Editor’s note: The following article represents the analysis and views of the author.
The lack of sports during the coronavirus pandemic has frozen the sports betting sector like never before.
Large chunks of revenues have been chopped off almost overnight, and sports betting legislation across the country has been cast aside.
However, the stasis extends beyond the games themselves to merger and acquisition (M&A) activity, too.
Who has the heft to compete?
At the start of 2020, there was a feeling that more consolidation was on the way in the US sports betting sector.
The market, to put it bluntly, is for big boys. The cost of market access, multiple tech stacks and the sheer level of red tape mean scale is an important driver of success.
Coronavirus, however, has put the M&A merry-go-round on hold for now. After all, it’s hard to come to terms when neither the buyer nor the seller knows what their business is worth.
The question is, what happens when sports resume? Will the developing financial crisis nix deals before they’ve even begun? Or will the hiatus reaffirm the importance of scale?
A matter of time for sports betting M&A?
“When we emerge from this, there will be a boom,” predicts one M&A banker, speaking to LSR on the background.
“The transactions we’re working on are not going away; they’re all being deferred. What this virus does show is the importance of diversification, scale and a strong balance sheet. So you can make a compelling case that these smaller guys in the market need to come together.”
Pure-play sports operators, like PointsBet and William Hill, could look to tie up with casino operators, for instance, to ensure all key online gambling verticals are covered in the future. The banker says tie-ups between smaller companies will be even more important once the Stars-Flutter deal is done and there are fewer whales that could feasibly snap up small firms.
“Execs and shareholders are right now having a wake-up call,” the banker adds. “They’re asking: ‘How can we make sure we’re never in this position again?’”
Buyers’ market on the horizon?
The relative dip in valuations across the sector could also grease the M&A wheels. Some firms will be running low on cash and looking for new funds.
So, who might be feasible candidates for a deal?
“Honestly, just about every name in the sector is attractive,” the banker says. “Kindred, William Hill, GVC, Pointsbet, 888. All of these guys could do something and probably will do something.”
It’s worth noting these companies are unlikely to be able to raise money through traditional debt markets for buyouts, thanks to the ongoing liquidity crunch. Instead, companies with cash in the bank will have an advantage.
“The gambling sector will weather this storm better than most,” the banker adds. “Because very few companies have leverage, and as soon as the games start back up, they’ll have product again.”
Switch to mobile will drive deals
Sandford Loudon, a partner at Oakvale Capital, said the crisis could speed up the land-based sector’s transition to mobile sports betting and gaming. Specifically, that means brick-and-mortar giants could be looking to acquire digital assets with marketing expertise, technology or even just talent.
“It’s something they all have talked about doing for a long time, but they have been focused on their beautiful businesses that were just kicking off cash,” Loudon says. “With that now shown to be somewhat fragile, I think we’ll see an acceleration of the digital revolution.”
It’s a view shared by Gideon Bierer, the co-founder of consultancy firm Partis Solutions. Bierer also expects a shift from traditional land-based companies into the online space – extending from sports into online casino and lottery.
Furloughs a reality of retail focus
The land-based gambling industry is worth more than $100 billion in GGR and pays a sizable share in taxes, and 650,000 staff are affected.
“Conversations are already starting about how to accelerate the use of the online channel to maintain tax revenue, employment, and customer relationships,” Bierer says. “Ultimately, the industry needs another route to reach its players. It is likely that we will see new online gaming legislation introduced, albeit the timing and details are not yet known.”
One M&A source speaking on background suggests a powerful US land-based firm is already considering a “hard pivot” to online gambling, which could see the acquisition of multiple assets to kick-start the transition.
Watch out for private equity
The sector is also open to external acquirers. In the ongoing crisis, cash is king and one corner of Wall Street is sitting on more than most. According to CNBC, private equity firms like Blackrock and KKR have $1.5 trillion in cash, ready to acquire struggling companies.
Julian Buhagiar, an M&A broker at RB Capital, predicts a spate of acquisitions of European firms backed with PE cash.
“There’s an opportunity for US firms to capitalize on a weak share price and weak pound,” Buhagiar says. “I suspect it’s already happening as we speak.”
PE has a pretty strong record in the sector with CVC making a flashy ROI on its investment in Sky Bet, for example.
More media deals on the way
The final area of potential interest could be sports properties, as sportsbooks look for cheap customer acquisition channels. Potential targets include sports media or other sports entities such as teams, leagues, stadiums, and other types of sports retail venues.
“Most sportsbook operators still lack both a meaningful US brand and critical mass with consumers, and there are dozens of scaled sports partners still available,” Bierer says. “Given the operational complexities of contracting with multiple marketing partners for each state, the potential for strategic alliances is clear, whether M&A or commercial.”
Sooner rather than later?
And what’s the timeline on this presumed M&A mini-boom? It depends on the resumption of sports. A working estimate for that seems to be September, when the NFL is aiming to begin its season roughly on time, according to NBC’s Peter King.
“I’d keep an eye on the public markets,” the broker adds. “As share prices surge back up, likely as sports return, these talks accelerate and the closer you get to people announcing these deals.”
Get checking those stock tickers.