Consolidation in the online gambling industry is picking up speed. The intense competition in this industry has made many players realize that it is better to merge than to engage in a bloody battle for independence. That is why Bwin.party will be merged into Israeli company 888 Holding plc (LSE:888) (as long as GVC does not take a last card out of its sleeve in a desperate attempt to snatch it from the Israeli company), and Labrokes is merging with Gala Coral, as was learned late last week.
These mergers are expected to have an effect on the industry as a whole, especially on Playtech Cyprus Ltd. (LSE:PTEC), Teddy Sagi's software platform giant, which provides its solutions to both Labrokes and Gala Coral, and whose share recently surged, pushing the company market cap up to $4.7 billion.
Ladbrokes is the second largest bookmaker in the UK. The largest is William Hill, a former partner of Playtech in the WHO company, which handled William Hill's online business, and quickly became a golden egg-laying goose. Gala Coral is the third largest bookmaker in the UK, and online business is the principal growth engine for both of the merging companies.
The Labrokes-Gala Coral merger will create a company with a value of £2.3 billion ($3.6 billion), whose revenue from online gambling will total £400 million ($620 million). Ladbrokes is a public company traded on the London Stock Exchange at market cap of $1.7 billion, while Gala Coral is a private company.
In March 2013, after selling its holdings in WHO, Playtech made the same kind of arrangement with Ladbrokes through its PTTS arm, which provides end-to-end services for anyone wishing to get involved in the online gambling business. PTTS will build online business for Ladbrokes, and try to at least equal its success with WHO.
This cooperation got underway in May 2013. Playtech receives royalties for the use of its platform, as well as a share of the profits from Ladbrokes' online business, on the basis of improvement in performance, compared with 2012. According to Playtech's 2014 reports summing up a year of this cooperation, it had no revenue from profits on Ladbrokes' online business.
Buying shares issued by Ladbrokes
Under the terms of their cooperation, Playtech is due to receive 27.5% of the increase in Ladbrokes' EBITDA from 2014, multiplied by Ladbrokes' multiple during that period. In order to help the two companies, and provide them with the flexibility required for the merger, Playtech agreed that instead of waiting until 2017, it would settle its accounts ahead of time, and will therefore receive a £75 million ($116.3 million) one-time payment, including £35 million in cash and the rest in Ladbrokes shares. In addition, Playtech will receive £35 million more within 42 months of the completion of the merger, depending on milestones.
According to Playtech, the two customers are its strategic partners, and it is expected to benefit from the value produced by the merger. Independently, the two companies will remain Playtech's customers and strategic partners.
Furthermore, Playtech purchased 22.9% of the shares now issued by Ladbrokes as part of the Gala Coral acquisition. The acquisition was at a share price of £1.25, and Playtech invested $41 million for 2.3% of Ladbrokes' capital - a vote of confidence by Playtech in the partnership and the results of the merger between Ladbrokes and Gala Coral. Playtech acquired 3% of Ladbrokes' capital in October 2013, but apparently sold this holding.
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2015
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