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Retail Resourcefulness and iGaming Inevitability

As the online gaming sector continues to consolidate, its brick-and-mortar counterpart looks to bolster its leverage

Retail Resourcefulness and iGaming Inevitability

The inevitable has arrived. Online sports betting and iGaming consolidation has begun in earnest.

The most recent and perhaps most telling announcements have come from Aristocrat and privately owned Fanatics. The former is buying iGaming and iLottery software company NeoGames for $1.2 billion and a whopping 104 percent premium from the stock price on the day prior to the deal being announced. Fanatics is buying the U.S. operations of Australian sports bettor PointsBet.

The deals represent the usual motivations for consolidation—opportunity by those with deep pockets like Aristocrat and management’s acceptance of the futility of its over-ambition in the case of PointsBet.

Aristocrat continues to build itself into a digital powerhouse both in social games and gambling. Acquisition of NeoGames positions Aristocrat to capitalize on what almost surely will be a huge and lucrative market—the coming of iLottery as a standard offering by American states.

PointsBet’s departure is representative of so many companies that entered the U.S. with grand ambitions, then over-spent and under-produced relative to the size of their investments.

Public attention has turned now to Rush Street Interactive as an acquisition candidate. The company has long boasted of its financial discipline and emphasis on proprietary software and more profitable iGaming over online sports betting. All the while, it has been losing money like all the others. Rush Street still promises to turn EBITDA positive this year and talks about its Latin American expansion as a company builder and the lack of new jurisdictional openings in the U.S. this year as a reason for slower U.S. growth.

All of that may be true, but pinning hopes on Latin America isn’t the way gaming companies historically have built success, and the slow-down in U.S. market openings has become the common whine among the money losers. And, of course, when new jurisdictions do open, money will be lost chasing market share. So, you lose if you do and you lose if you don’t, but there’s always next year.

That doesn’t mean Rush Street’s self-touted strengths aren’t real. It just might mean that a deep-pocketed acquirer is better suited to capitalize on them.

The winners, as we’ve said in this space before, are clear: casino-based companies with databases of tens of millions of proven customers like Caesars, Penn Entertainment, and MGM and its BetMGM joint venture with Entain, and those with huge market share and brand recognition like DraftKings and Flutter’s FanDuel.

There also will be consolidation in related areas as the same dynamic of building on success and size benefits the likes of Better Collective among affiliates and Evolution among pure iCasino players.

The list of buyout candidates is large—like, almost all of them.

Meanwhile, the iGaming companies try to out-news release each other in their scramble to build brand and size, whether that is a games platform like Bragg, those hoping their novel approaches catch on with players like Rivalry, or any of the traditional slot machine companies providing games to iGaming operators.

Every company, it seems, from the multibillion-dollar giants to the $50 million microcaps, start their announcements describing themselves as “a leading global digital” something or other.

As investors, we’ll stick with the prospective acquirers mentioned above.

Optionality

Optionality has become a popular word in describing brick-and-mortar gaming companies.

The reasons may have to do with the maturity of the business. After years of running up debt to expand, companies now find fewer growth opportunities, so they are paying down debt and taking other actions to open up their options.

The word applies to one of our longtime favorite stories, Golden Entertainment.

As readers of this space know, we bought into Golden shortly after it went public and when the stock was in the single and low double digits. We rode it up to its all-time high just shy of $60 a share a couple of years ago. The gains from that big run up bought patience to hold through the period when it has for so long now sat in the $40s with the occasional slip into the $30s.

This is a transitional year for Golden. The business is being focused on southern Nevada casinos and taverns as slot routes and its Maryland casino are sold. The result will be a debt-to-EBITDA ratio down to 1.5 times or slightly lower accompanied by incremental growth projects.

The result is expected to be an EBITDA of $230 million a year or more that, combined with the cash from asset sales, will put Golden in position to initiate a dividend and/or buy back shares. Assuming even a modest EBITDA multiple of eight or 8.5 times, a return to a stock price of $55 or higher seems reasonable.

The question is what happens then. That’s where optionality comes in. With low debt, plenty of free cash flow, steady EBITDA growth and the chance to monetize its considerable real estate holdings, there are plenty of options.

One option a bit below the radar screen is to extend the tavern business into states like Montana and Illinois that allow bars to operate slots. In Nevada, Golden generates a 30 percent return on investment in taverns that, at $2.2 million each, mean EBITDA around $700,000 per unit. The economics probably aren’t as good outside Nevada, but even a 20-25 percent return can offer steady, low-risk growth.

Then there are mergers and acquisitions, either Golden as a buyer given its balance sheet strength, or a seller given its currently undervalued assets.

In short, Golden isn’t the slam-dunk four-bagger of its early days as a public company, but its proven ownership and management has a lot of—and here’s that word—optionality.

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