Investors Still Bullish On Gambling M&A Despite Economic Downturn

September 29, 2022
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Mergers and acquisitions activity in the gaming industry could continue at a high volume even in the event of an economic downturn, according to leading U.S. investment analysts.

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Mergers and acquisitions activity in the gaming industry could continue at a high volume even in the event of an economic downturn, according to leading U.S. investment analysts.

With consistent warnings from financial experts that a downturn or even a recession could be on the horizon, interest remains high in the potential vertical or horizontal integration of the gaming industry, believe analysts and investors.

“I can tell you kind of under the hood, the amount of conversations is at a high level, but there’s often a gap between conversations and actual transaction,” said Andrew Fabian, an investment banker with Citi.

One key for M&A activity to remain frequent, analysts say, is a recognition among sellers that the valuations of recent years may have represented an unrealistic peak.

“I'm going to say 60 to 70 percent of those deals, people wildly overpaid,” said Joel Simkins, managing director of investment bank Houlihan Lokey, of major partnerships or acquisitions struck within the sports betting and online gaming market between 2018 and 2020.

“Obviously, we were in a different timeframe with 0 percent interest rates and meme stocks and valuations are running out of control, so I’m looking at this as a banker who just joined Houlihan a few months ago, and I’m sort of licking my chops and saying, there’s going to be a fallout from this.

“There's going to be assets that shake loose; there’s going to be folks that are subscale that are looking to partner up or looking for an exit,” Simkins added. “I think economic uncertainty is going to further accelerate this business.”

Fabian of Citi cautioned that some companies that may have only recently been valued 50 percent higher than they are today could cling to the belief that it is “sort of a temporary blip that you’re being valued where you are right now.”

“But as time progresses, and the market doesn’t rebound or continues to go in the other direction, I think there’s more of an acceptance of a new normal,” Fabian said.

“And that acceptance then also causes a bit of a reluctant embracing of a reality where certain businesses will say, ‘hey, it is the right time for us to sell, even if we’re not worth what we were six or 12 months beforehand’, because … there is a view that perhaps the markets too crowded right now.”

Melvin Ike, managing director of Blackstone Group, said one of the private equity giant’s chief focuses within the gaming industry has been on business-to-business solutions, but even that comes with its own set of risks.

“We like, particularly, being in the B2B space where we can invest behind a partner with companies that are point solutions or providing picks and shovels to the large sportsbooks,” Ike said.

“For us, one of the major risks as we think about investing in that area is, one, the risk of insourcing; the sportsbooks doing this stuff themselves.

“And the other is the risk that our customers get purchased and get migrated to different solutions other than the ones that we have.”

Fabian and Ike spoke during a webinar last week presented by iDEA Growth and GeoComply, while Simkins spoke during a panel at the East Coast Gaming Congress in Atlantic City.

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