• Activist investors have notched some notable successes within the betting and gaming space since the New Year – and there is every reason to suspect more shareholder campaigns will be forthcoming in the year ahead.

• Theories about mercantilism get a run out as the team at Regulus spots some historical allusions in the news of FDJ’s $2.8bn Kindred all-cash offer. 

• Lastly, the Deutsche Bank team points to another reason why New Jersey is an outlier when it comes to sports betting.

Change, like the sky, like the leaves, like a butterfly.

Change makers

High-profile activist investor efforts are reshaping the sector.

Chalk ’em up: There is no denying the impact of activist investors in the betting and gaming space after two high-profile ‘wins’ for those hoping to reshape and reposition key players in the space, setting the scene for more actions in 2024. 

• First, Eminence Capital managed to muscle its way onto the board at Entain just as that company seeks to identify a new CEO.

• Second, the views of long-term Kindred investor Corvex were instrumental in kickstarting the strategic review that concluded yesterday with a $2.8bn bid from French lottery operator FDJ. Notably, Eminence is also an investor in Kindred.

Can you feel it now? Penn Entertainment, 888, PointsBet and Bragg Gaming are four further recent examples where activist investors have gone public with complaints about strategic directions – highlighting how investors feel emboldened in thinking they can effectively agitate for change.

• In Penn’s case, it is HG Vora that has launched a campaign to get places on the board in the hope of steering the company from within.

• The same investor is also still on the register at 888, albeit with a minor stake after it joined in the doomed effort on the part of FS Gaming to get Kenny Alexander installed as CEO. 

• It also has a 10.5% stake in PointsBet where it successfully agitated for the sale of the US business to Fanatics last year.

• For Bragg, in November shareholder Raper Capital posted an open letter calling for a partial or complete sale of assets in order to maximize shareholder value.

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Venture capital firm Yolo Investments manages in excess of €500m in capital across 100 exciting fintech, gaming and blockchain companies. The Yolo Investments' Gaming fund, regulated by the Guernsey Financial Services Commission, has taken positions in fast-growth suppliers and operators, including Dabble and Enteractive. Yolo Investments (yolo.io) wants to hear from readers of this newsletter. Get in touch with your pitch, or for a chat about innovative products which can plug into our investment ecosystem.

Activists on the march

Change is gonna come: The success of Eminence and Corvex in their campaigns at Entain and Kindred respectively comes against a backdrop of a wider increase in shareholder activism in the past year. This is backed up by two recent surveys.

• Lazard said in its annual review that activity had hit an all-time record with new campaigns up globally by 7% to 252.

• The report found the broadest range of activists launching campaigns in history, up 21% at 183. Among them were 77 first timers.

Notably, the report found that in Europe two-thirds of first-timer campaigns focused on challenging announced M&A transactions or advocating for sale/divestitures as a path to unlock value; while the number of board seats won globally rose 13% YoY to 122.

• A record 31% of those seats were won through proxy contests.

• 83% of the 23 seats won in Europe were through proxy fights, but the number in North America – 88 seats – was down 12% on the five-year average.

Laying the foundations: A second report from experts at consulting firm Alvarez & Marsal put some flesh on the numbers, suggesting the foundation has been laid for further activist campaigns in the year ahead.

Fix you: Its Activist Alert Outlook for 2024, published earlier this month, suggested that among the six major themes that would drive an increase in activist campaigns this year was a strategy of pushing for M&A actions and, while the deal market remains subdued, the campaigns often have a mindset of “if you can’t sell, fix.”

This plays into the other themes identified by A&M, including:

• Equity markets are predicted to enjoy a positive year – providing comfort for investors pushing for change,

• Potential pipelines for activist involvement are more developed than this time last year.

• Lower present market valuations in Europe means returns might be exponentially higher.

• Improved backdrop for M&A offers the “lever for change.”

• Capital allocation decisions will be increasingly scrutinized – and will inevitably draw criticism from activists depending on which routes are taken by corporates.

A seat at the table

Board games: Until yesterday’s news from Kindred, the most outwardly successful activist campaign concerns the troubled Entain after it recently gave shareholder Eminence Capital’s CIO Ricky Sandler a seat on the board and apparently a substantial say on who will be the next CEO.

• Eminence went public with its concerns about Entain’s M&A strategy last summer.

• It was joined in its campaign for change by other activist funds including, notably, Corvex (again), Sachem Head Capital Management and Dendur Capital.

Similarly, hoping to influence events from the top table is HG Vora, which is seeking at least a couple of board posts at Penn Entertainment – and has said it is willing to go the proxy battle route should it not get its way.

• Most threats to go to a proxy vote end with the board of the target company capitulating to the activist demands for more say.

Check the guy’s track record: Sources close to HG Vora’s thinking suggested the company is worried about the board’s track record on capital allocations, given what it sees as the value-destructive acquisitions of Barstool Sports and theScore. It is now worried Penn will “fumble the ball” from a promising start with ESPN Bet.

Disruption ahead

Rumble fish: As noted earlier, the suspicion is that 2024 will see more activist investor actions. According to one fund source, the economic backdrop has changed to such an extent that boards and management are now more constrained and unable to buy their way out of trouble.

• “When interest rates were effectively zero and stocks were indiscriminately performing well, there just weren’t the voices out there arguing for accountability,” the source suggested.

• But with the more tightened circumstances that prevailed last year, more investors were willing to stand up for properly aligned incentives and better oversight.

• Skinny dipping: “When the stock bubble burst and rates went higher, and suddenly capital wasn’t free, we found out that some companies were effectively swimming naked.”

Gloss paint: Under the circumstances that occurred at the time of the pandemic, some “very, very bad decisions were glossed over when times were good. “And when all of that is laid bare suddenly, there’s a bigger demand for accountability,” said an advisor source.

• “And really, it’s happened a lot with companies [that] have made bad M&A decisions.”

• “Management teams and boards may have a tendency to empire-build – and pay any price – and when times are good and money is cheap, that’s easy to do.”

The hindsight fund: This is where the activists step in. With the era of cheap money in the rear-view mirror, 20/20 hindsight is a powerful force and investors – particularly activist investors – have it in abundance. 

• “Everyone’s great at seeing where it all went wrong, but only after the fact,” said one adviser.

• Back-seat drivers: By this reckoning, it is more obvious now than was previously the case where companies have taken wrong turns.

• There will be more activist campaigns in the year ahead, said one advisor. But it remains a “low conviction call” given the other moving parts affecting the sector.

FDJ/Kindred reaction

The state we’re in: Titling their reaction to the news of FDJ’s $2.8bn all-cash offer for Kindred ‘L’etat c’est moi’, the team at Regulus highlighted the importance of FDJ’s position as a lottery monopoly as the company moves to try and cement a stronger position in its home market.

Bolster: FDJ, the analysts contended, has a “desultory” ~11% share of the competitive online French market “despite being able to leverage a strong brand, ubiquitous distribution, lottery cash flow,and a land-based betting monopoly.”

• “FDJ was failing to cut through despite strong strategic tailwinds and over a decade of trying, e.g. the acquisition and sale of Sporting Solutions; the launch closure and relaunch of poker,” Regulus added.

Prêt à porter: Adding Kindred’s ~12% share of the market – while not enough to raise competition concerns – would give FDJ a “compelling” 23% of the market. “Kindred is therefore a perfect fit for FDJ in France,” the team added.

• “It is available and, if the turnaround EBITDA is to be believed, it is relatively inexpensive.” 

• They also noted Kindred is a “relatively” low-risk bet, given it is strongest in markets that FDJ is “likely to be fairly comfortable with” – Belgium, Netherlands and Romania, for example, while only 17% of revenue is dotcom.

Française des-truction: Despite the $2.8bn price tag, Regulus suggested adding Kindred to FDJ produces only a 17% revenue increment  – FDJ delivers ~€6.6bn in annual revenues and €600m in EBITDA. “The acquisition is therefore relatively low risk and easy to digest financially for FDJ,” they ssaid. 

• But there is execution risk given FDJ’s “weak online track record.”

• “Consequently, we believe the real attraction of Kindred to FDJ is that it allows excess cash flow generated from a privatized state monopoly to be pumped into a ready-made competitive platform, which the sclerotic statist FDJ failed organically to create.” 

• As Regulus added, Jean-Baptiste Colbert, le père de French mercantilism, “would be proud.”

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New Jersey’s surprising November

The hold steady: Hold in November in New Jersey tracked the weakness seen across the market. No surprises there. After all, sporting results are results across the board.

🏈 New Jersey hold tracks the rest of the market

Against the odds: Yet, as the team at Deutsche Bank noted, New Jersey’s monthly handle notably outperformed the peer group and was the cause of a “material outperformance” in GGR. 

• As can be seen below, while the peer group notched up declines of between 17% and 30% YoY, New Jersey saw a rise of 19.5%.

🔥 New Jersey outperforms on GGR growth in November

+More analyst takes

Macro: “Net-net, the macroeconomic outlook for gaming doesn’t look particularly great, but we don’t think it looks particularly grim either,” said the team at Truist in a recent analysis of trends in REIT investment.

• By their reckoning, both consumer confidence and the personal savings rates remain below pre-Covid levels, the unemployment rate remains stagnant and, encouragingly, the CPI and Core CPI rates have come down somewhat meaningfully from record highs in 2023.

• But 2024 is an election year so “choppiness” can be expected.

Rate my goal: Given the rate environment, the team said they expected most companies in the gaming space to continue deleveraging. “Most economic forecasts show rates continuing to decline, though we think much will depend on how economic data presents over the next quarter,” they suggested.

• “The Fed has been committed to fighting inflation and, if CPI data continues to remain stubbornly above pre-Covid levels, rate declines could take a backseat over ensuring inflation does not return to previous highs.”

• “That said, we do think the worst is behind us as far as uncertainty around the overall trajectory of interest rates, and we expect capital markets to improve (at least relatively) compared to the prior two years.”

Calendar

• Jan 24 Las Vegas Sands

• Jan 30: PointsBet

• Feb 1: Rank

• Feb 6-8: ICE, London

• Feb 7: Disney

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