Hello and welcome to edition #7 of Deal Talk. This month we are discussing:

• The sector enjoyed a bounce in January as markets appeared to decide the rate tightening cycle had come to an end – but does that mean the capital markets will once again be accessible?

• MGM has set out the path ahead – and that doesn’t involve bidding for BetMGM JV partner Entain. So where will it look?

• DoubleDown Interactive’s acquisition of SuprNation is the headline deal of the month.

I've reached the turning point.

Have the capital markets turned?

Going by share price performance since the turn of the year and capital raising activity, we might be seeing the green shoots of returning corporate activity.

Reading the runes: It is the nature of the markets to always be on the lookout for turning points, particularly when coming out of a trough. Huge significance is placed on the share price movements of sector bellwethers, hence the interest that was shown in the performance of DraftKings. 

• Since the New Year, it has gained 30% in value and was up 44% before it tailed off late last week.

• The news of 140 redundancies helped reassure investors that the company was serious about hitting profitability.

• Across the wider sector, though, it was commentary suggesting the US interest rate cycle may have peaked which provided the markets with a January boost.

• That in turn has ignited speculation that the capital markets tap might be open once again.

Animal spirits: Those involved in corporate development agree that there is every indication that sentiment has shifted from the negative backdrop being spoken about for much of 2022.  

• “Clearly sentiment has shifted as the market is now pricing a more accommodative stance from the Fed,” says Chris Lynch, head of gaming & leisure investment banking at Citizens Bank.

• But, he adds, “it does feel too much, too soon”. From his point of view, it is too early to know where Fed funds rates are going to settle.

• Davis Catlin, managing director at Discerning Capital, agrees that he “cannot find any great reasons” other than the belief that the Fed has quit raising rates for the “return of risk on mindsets”.

• “The problem is that the flood of cash into the markets and continued consumer spending (on credit) will force the Fed to raise rates for longer than currently anticipated, which will deflate the now re-inflated bubble,” he adds.

• “We’re not out of the woods yet,” says Tekkorp chair Matt Davey.

• Rates aren’t the only issue. Paul Leyland, partner at Regulus, points out that it is the employment picture that will be the key to whether a corner has been turned.

• “If unemployment rises then far worse is to come,” he warns.

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The unemployment line

Unquiet quitting: One corporate financier who wanted to remain anonymous points out why DraftKings’ redundancy news was so well received. “There’s been a view among investors that the leaders in this space were willing to invest in growth at all costs despite their objections,” they suggest. 

• “The news on layoffs proves to the market that times have changed and companies are willing to do what it takes to generate profits.”

• Catlin expresses much the same idea. “The hard truth for our industry is that hype and enthusiasm led us to delirium,” he says.

• “Loose capital markets led to explosive stock prices, cheap capital, expanding company rosters and a flurry of uneconomical deals.”

• The unwinding of that was an “important step” towards the sustainable industry that investors hope to emerge.

• “Our industry was bleeding money for no reason other than our own decisions, so job losses are a difficult and important step to rebuilding the industry's economics,” Catlin adds.

Leyland suggests that the share price reactions to redundancies, not just at DraftKings but also at Bally’s, are “definitely” being viewed as a good thing by the markets. Yet, as Chris Grove, partner at Acies Investments, points out, these remain isolated to a handful of companies in the space rather than the widespread job losses seen in the tech sector.

• Leyland adds that a longer-term bout of faith in the online sector “can only come from sustainable operations and consumer-centric innovation”.

• “With those, the P&L will look after itself; without them, expect more top-line disappointment and increasing regulatory interventions, even in the US.”

• Davey agrees: “With a higher cost of capital, the market is favoring stronger balance sheets and cash-flow generation over top-line revenue growth, and value the more immediate and measurable impact of cost reductions.”

Capital move

Nickels and dimes: The clearest sense of optimism returning comes from recent capital raises undertaken by the gaming REIT VICI, which raised $1m via a share sale, and Caesars, which recently completed a bond-and-debt raise worth nearly $4bn as well as pushing out its maturities.

• “The cream of the crop has been able to raise capital,” says the unnamed corporate financier.

• “When markets reopen after closing, the first companies that are able to access it are the best. So it’s no surprise to see Caesars, VICI and others securing capital.”

• Davey adds that while there remains a reticence over the deployment of capital, “the market will still support capital raisings for strong, profitable companies however we believe these are more company-specific situations at present”.

Ultimately, the hope is that willingness to open up the doors to funding will trickle down to the rest of the market. But as Grove points out, access to capital is “still very much a company-by-company situation”. 

• And, as Catlin adds, while garnering funds is generally easier, “it will depend on the size of the company, the type of financing and the market you want to raise/borrow in”.

• “If you are a large loss-making public company that needs more debt to keep growing, then you will probably still find capital is expensive,” he adds. 

• “Our view is that access to capital likely gets harder in the next six months, so every company should do everything they can to raise enough money to make it two years without additional capital.”

Downdraft: Catlin suggests there might be “another leg down” within the next three-to-six months. “On the spectrum of fear and greed, it feels like the world rushed back towards greed,” he says.

• “We need to get back to more sustainable business models, sustainable capital flows and interest rates that make sense. “

Further reading: The big short is over but investors are in danger of “sleepwalking into a sell-off”, says Bank of America.

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MGM’s path ahead

The comments from MGM Resorts boss Bill Hornbuckle appeared to catch Entain investors by surprise – but maybe they were guilty of not paying attention.

No means no: Taking the opportunity of MGM’s recent earnings call with analysts, Hornbuckle made it plain that the gaming giant would no longer be pursuing any type of M&A regarding BetMGM JV partner Entain. 

• The news clearly caught out shareholders in Entain, who dumped the stock last Thursday, causing a 14% slump on the week.

🤿 Entain’s share take a dive following MGM’s earnings call comments

He’s just not that into you: As a previous Deal Talk indicated, while Hornbuckle had said publicly that MGM would want to own more of BetMGM, there was no easy pathway for this to happen. 

• But even after MGM’s €607m acquisition of LeoVegas in May22, rumors persisted that an offer was just around the corner when arguably the writing was already on the wall.

• Subsequent earnings call comments had made it clear that MGM now saw LeoVegas as its chosen online vehicle ex-US and that it would seek to bolster the company with more bolt-on acquisitions.

Go your own way: This was confirmed last week when Hornbuckle said MGM was “going to go down our own direction” and would allocate capital accordingly. “When you talk studio business or even live dealer, the technology aspect of that is, on our scale, relatively de minimis,” Hornbuckle said. 

• “When you talk about stepping up to other marketplaces, whether it’s South America over time or the rest of Europe, we’ll have to take a different view on that as these opportunities unfold.” 

• “But for now, it’s more bolt-on and relatively small.”

The month in deals

Deal of the month: DoubleDown Interactive’s buyout of SuprNation sees the social gaming operator make a move into real-money gaming via the flagship Duelz.com business. Moreover, by making the point that it was DDI’s “first acquisition” in the RMG space, it was clear it will be making more forays.

• Golden Matrix, a Las Vegas-based online gaming outfit, will be reversed into south-east European B2C operator Meridianbet in a deal that values the latter at $300m.

• Betway and Spin owner Super Group sold the B2B arm of the Digital Games Corp. to Games Global for an undisclosed sum.

• Greentube has made two forays in the past month. First, it snapped up a majority stake in games management system provider Alteatec and then it followed it up with the buyout of software development specialist Ineor.

• SkillOnNet said it has made a strategic investment in independent games studio Peter & Sons.

• White-label gaming and sports-betting backend provider Lion Gaming bought 1Click Games, a games studio.

REIT moves

VICI: Along with its $1bn capital raise, the leading gaming-related real estate investor also completed the acquisition of the MGM Grand and Mandalay Bay from Blackstone for $1.27bn and announced a sale-and-leaseback of four casinos from Pure Canadian for $200.8m. 

Affiliate M&A

Stake size: As noted last month, M&A in the affiliate space made something of a return at the end of last year with GiG’s buyout of the AskGamblers assets from Catena Media. That has now been followed by news that Better Collective has taken a 5% stake in Catena.

• Both have seen their share prices soar over the past month in expectation of further M&A in the affiliate space.

• Planet Sport, the company behind Football365, has bought UK-based affiliate Tipstrr for an undisclosed sum.

• Stram Entertainment, the company behind the affiliate BestOdds, has bought out the BetPrep site owned by FansUnite, again for an undisclosed sum.

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