Evolution Gaming to acquire NetEnt for €1.9B

By Aron Adamski, BSc Economics @LSE

Evolution Gaming to acquire NetEnt for €1.9B.

OVERVIEW OF THE ACQUISITION

Evolution and NetEnt are both suppliers to gambling operators, such as Flutter Entertainment.

The consideration will be paid in new shares of Evolution Gaming at an exchange ratio of 0.1306 Evolution Gaming share for each share of NetEnt, representing a 43% premium on the 23/06/2020 close. The Offer includes both the unlisted shares of series A and the shares of series B that are trading on Nasdaq Stockholm. Senior management and employees of NetEnt will be retained after the acquisition.

The deal is expected to close in November 2020.

COMPANY DETAILS (Evolution Gaming)

©Evolution Gaming

Evolution Gaming develops, produces, markets and licenses fully-integrated B2B Live Casino solutions to gaming operators.

Live Casinos are a lucrative niche providing live games where online gamblers play with assistance from human dealers over video link. Live Casino is the fastest growing online casino segment with 38% annual growth rate between 2015–19.

Revenue structure: The majority of Evolution’s revenues consist of commission fees and fixed fees for dedicated tables, which are paid monthly by operators. Through commission, Evolution gains beneficial exposure to the general growth of the Live Casino market.

Cost structure: Evolution’s largest cost items are personnel costs and costs relating to facilities and production studios. Personnel costs are primarily related to staff and recruitment within operations, as well as IT and product development.

COMPANY DETAILS (NetEnt)

©NetEnt

NetEnt is a digital entertainment company, providing gaming solutions to online casino operators worldwide. It offers slot games and live casinos, including table games, such as Roulette and Blackjack. It has approximately 200 game titles in 25 languages.

STRATEGIC RATIONALE:

Consolidation of the market

Tougher regulation, higher taxes and squeezed margins pressured companies such as NetEnt into consolidation with other firms in recent years. Online slots have low barriers to entry and competition is fierce and by consolidating with larger peers the merged entity will be able to expand its product offering and achieve greater economies of scale, enabling it to gain a competitive edge.

Market share expansion in a rapidly growing industry

H2GC estimated the value of the global gambling market at €406B in 2019 using gross gaming revenue. Of this, around 88% constituted land-based gambling. This means that only 12% of all gambling in the world occurred online. The corresponding figure for Europe was 25%.

The market for online gaming has grown faster than the overall gambling market the past few years. In the past five years (2015–2019), online gaming grew annually by 10%, compared to only 2% for the total market. Online gambling is expected to grow at a CAGR of 11.5% from 2020-27.

NetEnt has been a pioneer on the digital casino market and has over 170 active customers today, including most major gaming companies in Europe. In the past 8 years, NetEnt has grown much faster than the market and currently has a market share of an estimated 25% in Europe and 15% globally.

US online gambling market size 2016–27.

Cost and revenue synergies

The deal is expected to bring about €280M of cost savings through rationalisation of operations. It is also expected to have a positive effect on EPS through revenue synergies in 2021.

Diversification

NetEnt offers diversification of Evolution’s revenues into online slots. As result of the acquisition will expand Evolution’s consumer offering, improving its market position further.

“Evolution’s position within Live Casino combined with NetEnt’s position within online slots will create a company well positioned to take significant market shares” ~ NetEnt Chairman Mathias Hedlund

RISKS AND UNCERTAINTIES:

Online casino growth in the past years has mainly come from the Live Casino segment. As result, Evolution has a stronger position in the market. Live games are harder to pull off and it has captured an estimated 70% of the market. Evolution’s operating margins have continued to grow, hitting 46 per cent last year. Hence, the deal might actually make more sense for NetEnt than for Evolution.

OUR VIEW:

After performing our indicative valuation of NetEnt we have arrived at an implied share price of €6.42. This valuation of the target excludes the cost synergies which are expected to be worth around €280M. If we account for the synergy premium our implied share price for NetEnt will be €7.56. The deal value per share is actually €7.61 which is very close to our valuation.

Below you can find the details of our valuation, together with the assumptions underpinning the model.

Historical performance & projections for NetEnt’s financial performance (excluding the effect of projected cost synergies).
Assumptions input sheet (COGS=0 throughout because NetEnt doesn’t have inventory).
Implied EV & EqV (excluding the effect of cost synergies).
Implied EV/ adjusted EBITDA.
Sensitivity analysis: WACC/Exit Multiple.

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