‘Bargain basement’ JackpotJoy gets analyst boost

‘Bargain basement’ JackpotJoy gets analyst boost

Wednesday, March 8, 2017 Posted by Andy McCarron
New London listing could spark investor rethink

More than a month after finally effecting its move from Toronto to the London Stock Exchange, JackpotJoy (formerly Intertain) has been termed a “bargain basement buy” similar to GVC by analysts at Canaccord Genuity.

Now headed up by Andy McIver, the former chief executive at Sportingbet, and with Neil Goulden, ex-Gala Coral, as chairman, JackpotJoy was finally accepted onto the LSE in late January.

The bingo and gaming conglomerate consists of four major online gambling brands acquired through an acquisition spree over the past three years, including the eponymous JackpotJoy (bought from supplier Gamesys), Vera&John, the Mandalay brands (including Costa Bingo) and the remnants of the Intercasino business. It has a footprint largely in the UK, Spain and Scandinavia with just 22 percent of the business comes from unregulated markets.

One of the main concerns surrounding JackpotJoy is what the analysts term the “symbiotic relationship” between the company and Gamesys. The brand and customer base were acquired in a deal in 2015 for £436m with what the analysts term as a “complex earnout” that will be worth a further £287m. The large majority of this will be paid by June.

As Cannaccord Genuity says, the deal was structured so that Gamesys retained significant control over the business throughout the earnout period which runs until April 2019. The supply agreement also runs until this date.

Under the terms of the arrangement, JackpotJoy agrees sales and marketing budget and targets but Gamesys still effectively employs 265 JackpotJoy staff with 100 percent of costs passed on.

As the analysts point out, one “point of concern” is that Gamesys has the ability to compete with JackpotJoy from April 2019. “However, it has a number of material disincentives to do so,” they add, pointing out that Gamesys will be generating over £30m a year of revenues from JackpotJoy by 2020, over 90 percent of its total revenues (its only other material customer being  Virgin Games). “We believe that the core Gamesys business is loss-making without JPJ,” they added.

Given the chequered corporate past of the company – previous chief executive John Kennedy Fitzgerald left the company under a cloud after details of the management incentive plan exposed lax corporate governance -  and the Gamesys complexities, the analysts suggest there are sufficient reasons for the current bargain basement valuation of JackpotJoy.

“Clearly, the high levels of leverage, history of weak corporate governance and complex relationship with technology supplier Gamesys all argue for some valuation discount, but at current levels, this looks to us very excessive,” they suggest.

Totally Gaming says: There can be no doubting the strength of some of JackpotJoy’s brands, particularly its eponymous one which as the analysts point out is likely the market leader in the UK online bingo space. The only question really boils down to who controls the levers at that business. Although Canaccord makes the point that there are “disincentives” for Gamesys to re-enter the UK market once the earnout is complete, its ability to disrupt the JackpotJoy business will remain a worry regardless of where its own attentions turn.

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