Amaya-Stars: A new world order?
Published 28th September 2014
The proposed acquisition of PokerStars/Full Tilt by Amaya Gaming would not only be the biggest deal the online gaming world has seen in financial terms, but it could also have seismic repercussions for the structure of the industry as a whole.
Before we dive into the main issues the transaction raises, let’s congratulate David Baazov and his team for being on the verge of pulling off such an audacious deal. We haven’t spoken to a single investor, advisor or competitor that hasn’t reacted in awe at what Amaya is trying to do. Buying the world’s leading online gaming brand is one thing; persuading high-profile financial organisations as Blackstone, Barclays, Deutsche Bank and Macquarie to stump up over $3.5bn in financing is an incredible achievement in its own right.
Ok, so down to the meat of the deal. This transaction is happening because the world’s largest online gaming brand is finding it difficult to join the regulated party in the US. It may also be happening because, structurally, the poker market globally is under pressure, something that will eventually catch up with PokerStars, even if it hasn’t thus far. The gamble is that by breaking all ties with the past in terms of ownership, PokerStars’ entrance into the regulated US market will then be expedited.
David Baazov may argue that it isn’t much of a gamble because, even if the US regulatory door doesn’t open, he is acquiring a mega brand, generating substantial cash flow, with enormous product potential beyond poker. At just over 11x historical EBITDA, the price for a leading global brand doesn’t look overly expensive.
Turning to the US, there is a view that the banks would not have stumped up for the deal unless there was a considerable confidence that PokerStars will be able to enter the market, sooner rather than later.
While unregulated earnings may have previously frightened off the land-based casinos, Amaya’s deal may lead to a higher appetite for deal risk.
Competitors wishing to keep the brand out of the US will undoubtedly argue that simply changing the ownership doesn’t address the fact that a significant proportion of PokerStars’ value was created from its continued operation in the US post-UIGEA. That is, any bad actor clause should apply as much to an asset as it does to a company. However, whichever way your moral compass points, should other operators really fear PokerStars?
We recently met an executive from a European leisure group that has a dominant position in several markets. When asked about the threat from new competitors entering these markets, he said he welcomed this. From his experience, markets with two or three strong operators were almost always healthier than those with little competition. He would rather have a smaller share of a stronger, larger market than dominate a weaker, smaller market.
If we look at the regulated online New Jersey market, its performance thus far has been anaemic. While payment processing and geo-location issues have been blamed, could it be that it is lacking a brand of the scale of PokerStars? We have no doubt that if PokerStars were in New Jersey, the market would be bigger than it is today.
It may mean that the other operators lose market share, but they may end up with a bigger business as a result. It may also lead to fewer operators, but this will only be an acceleration of a process that will ultimately happen anyway.
888 has been able to grow its poker business in several markets, despite being a distant second behind PokerStars. We would also argue that one reason 888 has such a strong proposition in poker is that PokerStars has set the bar so high (it is often overlooked that other businesses operated in the US post UIGEA; part of the reason PokerStars was so successful is that it has an awesome platform). Of course, not all operators have reacted as positively to competition as 888, and this is likely to be the case in the US as well.
What the Amaya deal has done is create uncertainty for other operators, and markets hate uncertainty. It is no coincidence that the share prices of 888 and bwin.party have been hit hardest by the news of the PokerStars deal; the value of their respective US ‘options’ have effectively disappeared overnight. In our opinion, what bwin.party and 888 will have to decide is whether to continue with a twin B2B and B2C strategy, or simply follow one route to market.
The land-based casino operators will also have to decide how they intend to play the market post any PokerStars entry. One possible strategy is to wait for Amaya to do the hard work, and then look to buy the enlarged group. Alternatively, 888 and bwin.party could become potential targets.
While unregulated earnings may have previously frightened off the land-based casinos, Amaya’s deal may lead to a higher appetite for deal risk. What is certain is that standing back and crying foul over any PokerStars entry into the US is not a strategy that any operator can afford to adopt as its sole response to the deal.
What are the implications for the online gaming market beyond the US?
Part of the stated rationale behind the acquisition is to exploit the PokerStars (and to a lesser extent Full Tilt) brand across other gaming products, such as casino and sportsbook. Perhaps not surprisingly at this stage, detail is a bit thin on the ground.
As far as sportsbook is concerned, this could be achieved through acquisition, as opposed to organic growth. However, there is the little matter of paying down some of the $2.9bn debt before further major corporate deals are considered. Full Tilt has already moved into casino, but it is early days. Whatever PokerStars does, it is a competitor to be respected, but we don’t see other online casino and sportsbook operators running for the hills in panic.
What will be interesting is how post the deal Amaya marries a B2B strategy with the world’s leading B2C operation. It is one thing to have a B2B business when you have a relatively small B2C operation; but when you are the owner of PokerStars, prospective customers might just be a little nervous about potential conflicts of interest. However, the reality is that in the grand scheme of things, B2B is unlikely to be a major driver of the enlarged group’s valuation.
Those proclaiming the demise of all other operators may prove to be premature. Sure, life could become tougher in certain markets; but the likes of 888 and bwin.party have taken knocks before, not least UIGEA, and have bounced back.
We’ve spoken about the opportunities for the expanded Amaya and the potential impact on the industry; what we haven’t covered is deal risk. During the investor conference call that accompanied the deal announcement, David Baazov was keen to stress that customers would notice no change and it would be a smooth transition. However, it remains to be seen just how many senior people will leave PokerStars as part of the transaction.
Also, taking on $2.9bn of bank debt and $1bn of convertible debt doesn’t leave much room for error and will bring added pressure on management. One question that David Baazov was unable/ unwilling to answer on the investor call was what proportion of PokerStars revenue was unregulated. What happens if a market such as Russia becomes closed off to PokerStars? Does Amaya have sufficient management bandwidth to digest such a substantial acquisition, and will it be able to deliver its stated strategy? Every deal carries transaction risk, no matter how simple it appears to be.
Undoubtedly the most urgent discussions will be happening in operator boardrooms with US regulatory exposure or ambition. Maybe some of the operators already have a Plan B; if they haven’t, they need one now. However, there are likely to be repercussions beyond the US.
Operators in the UK are already faced with the pending point-of-consumption tax and the number of sales memoranda in circulation is increasing. Further industry consolidation is likely but, as bwin and PartyGaming have shown, marriages don’t always go as smoothly as hoped.
Amongst all the uncertainty, the one fact is the online gaming industry is never dull. Amaya’s acquisition of PokerStars will be a game-changer, irrespective of whether the US market opens up for the world’s leading poker brand. But those proclaiming the demise of all other operators may prove to be premature.
Sure, life could become tougher in certain markets; but the likes of 888 and bwin.party have taken knocks before, not least UIGEA, and have bounced back.