming markets have disproved this theory, given the turbulent tax and restrictive advertising rulings that have emerged in both territories recently.

In the UK, the government’s dramatic cut in FOBT stakes and the expected increase in Remote Gaming Duty (RGD) will undoubtedly have an impact on UK operators’ medium-term profit margins. As with any major change in regulation, particularly one that affects the bottom line, there will be uncertainty, and consequently any M&A discussions taking place are likely to be put on ice, alternatively the would-be seller will have its profit forecasts scrutinised, and purchase price adjusted.

Worse still, the ongoing uncertainty and potential impact of a rise in RGD will mean that nascent businesses could see their break-even point extended. This will impact sentiment with any external investors, causing issues with any companies reliant on external funding, and could stymie any future investment in this market.

With profits being squeezed from one end and acquisition costs increasing at the other, it’s highly likely that some casino operators in the UK will become acquisition targets. We expect this to further stimulate consolidation, with a potential stream of newly distressed assets becoming available.

Second-tier ops poised to strike

The Australian market has witnessed several acquisitions in recent times and is experiencing similar regulatory challenges, with a succession of Point of Consumption taxes announced of 8% in Queensland and 10% in New South Wales (NSW), and the two most populated states (NSW and Victoria) banning inducements (sign-up bonuses).

Australian punters are historically less price sensitive than other markets, but this may change when advertising messages switch from bonuses to best price. New entrants to the market will need to differentiate to make any significant headway, and we therefore expect smaller operators to be susceptible to acquisition by tier two operators that are struggling for market share.

Greater risk can mean greater rewards

Away from more established markets where competition is fierce and operators risk paying over the odds, there are a number of compelling territories where significant opportunities are presenting themselves. Two such examples are sub-Saharan Africa and South America.

M&A is the fastest (and sometimes cheapest) way to significantly make inroads into a new market, although finding the right business that will complement the buyer and the market will always be the main challenge. It is also critical that the cultural influence brought on by the new team is complementary in nature, and balances strategic with tactical decision making. There is no point acquiring a business in a foreign market without a firm grasp on the nuances that make it successful.

The current volatility of this industry is expected to continue for the foreseeable future, creating challenges for some players, but also a wealth of opportunities for others. Being informed, prepared and one step ahead is always the best position to be in; both for the prospective buyer or seller.

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has led investments, M&As and exits to date totalling more than of $340m.