Playtech’s Power Play

Playtech, the largest publicly-traded provider of gambling software, is positioning itself in Europe and the United States to dominate the industry. For investors, the company’s commanding market share and potential for growth make shares an exciting prospect.
10321 18th August, 2011 Opinion
Playtech’s Power Play

Since Teddy Sagi founded Playtech in 1999, the company, now led by Chief Executive Mor Weizer, has grown into the largest publicly-traded provider of gambling software for online, mobile and land-based gambling concerns. Headquartered in the Isle of Man with 2,000 employees, Playtech provides its software to online operators and sportsbooks like Betfair, William Hill and Paddy Power. The company also works in regulated markets across Europe with local operators like Italy's SNAI and Casino Gran Madrid, the recipient of Spain’s first online gambling license. Playtech supplies software for the online casino in Estonia operated by Olympic, the leading casino group in Eastern Europe, and provides online casino and poker products to the Serbian State Lottery.

Acquisitions, Contracts and Ventures

Playtech, with a market capitalisation of £775 million, reported Key Performance Indicators (KPIs) on July 20 for the second quarter of the 2011 fiscal year. Net revenues increased 7% to €39.6 million from €36.8 million last year, and the company saw revenue rises in all verticals with the exception of poker, where the 3% drop recorded in the first quarter was followed by a 12% loss in the second. Playtech, which owns and operates the iPoker network, has seen poker revenues slip 32% in the last year. Results (released on August 5) were better for William Hill Online, in which Playtech has a 29% stake. Revenues grew 23% in the first half of 2011 to £152.7 million from £124.2 million in 2010. Operating income jumped 24% to £55.9 million, with Playtech’s share of the profit worth £16.5 million, up 28% from £12.9 million last year.

Management said that poker traffic has spiked since Black Friday and, in particular, since the Alderney Gaming Control Commission revoked Full Tilt’s operating licenses on June 29. Playtech is also hoping that poker picks up after the launch of cash games in Italy, as iPoker joins Ongame and others in offering cash as well as tournament play. Italy's leading land-based operator SNAI, with whom iPoker announced a partnership in August 2008, has already begun offering cash games, while William Hill has recently been added to the Italian network. Trust Partners, a consulting firm in Roma, Italy, says the launch of casino games and cash poker this summer is expected to double turnover for the Italian government by the end of the year. Playtech will be hoping to receive a boost, as a result.

In addition to the quarterly results, Playtech announced the acquisition of mobile sportsbook specialist Mobenga in a deal worth €8 million that may rise to €24 million by 2013. Mobenga provides mobile services to 14 of the United Kingdom, Ireland and Europe’s largest and most reputable sportsbooks, including Paddy Power and StanJames. Also on July 20, Playtech revealed a €5 million-a-year licensing deal with Gala Coral for the next 10 years. The company will provide software for Gala Coral’s online gaming products, including sports betting, casino and bingo. The contract is one of Playtech’s largest and may be worth up to €5 million a year in pre-tax profit, according to the Financial Times.

The Gala Coral deal is notable too because it is the first to include software for all gambling platforms, as opposed to the single-product deals (casino or poker software, for example) that Playtech usually signs with operators. Playtech will also provide platform management for Gala Coral’s sportsbook. The privately-held bookmaker from Nottingham already uses Playtech's Videobet software through its contract with Global Draw. That deal supplies 6,500 gaming terminals to Gala Coral as well as rivals Ladbrokes and William Hill. Playtech revealed that it will continue to add assets and contracts, with Mor Weizer telling eGaming Review on July 20 that “the business had a further 10 deals signed and ready to be announced later this year.”

According to reports, William Hill, Playtech’s joint venture partner, was privy to the deal prior to its announcement and raised no objections. After rumours of talks between Playtech and Ladbrokes surfaced, William Hill took Playtech to court in February 2011, taking out an injunction protecting its agreement and preventing the software provider from forming similar ventures with rivals. William Hill and Playtech, however, struck a deal earlier this year that “recognised Playtech’s right to complete software agreements as opposed to fully fledged joint ventures with other companies,” according to the Financial Times. The two created their joint venture in October, 2008. Playtech bought a series of assets, businesses and contracts and sold them to William Hill for $250 million to create William Hill Online in return for a 29% stake in the business. The move has gone well. In its first full year, the joint venture brought in €22.5 million in profits for Playtech.

While the Gala Coral contract was announced with the company’s financial results, Playtech also made several significant deals during the quarter and year. On March 10, Playtech announced that it would acquire private assets from PT Turnkey Services, the holding company previously owned by founder Teddy Sagi. Playtech is paying up to €280 million for affiliates businesses and assets that include marketing and customer services, as well as payment advisory operations. Analysts say the affiliated companies, whose unaudited revenues were €90.2 million in 2010, will generate €40 million in sales and €10 million in EBITDA for Playtech in the second half of the year. The deal was not the first cash-grab for Teddy Sagi, who still controls 40% of Playtech through his investment vehicle Brickington Trading. Sagi first pocketed more than £150 million in 2006 when the company floated on the London Stock Exchange for £550 million.

Another notable dea

in January 2010, Playtech announced a joint venture called SciPlay with Scientific Games, one of the world’s largest suppliers of lottery systems. During the second quarter on June 21, SciPlay was selected by the California Online Poker Association (COPA) for its online poker platform with eyes on potential intrastate regulation. SciPlay will seek gambling contracts in the business-to-government (B2G) market, delivering software to state operators in soon-to-be-regulated jurisdictions. In an announcement to the London Stock Exchange, Playtech called the move a “return to American operations,” its first since the Unlawful Internet Gambling Enforcement Act (UIGEA) was passed in 2006.

COPA, which includes the Commerce Casino in Los Angeles, is made up of 29 tribal governments, and 30 casinos and cards rooms. The lobbying group, which represents approximately 60% of the state’s two million player market, estimates that Californians wager $13 billion a year on unlicensed sites. California is the largest and most active state for online poker in the United States; as a result, the COPA license was one of the most lucrative and sought after deals in the market, with Playtech outbidding bwin.party and others to win the contract. Mor Weizer said the licence will become one of Playtech’s top five revenue generators when online poker becomes regulated in California.

Other UK gambling operators have established footprints in the United States ahead of potential legislation legalising online gambling. British bookmaker William Hill bought three land-based sports betting businesses with operations in Nevada and Delaware. Betfair owns a Tote-based pools business that takes bets in 18 states and 888 Holdings has a commercial relationship with Caesars Entertainment, whose Chief Executive Gary Loveman has been lobbying hard (to the tune of over 800k in the second quarter) for legislation.

Considering that potential legislation will likely favour US-based interests and shutout overseas operators as business-to-customer (B2C) operators, bwin.party Co-Chief Executive Jim Ryan sees business-to-business (B2B) contracts as an essential hedge against protectionism in newly regulated markets. Potential opportunities from intrastate initiatives in California, New Jersey and other states are attractive to European operators who have been shutout of the market since the passage of the UIGEA. As a result, major lottery providers in the United States like GTech, Scientific Games and Intralot are also looking to legislation and regulation to boost profits.

Some industry analysts think intrastate legislation is a better bet than the federal alternatives proposed by Rep. Joe Barton and Congressmen Barney Frank and John Campbell. SciPlay Chief Executive and Managing Director Rick Weil agrees, saying state lotteries, rather than land-based casinos, will lead the way. "Casinos are private enterprises, while lotteries are state managed. The state government view is that lotteries provide way more in aggregate than casinos to social programmes and education. And the lotteries’ perspective is that they will be the primary provider of intrastate online gaming in the US when it happens," Weil told eGaming Review on May 24. There are currently two bills in place in California: in December last year Senator Lou Correa introduced his internet poker only SB40 bill at the request of COPA; and Senator Rod Wright, Chair of the Senate Governmental Organization Committee, put forth his SB45 bill that seeks to legalise all online gaming.

Financials and Investment Prospects

After the passage of the UIGEA in 2006, Playtech shares suffered a one day drop of more than 40%. The company’s share price recovered to reach a peak of 550 pence on May 30, 2008. Since then, however, the stock is down 43%. Many analysts think shares are now undervalued, especially considering the company’s excellent growth prospects. Management certainly thinks they represent a bargain. On May 25, Playtech announced plans to buy back up to 10% of its 2.4 million outstanding shares. Management said in a statement to the London Stock Exchange: “We expect that the market will recognise the true value of our business. Should the public markets continue to offer an opportunity for us to purchase shares at what the company believes are compelling valuations, the board must retain the ability to utilise a portion of our cash resources for the benefit of all of our long-term shareholders.”

Despite losing more than a quarter of their value this year, Playtech shares have outperformed all London-listed peers in recent months with the exception of Sportingbet. The gaming sector in general has trended below the broader market due to investors’ fears of risky and volatile non-regulated and soon-to-be regulated markets. For example, the week following the announcement of Germany’s prohibitive sports betting proposals saw the price of bwin.party drop 16% in one day, and fall 34% below its March 31 float price of £1.94. Playtech, for whom the German market makes up an estimated 10% of revenues, saw shares slip only 8% after the announcement of the sports betting proposals. Online gaming stocks as a group have a beta coefficient of 1.3, according to Ed Birkin at British investment firm Barclays, making them 30% more volatile than the broader market.

Playtech emphasises that it is well positioned “to pursue potential acquisitions that meet its investment criteria and drive organic growth,” with management highlighting the substantial free cash flow (9% yield) generated by the business. “This strong cash flow generation allows the group to maintain a high payout ratio and also complete bolt-on acquisitions,” notes Gavin Kelleher of Goodbody Stockbrokers. Based on her discounted free cash flow model, Geetanjali Sharma, equity analyst at investment bank Execution Noble, sets a fair value price target of 504 pence, a 62% increase from yesterday’s close. Playtech shares trade at 9 times estimated earnings for the 2011 fiscal year, compared with a sector average of 12. The company is expected to grow revenues at a compound rate of 14% for the next three years.

“Playtech has developed, both organically and through acquisition, an excellent product portfolio in the key verticals of poker, casino and bingo. We believe that its portfolio of products is ahead of its competitors, leaving Playtech well positioned to win larger online contracts which are likely to come up as more markets regulate. We feel that Playtech offers investors an excellent means of getting exposure to the online gambling sector, which is likely to grow strongly over the long term. As we have noted previously, the online gambling industry represents just 9% of overall gambling and we see this increasing over time,” says Gavin Keller.

 

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