GAN, an online gambling B2B supplier with B2C operations as well, is being bought out by Sega Sammy, the pair announced last Wednesday.
Sega Sammy is a holding company listed in Japan that has various gaming businesses. Segments include arcade games, pachislot and pachinko machine manufacturing and a land-based casino with Paradise City in South Korea.
But its $88 million acquisition of GAN will bring its casino business to new territory: US online gaming. The buy comes as Sega Sammy commits to build out its casino gaming business through nearly $700 million in investments as part of a larger, $1.6 billion growth investment.
The purchase of GAN, a FanDuel supplier, should close sometime in late 2024 or early 2025.
Sega Sammy eyes US online gaming
Sega Sammy cited a report from MVB Bank and Eilers & Krejcik Gaming that says the online sports betting market should grow to $17 billion by 2027 while the iGaming market should hit $10.1 billion.
Sports betting, which has been legalized in many states, is a high-profile market with increasing competition, a growing user base, high customer acquisition costs, and diverse needs. While the U.S. iGaming market is still limited to six states, there are ongoing discussions around legalizing iGaming in additional states.
If we can enter the U.S. iGaming market before broad legalization, it could provide a promising opportunity to grow our presence in the U.S. iGaming market.– sega sammy release
Where GAN fits into US iGaming plan
Sega Sammy chose GAN as an acquisition target for multiple reasons:
- “Market-leading” player account management system
- Remote gaming server
- The acquisitions of B2C brand Coolbet and Silverback Gaming game development studio
- Turnkey online gaming solution provider
What Sega Sammy said
That kind of plug-and-play solution should be what some retail casino operators are looking for when iGaming expands in their market, the company said.
“Among the online gaming markets in the U.S., the Company has identified the iGaming market, which is expected to expand in the future, as a particularly promising market. As more states legalize online gaming, we expect existing operators to expand and new operators to enter the online gaming market. The Company believes that GAN’s turnkey technology solution is highly competitive in enabling these operators to quickly enter the online gaming market.
“The complementary nature of GAN’s market leading online gaming technologies and solutions, and the customer base and content development capabilities of SSC, which provides gaming equipment and content to land-based casino operators in North America, is expected to result in increased distribution of SSC’s compelling casino content and expanded customer reach.”
GAN searching for ‘value creation’
The sale makes sense for GAN for two reasons, recently appointed interim CEO Seamus McGill said in GAN’s release. It creates shareholder value and helps keep GAN from running out of cash.
“After a thoughtful review of value creation opportunities available to us, we are pleased to have reached this agreement with SSC. Market share concentration in the U.S. B2C space, a slower than expected adoption of regulated online gaming in the U.S., along with changes to key customer contracts make the near-term operating environment challenging without ample capital resources.
Sega Sammy has those resources and GAN is a strategic complement to their existing gaming portfolio. We believe this all-cash offer, at a substantial premium to recent trading prices, is the value-maximizing path for our shareholders.”
Sega Sammy will pay $1.97 for each outstanding GAN share. That is a 121% premium to the closing price on Nov. 7, the day before the deal was announced.
GAN’s stock closed down 3% Monday at $1.61 on more than three times its average volume. The price could suggest there is investor doubt over whether the deal gets completed.
10-Q shows GAN struggles
GAN’s quarterly earnings report shows some of that challenging environment.
GAN posted a net loss of $8.2 million in the third quarter, 17.6% more than last year. That helped adjusted EBITDA swing to a $2.5 million loss for the quarter compared to a gain of $2.1 million last year. Revenue fell 7.2% to $29.8 million.
Key KPIs were down as well:
- B2B revenue fell 19.8% to $10.2 million despite B2B operator revenue up 52.7%. That is because GAN’s B2B take rate, or the percentage kept from operator revenues, fell to 2.4%, down 2.2 percentage points, because of a decrease in contractural revenue rates after the expiration of an exclusivity period with one customer.
- GAN’s B2C marketing costs were 26% of revenue in the quarter, up from 23% last year. GAN also saw limited customer acquisition in Latin America, which when paired with a slow sports period led B2C active customers to fall 6.5% to 244,000.
Shifting US iGaming market
The US online gaming market is a bit different than what GAN expected when the company moved its listing from London to the US in 2020.
Two customers made major changes. Churchill Downs ended its online sports betting business because it was not profitable, while WynnBET scaled back online betting operations to just four states that could further dwindle to two.
GAN launched its first social casino partnership in 2014 and brought the technology to a point where it could be a simple switch to real-money gaming once a state legalized. Some of its most intriguing social casino deals, like with San Manuel Casino in California, WinStar in Oklahoma and Penn Entertainment, failed to hit full potential without real-money gaming.
Smurfit will profit after departure
Along with leading the company for years, Smurfit is also the largest shareholder of GAN at 4.0%, according to Sega Sammy’s release.
Based on the company’s 44.7 million outstanding shares as of Sept. 30, Smurfit would receive more than $3.5 million in proceeds at closing.