Hunting The Big Plays
The affiliate market has been an increasingly active target for buyers throughout the majority of 2018. RB Capital has managed some of the largest deals by size and volume, some of which have attracted buyers outside the gaming market for the first time.
Ahead of assessing the outlook on acquisitions for the short to medium term, it is worth looking back at the past 12 months to see why 2018 has really been a special year on the M&A front, even more so in the affiliate market.
By the end of June, the overall deal size of affiliate acquisitions had already surpassed the entirety of acquisition deals for 2017. So not only have deals increased in value this year, they have been increasing at an accelerated rate. The current deal momentum in the affiliate space is the highest it has ever been.
This is especially of note when considering that an overwhelming majority of the acquisitions are affected by the same buyers, largely publicly listed entities. Given that the market capitalisation for these buyers is relatively easy to determine, such acquisitions become a crucial determining factor for future share price. In other words, the (publicly listed buyer’s) rationale for acquiring a specific asset is based on the calculated expected increase in share price, as opposed to the perceived net returns that such an asset will contribute to the business.
This perception fundamentally changes the buyer’s target list of ideal acquisitions, as well as the conditions for sale. For instance, the earnout factor (that is, the portion of a sale that’s paid out over time depending on the seller’s ability to reach specific targets) has substantially increased in the last 12 months, as have the underlying criteria to satisfy such earnouts. Similarly, the amount of transactions involving a mixture of cash and share swaps has also started to change the affiliate M&A landscape.
What’s particularly interesting is the relative distribution of affiliate acquisitions across regulated, partially regulated and non-regulated markets. The split in regulated vs non-regulated sales (bearing in mind that the lesserregulated sales rarely make the press; thus, factoring in those transactions that RB Capital is familiar with and/ or has managed) is overwhelmingly increasing in favour of regulated markets (see chart). While the proportion of sales of affiliates in fully non-regulated markets has remained relatively constant over the last four to five years, there is a notable decrease in sales across partially regulated markets.
The reasons here are clear. Partly regulated markets are likely to become fully regulated in the short term, therefore the likelihood of changes to commission plans and/or rules (and, by extension, the risks that will impact this revenue soon) is high; would-be buyers, therefore, steer clear. Those buyers that have been happy to buy in markets with little or no regulation will continue to do so in the medium term.
So where does this leave the affiliate market? Have all the major deals been done? Far from it, even judging by just the most recent acquisitions. There is still a healthy list of private affiliates or affiliate networks that continue to enjoy strong annual growth and increased penetration in new markets; both regulated and unregulated.
Publicly listed buyers are employing a renewed level of creativity around selection criteria in an ongoing drive to increase share price. This means that there will continue to be affiliate transactions that will be multi-market, cross-product and variable commission plans. Conversely, private buyers and/ or those happier to work in nonregulated markets continue to buy at the same rate, with the same volume of deal-flow but different sale criteria (such as earnout multiples for example) compared with regulated markets.
Affiliate acquisitions are expected to continue at the same rate for the next 18 to 24 months and well into 2020. While the level of capital for public buyers remains liquid (good, healthy cash flow on their profit-andloss statements) and under-invested (more assets than liabilities on their balance sheets), these players will continue to support their growth in market capitalisation with more M&A transactions. Market perception of these public players’ strategy will continue to be based on their rate (and type) of acquisitions and a sudden change in buying behaviour may signal the beginning of the end of the affiliate-sale boom.
Two years from now, it is likely that M&A decision-making will mainly or even solely be determined by the public players’ share price, as most of shareholder capital will be vested.
Non-public and/or non-regulated market buyers will continue to buy at the same rate for the foreseeable future because their buying decisions are based less on external factors and more about emerging opportunities. As territories become more regulated, these buyers will shift their acquisition patterns to even newer markets (or technologies, for example the recent surge in app-store optimisation with ASO-based M&A).
In summary, there is no one-size template for gaming acquisitions – especially so for affiliate assets. Different buyers have significantly different requirements and, while they will enjoy the same momentum for the foreseeable future, expect to see changes in buying behaviour around early 2020. In the meantime, anyone planning to scale their affiliate business for a future transaction should look at the numbers to ensure they present the right metrics to the right buyer at the right time. What, who, how and when is a sufficiently critical discussion that it is best left for another time.