Aristocrat Leisure: Back the right horse - Proposed acquisition of Playtech

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
19 October 2021, 9:30 AM
Sectors Covered:
Gaming and Retail

  • Aristocrat Leisure's (ASX:ALL) proposed acquisition of UK-listed Playtech for an enterprise value of A$5.0bn will give ALL immediate scale and capacity in the fast-growing online real money gaming (RMG) space. Time is of the essence in this market.
  • We expect the pace of change and liberalisation in the US online RMG industry to be rapid. Acquiring Playtech will give ALL technology platforms and B2B relationships that would have taken it years to replicate organically. ALL can leverage its own market-leading content, especially in iGaming, to make it a powerhouse in US and global online RMG in the foreseeable future.
  • We don’t think everything about the deal is perfect. We can’t imagine that ALL would have set out with the intention of adding retail sports betting to its portfolio, for example.
  • These things tend to come as a package. The big picture, though, is that acquiring a sizeable and scalable presence in online RMG and doing it while generating mid to high single-digit EPSA accretion in Year 1 and keeping pro forma ND/EBITDA below 2.5x all adds up to a very good move indeed.
  • We have updated our estimates for the FY21 trading update also provided today. Factoring in a premium for the acquisition of Playtech, our target price increases to (login to view) and we reiterate our ADD rating. This is the kind of stock to own for the long term.

Proposal to acquire Playtech for an enterprise value of A$5.0bn

ALL proposes to acquire UK-listed Playtech (PTEC-GB) for 680p, a 58% premium to the last close. This represents an enterprise value for the acquired business of GBP2.7bn (A$5.0bn). This implies an 11.4x LTM EBITDA multiple on an adjusted basis.

The acquisition will be funded through a combination of cash (A$1.1bn), new debt (A$2.8bn) and equity (A$1.3bn through an underwritten entitlement offer). The transaction is expected to complete in mid-CY22.

Immediate scale in the fast-growing online RMG market

Playtech earned half of its adjusted EBITDA from its B2B business in FY20, and half from its B2C business. B2B provides technology to gambling operators, mainly through a revenue share model. It has around 170 licensees in over 30 regulated markets.

The B2C business operates directly as an operator of online gambling, gambling machines and retail betting venues, mainly in Italy.

In FY19, Playtech’s revenue on an adjusted basis was A$2.3bn and EBITDA was $586m. The B2C business was impacted by COVID shutdowns in FY20. This, combined with Playtech’s exit of many unregulated markets, meant group EBITDA fell 32% in FY20 and the share price has languished.

This may, in our opinion, have created an opportunity for ALL to act.

It makes sense to us

The proposed acquisition will give ALL instant scale and capacity to grow in the global online RMG space, an US$70bn market forecast to grow substantially in the years ahead as the US market opens up.

It expands and diversifies ALL's total addressable market from a $230bn market comprising land-based gaming and mobile games, to a $300bn market that will now include online RMG ( iGaming and online sports betting).

Playtech will provide a platform for ALL to leverage its content across new distribution channels and in new markets.

Investment view

ALL has guided to mid to high-single digit EPS accretion (before amortisation of acquired intangibles) in FY23, the first full year of ownership. This assumes ALL exits Playtech from certain jurisdictions that do not meet its risk and compliance profile (reducing EBITDA by EUR50-80m) and includes ‘modest cost synergies’.

In our opinion, however, the real prize is not short-term earnings accretion, it is getting scale in a market segment forecast to grow at a double-digit rate over the next five years, driven by a North America market growing at a CAGR of close to 50% as more US states liberalise and allow online iGaming and online sports betting.

Risks are mainly around the execution of the transaction and integration.

Trading update

ALL also provided a trading update that indicates FY21 NPATA was 2.2% above Factset consensus.

We have updated our model for this, with the result that FY21F EBITDA increases by 3.4% to A$1.54bn and NPATA by 7.5% to A$864m.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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