Aristocrat Leisure Gambles On Playtech

This story features ARISTOCRAT LEISURE LIMITED. For more info SHARE ANALYSIS: ALL

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.

B2B/B2C

Morgans notes Playtech earned half of its operating earnings from B2B (business-to-business) in FY20 and half from B2C (business-to-consumer). The broker explains that B2B provides a technology to gambling operators mainly through a revenue share model. The company has around seventeen licensees in over 30 regulated markets.

Meanwhile B2C operates directly as online gambling, the operation of gambling machines and retail betting venues. The latter was affected by shutdowns over FY21 and group EBITDA felt -32% while the share price languished. As a result, the broker suspects this gave Aristocrat Leisure the impetus to act.

North America

Playtech is yet to expand its presence in North America so the acquisition should be highly complementary. In this way, Macquarie finds the outlook compelling and upgrades to Outperform although notes there are regulatory risks for RMG, and there could be a post-pandemic slowing in the core business of land-based gaming and digital.

The total addressable market for global online RMG was around US$70bn in 2020, largely consisting of iGaming such as casino, poker, bingo and online sports betting. The market is expected to grow 13% compound to 2025 as customer adoption increases and more jurisdictions legalise RMG, particularly in the US.

Macquarie calculates the North American RMG market has potential to reach US$25-30bn by 2030. Aristocrat Leisure has guided to mid to high single-digit earnings accretion in FY23, the first full year of ownership. If the acquisition proceeds Aristocrat Leisure will need to undergo a jurisdiction review and may exit certain jurisdictions that do not meet its risk and compliance profile..

Morgans concludes that the real attraction is not earnings accretion over the short term but obtaining scale in a market segment that is forecast to grow at double-digit rates over the next five years.

Playtech

Playtech is headquartered in London and listed on the London Stock Exchange. The company operates across 24 countries and has a track record of innovative software. The two key business divisions obtain revenue largely within Europe, Asia and the Middle East. Macquarie notes Italy is one of the largest online RMG regions in Europe and RMG represents over 25% of the country's total gambling revenue.

The B2B gambling technology and content provided to the online and land-based industry delivered 45% of 2020 revenue. Revenue is largely skewed to casino, which Macquarie points out compliments Aristocrat Leisure's market-leading slot products.

Credit Suisse is also enthusiastic about the Playtech prospects in Latin America, perhaps even more so than North America. Operations in Latin America, driven by Mexico, are close to achieving the medium-term revenue target of EUR100m.

The broker believes Brazil could add a similar amount over the next five years, being a population of 220m and with potentially 1m illegal slot machines and a passion for sport. Brazil is expected to regulate sports betting in late 2021 or early 2022.

The database has six Buy ratings and one Hold (Morgan Stanley) for Aristocrat Leisure. The consensus target is $48.34, signalling 5.6% upside to the last share price. Targets range from $41.00 (Morgan Stanley, yet to comment on the update) to $52.90 (Morgans).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms