Analysts forecast that by 2028 the igaming market will reach over €165 billion in market value (Source: H2 Gambling Capital) across the globe. At the centre of it all is a degree of M&A activity, which continues to spur continued growth, ranging from seed investment in start-ups to hostile takeovers of well-established companies. Furthermore, growth is also being driven by ongoing organic growth in existing markets and the gradual regularisation of new regions worldwide.
The past couple of years were significantly characterised by a prevailing sentiment of uncertainty driven by global macroeconomic pressures and the introduction of new regulations in mature markets such as Germany and the Netherlands, just to mention a few. These factors have, in some shape or form, contributed to subdued deal activity throughout 2021, which activity gradually picked up in 2022. An upturn in deals worldwide is expected in 2023 and beyond as the larger players in the field aim to consolidate their position within the market.
In this flurry of M&A activity what distinguishes a successful company and its peers is the ability to identify those deals, which fit best with one’s long-term strategy. In particular, in this age of continuous rapid technological disruption, rising environmental, social, and governance (ESG) expectations and constant societal adjustments to the new typical post-COVID environment, the nature of an M&A strategy needs to evolve concurrent with prevailing market factors, thereby putting the capabilities of management to the test.
Nevertheless, a company’s success in its M&A activities still boils down to its ability to create value.
Market trends within the industry
Fuelled by companies trying to make up for lost time, considerable deal activity started to take place in the first half of 2022. However, market turmoil, inflationary pressures and general uncertainty in global markets in the second half of the year led to a significant decline in deal activity, which to a certain extent has prevailed at the turn of the year. Despite the prevailing subpar environment, larger players in the industry still have plenty of dry powder on which to bank on, although the pressure to avoid failure in deal-making and execution, has increased further as the stakes rise higher.
Further to the general capital market dynamics, there are two major overarching trends which have been shaping the industry and inherently influencing M&A tendencies in recent years.
- Regularisation
- Accessibility
Regularisation
The onset of new jurisdictions regularising their position, particularly across North America, has unlocked access to one of the largest markets in the world.
European-based operators were presented with two options, either (i) undergo the full licensing process, build their respective capabilities organically within the country/state and develop their service offering gradually; or (ii) collaborate with an existing entity having the necessary structures already in place and expand its geographical reach, either via joint venture or complete takeover.
On the flip side, more restrictive regulations in mature markets, particularly within the EU, make it onerous for companies to operate in certain jurisdictions. Thus, transactions within the region are characterised by two ends of the spectrum: (1) companies that are constantly on the lookout to take full advantage of underperforming companies; and (2) companies which are wilfully looking to divest their interests.
The onset of regularisation across LATAM and African regions over the past years has similarly been contributing to deal activity, as established operators attempt to benefit from first-mover advantage in these regions. Of particular note are countries like Peru, Brazil, Kenya and Nigeria which are widely deemed to be highly lucrative markets.
In some quarters, there is a perception that regularisation is a drawback. Yet, it has been proven time and time again that much stands to be gained by those who act proactively to address the impact of prospective regulation and re-regulation.
Accessibility
Ceaseless technological advances, upgraded internet connectivity (combined with a gradual move towards 5G internet) and the availability of mobile phones, all of which have become cheaper to access, have enabled easier access to players. Beyond traditional technologies, the onset of the metaverse, whose concept remains strange to some, will surely bring to the fore a new dynamic in the betting world.
Developing countries in particular stand to benefit the most from such technological advances, thereby expanding further the potential of the online betting industry.
What underlies a successful acquisition?
The margin of error for M&As which could potentially go wrong has decreased significantly. Investment capital has become more expensive, and the time granted to companies to produce results is shorter than ever, thereby creating increasing pressure for deals to be successful and for returns to be generated in the shortest possible time. The onus of making this a reality is that of establishing robust and effective pre- and post-acquisition fundamentals.
Pre-acquisition fundamentals
Besides ensuring that the target company has the prerequisites to be a right fit with the acquirer, the most prevalent pre-acquisition function is the due diligence process, which primarily looks into the financial, commercial, legal and tax aspects of the target company. Throughout this activity, the acquiring company acquires a deep insight into the target company. In particular, the financial due diligence delves into the target’s financials to get a better understanding of what constitutes a normalised level of profit generation, gaining insight into the target’s capital structure and working capital position, whilst shedding light on the potential synergies that the two combined parties to the transaction could create.
The estimation of maintainable earnings and the quantification of synergies is of particular importance to be able to prepare the pre-deal business case valuation to determine the baseline and strategic value to which the target could contribute. Ultimately, a potential deal needs to be backed up by a compelling business case which supports the rationale behind the transaction. What will the two companies bring to the table? How will the synergies, if any, be achieved? Despite its perceptible importance, there are instances where such a pre-deal “sanity check” is discarded, whether willingly or by naive oversight, potentially resulting in execution or integration issues which could have been rectified at an earlier stage.
Another factor which is often overlooked throughout the deal process is how the different management styles will fit post-closure. In certain instances, the extent of differing cultures across entities is so abundant that the potential value of a deal is destroyed, rather than created. This is of particular significance in transatlantic deals, whose effectiveness could be prejudiced by the different operational styles at present in Europe and the US.
Post-acquisition fundamentals
Contrary to the belief of some, a post-merger integration plan, from a financial, operational and human capital aspect, is fundamental for the success of a transaction. More often than not, the focus should be on those stakeholders who are critical to the deal and whose support the company is most at risk of losing. The objective is to obtain an understanding of the main concerns and explain the larger picture of the deal to allay any fears and potential disruption going forward. This entails holding the necessary conversations with the various business units and ensuring that a sound strategic plan is established and shared with all concerned parties.
Undoubtedly, as part of this strategic plan, management will have to consider making big decisions for the future direction of the company. This might range from restructuring certain operating segments, temporary suspension of certain activities and potential layoffs across several functions. Identification of these circumstances is achievable through operational due diligence which delves into the various functions of the underlying company and assesses how these could be best integrated with the company.
Conclusion
Companies who are seeking to become more active in M&As should not discard the importance of having access, whether in-house or otherwise, to the necessary capabilities linked to the fundamental activities as part of any deal. At PwC Malta we have extensive experience of over 20 years, having been involved in several M&As across the gaming and betting sectors. In line with The New Equation, we look forward to bringing a human-led and tech-powered approach to deliver faster, more intelligent and better outcomes to clients in the gaming and betting sectors as they seek growth and value creation through M&A activity.
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