How equine flu helped make the European gambling sector an attractive opportunity

Whilst short-term interest in acquiring US-based gaming assets may have waned, not least because of the Department of Justice’s recent opinion on the Wire Act, another, potentially more interesting dynamic, may now be emerging.

For a number of years, US-led acquisitions of European assets have been slowly – but steadily – been on the increase. In 2017, a record €8.1 billion in US venture capital was invested in European businesses, only to be surpassed in 2018 with a further €17.7 billion. The reasons may vary, but are widely believed to be due to the relative undervaluation of EU-based assets when compared to their US counterparts. That, and the depreciation of the British Pound as a result of prolonged Brexit negotiations, have contributed to the rise of vulnerable UK-based companies ripe for the taking.

So, where are the trend-lines pointing in gaming? A lot of interest has surfaced around publicly listed gaming companies that have little or no US revenue reporting. A significant proportion of FTSE-based companies state their earnings in US dollars, so when the pound inevitably depreciates, these companies increase in apparent value. So conversely, acquiring GBP- (or EUR-, given the ongoing ripple effect in European Forex markets) entities makes a lot more financial sense now, given the relative increase in dollar purchasing power, which appears seemingly resilient to administration policies and government lockdown.

However, putting comparative advantage in exchange rates aside, a number of other entities are also rapidly approaching the point of manageable takeover, often due to unforeseeable – or unmanageable – circumstances. Witness what has just happened with public operators managing UK-based horseracing markets. The recent outbreak of equine flu, although contained, has significantly impacted share prices (as much as by 8-12% in some cases) across the sector, reducing overall market capitalisation and making such assets appear cheaper, even if for a limited time period.  Savvy US operators see this as a bold takeover opportunity, and if history is anything to go by, will make the move official once their respective quarterly reports have been published.

Even so, the valuations for such assets are significant. This is where venture capital (or larger stakes of private equity), step in. Using specially designed vehicles, such as growth funds, they are able to rapidly raise the required quantum of capital to leverage such acquisitions, normally taking a significant stake in the target business with view to gradually acquiring more on subsequent successful milestones. These normally transform into a double win – with a combination of increased profit reporting, and currency re-basing, VCs typically enjoy returns of 5-7 times their capital over a 5-year return, and significantly more if they also have a star performer in their fund.

So what emerging assets would contribute to a star performer? A content play would be key here; indeed, a number of post-product & post-revenue gaming providers with their own remote gaming servers (RGSs) are already in advanced discussions with some key US players. An IP based acquisition is in line with what most VCs are already looking at outside of gaming circles; as the value of a tech fund increases with product-based (as opposed to service-based) investments. Coupled with this, when such platforms already (or have quick potential to) offer fantasy and/or esports based products; verticals that are reasonably amenable to the US player market in turn make it a very attractive offering to investors.

Additionally, there is also strong demand for small (or medium non-public) operators with existing EU territorial licences and largely white (or whiteish grey) player databases. Newer VC and PE tech funds recognise that there is an active need to invest in operations with sustainable player lifetime values across differentiated markets. Previous funds have enjoyed significant returns across player-centric verticals (music, fintech et al) where profitability is less important than sustainable revenue growth.

The latter point is especially poignant. US VCs care less whether a business is profitable or not, provided that it will be priced at a higher valuation on a subsequent funding round.  This is (mainly) why companies like Spotify and Uber continue to enjoy profitless growth amid ballooning valuations.

Thanks to the market dynamics outlined above, these same VCs are now focusing on these markets with interest to build portfolios based on such (relatively) cheaper opportunities. There will indeed be US-based action this year, just not in the direction we’re expecting. With so many variables at play, and a changing political and economic climate that was unforeseeable just years ago, the landscape is changing fast and is likely to lead to a range of exciting movements in the very near future.

Julian is an investor, CEO and board director to multiple ventures in egaming, fintech & media markets. Investments, M&As and exits to date in excess of $330m.