Questions arise over Playtech’s ‘conglomerate’ model

Questions arise over Playtech’s ‘conglomerate’ model

Friday, September 15, 2017 Posted by Sam Cooke
Copyright: <a href='https://www.123rf.com/profile_flynt'>flynt / 123RF Stock Photo</a>

Conglomerate isn’t a business term that has aged well. Once all the rage among listed entities, conglomerate structures have long since fall out of fashion with investors who tend to be much keener on focused entities with easier to understand corporate structures.

Yet, as a recent article in the Financial Times pointed out, the conglomerate lives on in the guise of the “more industrially coherent” advertising and marketing behemoth WPP.

Since the start of the decade, the company has affected over 300 acquisitions or an average of 40 transactions a year.

There are secular trends within the advertising space to that help explain WPP’s consistent attempts at land grabs, in particular with regard to digital, but the tensions of a sprawling empire has seen the company’s own chief executive Sir Martin Sorrell admit the company had to continually justify its structure “otherwise it would only make sense to split the company up.”

It might initially appear to be something of a stretch to describe Playtech as the gambling industry’s WPP. The company hasn’t racked up nearly the same level of acquisitions - it’s deals number in the dozens rather than the hundreds.

Yet the rationale behind the acquisitions on the part of both companies bears some comparison, namely that of horizontality, or in plainer language cross-sell, which allows Playtech to provide a range of services across multiple channels and products for its largest clients.

It’s the one-to-many model writ large and for Playtech it has been hugely successful, driving the business to pre-eminence within the online gambling supply space and beyond into land-based gaming and most recently retail financial trading.

It is this area of operations which gives us the most recent example of the Playtech acquisition model.

At the time of the recent results, Playtech announced it had bought out certain assets of a company called ACM or Alpha for an upfront $5m and a maximum $150m earnout, which is a huge pointer to what the company believes the acquisition might mean for its newly-renamed TradeTech arm.

Analyst comment on the deal focused on the deal rationale. Simon Davies at Canaccord Genuity, suggested it would enable Playtech to bring “real scale and momentum to the (financial trading) B2B business,” something it has of course already achieved within the gaming space.

The achievement of scale, however, comes with its own issues. The company’s results for the six months to June were decently received but according to Simon French at Cenkos, earning visibility is “clouded by operational issues.”

As well as “taking a hit”, as French suggested, over the underperformance of Sun Bingo, which the company said “remains challenging”, the results also mentioned the previously announced loss of contracts at the Mobenga mobile sports-betting unit.

It is an indicator that despite the addition of the BGT self-service betting terminals (SSBTs) business in July last year, the sports-betting vertical remains very much a work in progress.

These might only be short-term issues. While French at Cenkos has downgraded the shares to a hold from a buy on his concerns, he still believes that Playtech has scope for further value-enhancing M&A.

This might have a restorative effect yet such moves also further obscure the organic growth trends within the business. According to French’s breakdown, while the casino B2B arm enjoyed 22 percent organic growth in the first half, the services business (i.e. affiliate marketing) was down 6 percent, poker was down 5 percent and sports-betting was off by 28 percent.

French suggested there is “opacity’ in how the company’s EBITDA margins can be assessed. While total gaming margin excluding acquisitions, white label and casual games stood at 51.3 percent in the period, up 240 basis points on the same period last year, the group headline margin actually fell 340 basis points to 41.1 percent.

“Whilst we do not doubt (these figures), it is becoming increasingly difficult to externally assess the moving parts of the group’s margin,” said French.

Such issues might be masking broader problems. Marcus Wareham, a gambling industry consultant, believes Playtech operates like a holding company where the focus is on ensuring it owns the supply chain to its partners. “If they have enough of the market then no single operator can stand out,” he points out. “Playtech tends to solve their innovation problems by acquisition and it also allows them to scale to new geographies or verticals.”

So is Playtech a conglomerate? Well, if it walks like a duck…

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