Aristocrat Leisure Gambles On Playtech

Australia | Oct 19 2021

Aristocrat Leisure has seized the moment, launching a takeover of Playtech to quickly expand its presence in the iGaming market

-Aristocrat Leisure seizes on Playtech's languishing share price
-Acquisition fills a gap in iGaming, providing established technology
-Substantial addressable market for global online real money gambling

By Eva Brocklehurst

Amid a plethora of takeover actions Aristocrat Leisure ((ALL)) has joined the party, making a $5bn cash offer for the UK's Playtech that provides a platform to enter the global real money gambling (RMG) market.

Playtech will provide scale and capacity in a fast-growing space and Morgans believes timing is critical, as changes are happening fast in the US online RMG industry.

The acquisition will provide all the technology and B2B relationships that would have taken Aristocrat Leisure years to achieve. Morgans does not believe the deal is completely without its less attractive aspects, in that retail sports betting was unlikely to be an addition sought by Aristocrat Leisure.

Still, this is a sizeable business and, factoring in a premium for the acquisition, the broker reiterates an Add rating, believing this is the kind of stock to own over the long-term.

Credit Suisse believes that over 70% of the North American iGaming market share will be taken by the top 3-4 operators which have either internal systems or partners at the ready. In the broker's calculations, under Aristocrat Leisure ownership, Playtech could generate around $650m in operating earnings (EBITDA) in FY24. Moreover, the acquisition fills a gap in iGaming for Aristocrat Leisure.

The broker assesses, prior to the bid, the market had not been valuing the US option for Playtech very highly as the stock was trading on around 7x forward enterprise value/EBITDA.

There are significant execution risks such that Credit Suisse finds no reason to change its target on Aristocrat Leisure until the business plan for Playtech is fleshed out. Ord Minnett agrees the platform will provide a strong base for earnings growth across Aristocrat Leisure's franchise titles adding both content and platform fees.

Macquarie considers the acquisition will transform the company as there is little business overlap and the upside potential is large, perhaps as much as $6/share on a bull case. The opportunity consists of monetising Aristocrat Leisure's content and launching a compelling offering in North America with Playtech's proven technology.

The offer is via cash, debt and a rights issue. Playtech's board has unanimously recommended the offer which has an implied acquisition multiple of 11.4x EBITDA. Ord Minnett considers this multiple reasonable compared with peers and history, justified by the focus on growing the platform in the US and leveraging in-house product.

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