Let the Party begin

GVC Holdings 4 February 2016 Outlook

GVC Holdings

Let the Party begin

Completion of bwin.party deal

Travel & leisure

 

4 February 2016

Price

509.5p

Market cap

£1.49bn

€1.32/$1.43/£

Pro forma net cash for enlarged group (€m) at 31 December 2015e

13.4

Shares in issue

291.7m

Free float

95%

Code

GVC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.9

27.9

14.0

Rel (local)

18.0

39.4

30.9

52-week high/low

511.0p

372.0p

Business description

GVC Holdings is a leading e-gaming operator in both B2C and B2B markets. GVC completed the acquisition (announced September 2015) of bwin.party for c £1.14bn on 1 February 2016. The enlarged group has c 3,000 employees and is licensed in 15 jurisdictions around the world.

Next event

Preliminary results

April 2016

Analysts

Eric Opara

+44 (0)20 3681 2524

Jane Anscombe

+44 (0)20 3077 5740

GVC Holdings is a research client of Edison Investment Research Limited

GVC has now completed its game-changing acquisition of bwin.party, a deal designed to propel the company into the upper reaches of the online gambling industry in terms of size and profitability. The focus now turns to delivering the €125m of projected cost synergies and re-energising bwin’s sizable asset base to drive sustainable growth. We reintroduce our forecasts and expect GVC’s EBITDA to rise from €51m in 2015 to €236.5m in 2017, with strong underlying cash flows driving rapid debt reduction and underpinning a resumption of dividends in 2017. Based on our forecasts the enlarged group trades on a 2017e EV/EBITDA of only 8.8x, a 17% discount to the sector average of 10.6x.

Year end

Revenue (€m)

EBITDA* (€m)

PBT* (€m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

12/14

224.8

49.2

41.3

61.4

55.5

11.0

8.3

12/15e

247.7

51.0

41.3

62.4

56.0

10.8

8.3

12/16e**

824.4

196.5

89.9

26.8

0.0

25.1

N/A

12/17e

873.9

236.5

163.7

48.8

44.0

13.8

6.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Pro forma including 12 months of bwin.

Diversified top five global online gambling company

We expect the enlarged GVC to generate pro forma revenues of €824.4m in 2016 (assuming 12-month bwin inclusion). This places it in the top five of online gambling companies globally by revenue and increases its exposure to regulated markets to over 50%, with no individual unregulated market accounting for more than 9%. While the enlarged group will remain a sports-led business followed by casino, bwin adds large bingo and poker operations, namely the Party and Foxy Bingo brands.

Planned swift return to dividend payments

GVC’s management are now focused on realising the projected synergies, with one off costs during 2016 but material ongoing synergies reaching the full targeted run-rate by end-2017. GVC will take a dividend holiday in 2016 but the underlying business remains extremely cash generative. We forecast pro forma normalised EBITDA of €196.5m in 2016 followed by €236.5m in 2017. As a result, we expect net debt to fall materially from €120m in 2016 to €56.1m in 2017, with a planned debt refinancing also helping interest payments to halve to c €21m in 2017. This will put the company in a strong position to restart the payment of dividends that year and management aims to return to an aggressive payout.

Valuation: Discount expected to close

GVC has historically traded at a discount to its peers, partly due to its perceived relatively high exposure to unregulated markets. The bwin acquisition increases its exposure to regulated markets and management has been strengthened with a number of board and senior executive team appointments. We expect the 2017 valuation discount to peers of 17% to materially close as the stock market gains increased visibility of GVC’s strong post-integration cash flow profile. The move to the Main Market also widens the potential shareholder base.

Investment summary
Company description: Leading online gambling provider

GVC is a leading provider of B2C and B2B services to the online gaming and sports betting industry. GVC’s B2C offerings mainly target European and Latin American markets with further operations in North America and the rest of the world. The company started life as Gaming VC offering the CasinoClub brand in Germany. M&A has long formed a key part of its growth strategy with the Betboo (2009), Sportingbet (2013) and now the Party Poker, Party Casino, bwin and Foxy Bingo (2016) brands all joining the group via acquisitions. GVC benefits from its own proprietary sportsbook and mobile platforms. The company’s recent acquisition of bwin.party (February 2016) was valued at £1.14bn and adds c 2,500 employees to GVC’s existing staff of c 520. The company is headquartered in the Isle of Man with offices in the UK, Gibraltar, Europe and world-wide.

Valuation: Larger licensed revenues warrant positive re-rating

GVC shares delivered a total shareholder return of 135% in the two years following the Sportingbet acquisition. That deal offered the company increased scale while revenues remained predominantly derived from unlicensed markets. The bwin deal offers even greater scale benefits and cross-selling opportunities, while also significantly increasing the company’s licensed revenues and diversifying its geographic spread. Assuming it achieves the expected synergies, GVC trades at a 17% discount to the sector on an EV/EBITDA basis for 2017e. We believe this represents a value opportunity that should close as the synergies are delivered, the company’s strong cash-flow generation becomes apparent once more, and the dividend is re-initiated in 2017e.

Financials: Highly cash-generative business

GVC is a highly cash-generative business partly due to the low capital requirements of the online gambling industry, but also due to the highly efficient and return focused manner in which its management team operate. We expect top-line growth as the enlarged group realises increased cross-selling opportunities, with strong profit growth as GVC brings its disciplined cost conscious management approach to the bwin asset base. We expect the EBITDA margin to rise from the 21.9% (GVC) and 16.5% (bwin) achieved by the independent businesses in FY14 to 27.1% in 2017 as the combined business begins to enjoy the full benefits of the €125m of anticipated synergies (calculated against the 2014 cost base; circa €110m off the 2015 cost base) .

Sensitivities: Integration and regulation

GVC’s acquisition of the bigger bwin.party digital entertainment introduces the typical post deal integration risks. These include higher than expected restructuring costs, failure to realise the stated synergies as anticipated and technology risks resulting from the platform migration. These all have the potential to negatively impact GVC’s profitability and cash-flow generation, which could impede its ability to pay down debt as quickly as we forecast. As with other gaming companies, a key risk for GVC is that the regulatory environment may change in any of its key markets, which could imply new taxes, product restrictions or even civil or criminal action. The proportion of unregulated revenues is reduced by the bwin acquisition and GVC provides its services from licensed jurisdictions (and via a B2B arrangement into Turkey). It will apply for licences where they become available and are economically viable. Other sensitivities to our estimates are normal business and economic risks including sensitivity to consumer spending; competitive markets; dependence on key personnel and third-party software and payment providers; and FX exposures.

Top five global online gambling operator

The February 2016 acquisition of bwin.party projects GVC into the top five of gambling companies globally by online revenues (see our 20 November 2015 Update report). The deal marks the continuation of GVC’s long held strategy of organic growth supplemented by M&A designed to facilitate entry into new markets, diversify its geographic footprint and expand its product offering. The online gambling market continues to grow strongly as technological advancements enable a richer user experience, particularly on mobile. The number of countries with more clearly stated regulation is also growing, leading to more licensed jurisdictions.

Business overview

GVC provides its sports and gaming products on both a B2C and B2B basis, principally into European and Latin American (Latam) markets. Sports betting continues to be GVC’s core offering (contributing 41% of pro forma FY15e net gaming revenue, or NGR) and historically it has been the focus of the majority of its marketing spend; we expect this to continue. It then cross-sells other gaming products to its sports betting players. Historically this has meant casino games with a very small amount of poker and bingo. The bwin acquisition adds scale and standalone poker, casino and bingo brands including PartyGaming and Foxy Bingo brands (Foxy Bingo is one of the most popular bingo brands in the growing UK online bingo market). bwin also brings in a number of ‘Other’ businesses including Kalixa (payment processing), InterTrade (financial markets trading) and some small social gaming assets.

Exhibit 1: Estimated mix of pro forma GVC and bwin 2015e revenue of €831m

Source: Edison Investment Research

Management team with extensive gambling sector experience

GVC’s board and executive team has a considerable depth of experience in online gaming, which has been further strengthened following a number of recent appointments designed to enhance management expertise and strengthen corporate governance. The 2013 acquisition of Sportingbet, where synergies were delivered ahead of time while still growing the business, provides a positive precedent for the coming bwin integration project, albeit with the bwin deal being on a larger scale.

Kenneth Alexander has been chief executive since March 2007 and was previously managing director of Sportingbet’s European operations, which he joined in 2000. Finance director Richard Cooper joined GVC in 2008, having previously been a founder of Trident Gaming in 2005 (which bought, developed and then sold the Gamebookers online gambling business).

Kenneth Alexander has already begun to restructure his management team to make the most of the best talent from both GVC and bwin under a management structure that emphasises clear reporting lines and management accountability. The newly combined sportsbook division will be led by GVC’s chief marketing officer Adam Lewis and bwin’s Labels director Sam Sadi. They will take the roles of group head of sportsbook marketing and group head of sports book operations respectively. Shay Segev will join as group COO while current GVC COO will become group head of trading and operations. Shay is the former COO of leading gaming software provider Playtech and his early focus will include leading the integration of the GVC and bwin technology platforms.

Jon Salmon (head of CasinoClub) will see the PartyCasino brand join his sphere of responsibility, while Tom Waters of bwin will head up the PartyPoker and Cashcade (including Foxy Bingo) operations.

bwin’s sports betting focus was a key feature of its appeal to GVC, and this has also been cited by bwin’s management as a reason why it saw GVC as offering an excellent cultural fit compared to a rival 888 bid. Outgoing CEO Norbert Teufelberger will join the GVC board as a non-executive director, bringing valuable experience at the board level, which will facilitate the integration process.

Two additional non-executive directors, Stephen Morana, CFO of Zoopla, and Peter Isola, senior partner at Isolas in Gibraltar, have been appointed to the board of directors following GVC’s promotion to the Main Market. Stephen spent 10 years as part of the management at Betfair, including serving as CFO and interim CEO during his time there. Gibraltar-based Peter brings extensive gaming law and regulation experience built up over a long legal career, having been initially called to the Bar of England and Wales and the Gibraltar Bar in 1982.

The management of the enlarged group is well incentivised with a new LTIP plan of c 29.5m shares. Within this GVC has announced that the Chairman, CEO and CFO have options over a total of 17.6m shares (at 467p and 422p) which vest over a 30 month period (subject to total shareholder return performance conditions).

Key historical milestones

GVC started life in 2004 as Gaming VC, which consisted of the largely German market-facing CasinoClub business. Over time management has successfully used a mixture of organic growth and M&A to grow the business, adding new geographies and product lines in the process. Key milestones include:

2007: launched a sportsbook;

2009: diversified into Latin America via the acquisition of Betboo;

2009: entered into B2B agreement with EPC (which acquired Sportingbet’s Turkish operations in November 2011);

2013: acquired Sportingbet (ex its Australian and Spanish businesses);

2014: took a 15% interest in Scandinavian start-up Betit; and

2016: completes takeover of bwin.party digital entertainment.

History of successful delivery
Sportingbet was a transformational deal

The consortium bid with William Hill valued Sportingbet at c €570m (£486m). It required minimal upfront cash from GVC since it paid its €84m share of the consideration in shares. It received a capital contribution of £36.5m and a loan facility from William Hill, which funded the cost of repairing Sportingbet’s balance sheet. William Hill facilitated the deal so that it could acquire Sportingbet’s licensed businesses in Australia and Spain.

Sportingbet brought in a long-established online gambling business with revenues of about €125m, which diversified and complemented the GVC mix. It was loss making, but GVC cut €50m from the cost base and returned it to profitability ahead of target, in less than a year.

The acquisition of Sportingbet meant that GVC (on behalf of EPC) no longer had to pay Sportingbet’s earn-out from the 2011 B2B deal (c 75% of Turkish profits over four to six years) saving over €110m on our estimates. This alone justified the price paid in our view.

Betboo took GVC into Latin America

Betboo was a Brazilian sports and bingo operator with its own software platform. GVC paid €2.8m upfront in 2009 and has paid €14.5m of deferred consideration to date, with a final €4.0m due between 2015 and 2017. The business was merged with Sportingbet’s small Latam business and relocated from Brazil to Uruguay, reducing operational costs.

GVC is already the market leader in Brazil and is now expanding into other Spanish-speaking markets including Mexico (with a partner) and Chile. It is also looking to recruit a team to enter Argentina. There seems no reason why Latam should not become as big as the Turkey-facing B2B operation, which has revenue of c €60m a year (versus c €23m from Latam in 2014).

Betit gives GVC a foothold in Scandinavia

In May 2014 GVC took a 15% stake in a JV with a start-up Scandinavian-facing operator, Betit, for €3.5m (see our 15 May Update). Betit is headed by an experienced management team (CEO Joakim Stockman is ex Betsson/Nordic Gaming Group) and GVC has a seat on the board, giving it valuable market insight. Betit has two brands, Thrills (a casino) and Superlenny (sports led), and moved onto the Playtech open platform in November 2014.

GVC has a call option to acquire the other 85% of Betit in Q317 for a minimum of €70m, which it will only exercise if Betit’s profits reach a level to make the deal earnings accretive.

The bwin.party opportunity

The bwin.party deal marks GVC’s second transformative acquisition in three years following the March 2013 acquisition of Sportingbet. We estimate that the enlarged group had 2015e pro forma revenues of €831m, making it a top five online gambling company globally, diversifying GVC’s revenues by both product category and geography. This is attractive as scale is becoming increasingly important as the industry goes through a period of significant consolidation.

The offer was approved by over 99% of both GVC’s and bwin’s shareholders in December 2015 and consisted of 0.231 GVC shares and 25p in cash for each bwin share. The deal was fully funded through a mix of GVC’s existing cash balance, an issue of new GVC shares and a €400m loan provided by Cerberus. Up to 194.8m GVC shares have been issued to bwin shareholders, giving them c 66% of the enlarged group.

Rationale for the deal

The bwin deal shares similarities with the previous Sportingbet deal as it offers the opportunity for GVC’s management team to leverage its gambling sector expertise over a larger asset base. Like Sportingbet at the time of its acquisition, bwin has underperformed in recent years, (mainly due to failures post the bwin/PartyGaming merger in 2011 and declines in the poker market). As a result it offers the potential for considerable value creation should a successful turnaround be executed. The deal has the following appealing characteristics:

The two businesses have complementary sports betting offerings.

A step change in scale in a consolidating industry.

Significant synergies including €125m of cost synergies (off the 2014 base, c €110m from 2015) plus the potential for additional revenue synergies through improved cross-selling opportunities. These are to be achieved as follows:

Workforce cost savings resulting from the elimination of duplicate activities.

A refocusing of marketing activities according to strict ROI criteria, focusing on geographies perceived to offer the greatest potential ROI.

GVC to implement its CRM expertise (a key competitive advantage) across the bwin customer base.

Technology development savings:

GVC will migrate its players to the superior bwin software platform, thus saving the development and maintenance cost associated with its own platform.

Integration programme

GVC has stated that it will migrate its players to the bwin.party platform in a way that minimises any potential disruption. As a result management has stated that it will take place after the UEFA Euro 2016 Championships and will begin with the smaller brands such as Betboo. This will offer the opportunity to iron out any unforeseen issues before migrating the larger number of Sportingbet customers. Moving GVC customers across to the bwin platform has a number of advantages:

bwin has invested heavily in platform development in recent in years, resulting in a software platform that is amongst the best in the sector. Improvements that this has delivered include a significant reduction in platform downtime. For example, a database restart that used to take 55 minutes now takes six. A move from waterfall to an iterative development approach also makes platform updates easier and cheaper to deploy.

bwin’s platform offers a superior mobile experience. This is particularly important for sports betting where the mobile channel now constitutes over 50% of online NGRs at the industry level.

The bwin platform has proven its ability to handle large player volumes and logistically it is more practical to migrate the relatively fewer number of GVC players over to the bwin platform.

Geographic footprint of the enlarged group

The enlarged GVC group will benefit from far greater levels of geographic revenue diversification. Before the acquisition, we estimate that 75% of GVC’s revenues were derived from its top four markets, of which 30% came from Turkey followed by Germany (Casino Club), Greece and Brazil. Turkey and Brazil are presently unlicensed, while GVC holds a license in Germany (Schleswig-Holstein) and an interim license in Greece where full licenses have yet to be awarded. The enlarged group is licensed in around than15 markets and will generate c 55% of its revenues from licensed or taxed jurisdictions. As shown in Exhibit 2, Germany (23%) is the largest single market with Europe (including the UK) at around 74%. The rest of the world includes bwin’s US operations (2014 revenue of €25m), Canada and elsewhere.

Exhibit 2: Estimated mix of pro forma GVC and bwin 2015e revenue of €831m

Source: Edison estimates, investor presentations, GVC prospectus

Move to the Main Market

GVC’s shares have moved up from AIM to the standard segment of the Main Market, and management intends to apply for a Premium listing later in 2016. This promotion to the more senior market with its relatively higher profile has the potential to both raise the rating of GVC shares and improve their liquidity.

Online gambling market

According to gambling market intelligence firm H2 Gambling Capital (2014), the global online gambling market has grown significantly in size over the last 10 years at a CAGR of 13% to 2014. This is well ahead of the broader growth of the gambling market, which is estimated to have been 3.3% over the same period. As a result by 2014 online gambling had risen from a relatively nascent revenue stream to make up 8.4% of total global gambling revenues worth $34.8bn in 2014, and is expected to continue to grow at 8.7% a year from 2013 to 2018. Within this mobile is the primary growth driver in every product vertical, largely driven by the increased adoption of smartphones and tablets and growing high speed internet penetration across the world. With an estimated CAGR of 27%, mobile gambling is expected to grow to $19bn and represent 40-45% of online gambling revenues by 2018.

Exhibit 3: Global gross gaming revenues

Source: H2 Gambling Capital, GVC Holdings, Edison Investment Research

The strong headline growth figures somewhat mask the fact that individual gambling markets are extremely heterogeneous, largely as a result of differing regulatory regimes. While land-based gambling regulation is well stated in most countries, legislators have been slow to implement laws relating to the specific practicalities and nuances of the online channel. In Europe a number of countries are now fully regulated (eg the UK, Italy, Spain, Denmark), while others are in different stages of introducing regulation (eg Netherlands). Markets that are still unregulated range from those where the licensing regime is fluid, such as Germany and Greece, to those where online gambling is only legal if supplied by local monopolies, such as Turkey.

Both regulated and unregulated markets can from time to time produce fluctuations in earnings, if there are changes in the level of advertising allowed, products that can be offered and the licensing and tax structure. Typically there is a ‘J-curve’ in profits when new markets regulate, with a dip in profits due to the introduction of new taxes and licensing costs but with the market subsequently growing more rapidly due to new advertising opportunities and greater consumer trust.

Industry consolidation and M&A

Scale is becoming increasingly important. Regulatory costs, marketing costs and IT costs have all grown significantly in recent years, requiring operators to have very deep pockets just to maintain their position. As a result, M&A activity in the industry has picked up over the last 18 months (as shown in Exhibit 4) and we would expect this to continue in the medium term. GVC’s management have clearly stated that M&A remains a core part of their corporate strategy and we expect that they may be part of a further round of future industry consolidation once the assimilation of bwin has been successfully completed.

Exhibit 4: Recent M&A activity

Deal

Date

Value (£m)

EV/EBITDA(x) (est)

Consideration

Intertain buys Mandalay/Costa Bingo

Jun 2014

45

7.6

Cash

Amaya buys PokerStars

Jun 2014

7,497

11.1

Cash

Intertain buys Vera&John

Oct 2014

59

8.1

Cash/shares

CVC Capital Partners buys Sky Bet

Dec 2014

800

15.0

Cash

Intertain buys Jackpotjoy

Feb 2015

426

9.0

Cash/shares

Ladbrokes/Coral (proposed)

Jul 2015

2,300*

Cash/shares

Paddy Power/Betfair merger (proposed)

Aug 2015

4,900*

Cash/shares

GVC buys bwin.party

Feb 2016

1,140

Cash/shares

Source: Edison Investment Research, company presentations. Note: *Total market cap of merged entity at the time of the merger announcement.

Sensitivities

Regulatory risks: the acquisition of bwin has increased the proportion of GVC revenues derived from regulated markets to over 50%. However, in common with most other online gambling operators it also operates in unregulated markets, which could introduce licensing regimes at some stage, with new associated taxes. Typically this produces a ‘J-curve’ in profitability and eventually expands the market due to freer advertising and greater customer trust. Even regulated markets may change the range of permitted products or tax rates from time to time (eg the December 2014 15% UK Point of Consumption POC tax). There is a risk that an individual market reduces in size due to clampdowns or product restrictions, or even that GVC faces civil or criminal action in an unregulated market. GVC minimises regulatory risk by diversifying across a range of geographies, being extremely experienced in its markets, supplying its services from licensed jurisdictions and closely following regulatory developments.

VAT: From 1 January 2015 the EU’s VAT rules have changed so that VAT on electronic services is applied based on the location of the consumer rather than the provider. Both GVC and bwin have been paying this (in Germany and Ireland) but there is some potential historic liability and some uncertainty regarding the basis of calculation (Ireland has clarified that it is based on NGR).

General business risks: GVC and the enlarged group are exposed to general economic risks including the strength of consumer spending in different markets. GVC has some exposure to Greece, where capital controls were imposed in 2015 that can severely restrict remittances and where further economic volatility could continue to affect consumer confidence. Other general business risks include dependence on key executives and personnel; fluctuating sports margins; issues relating to IT and technology (including some reliance on third-party providers); and competition (the group’s markets are highly competitive and rapidly evolving/consolidating). Both GVC and bwin management has long experience in their markets and in managing such risks.

Dividend policy: GVC’s stated dividend policy is to distribute at least 75% of net cash generated. However, a combination of the debt covenants attached to the Cerberus Loan Agreement and the anticipated restructuring costs resulting from the integration of bwin into GVC mean that it will take a dividend holiday in 2016. The company intends to resume dividend payments in 2017 once a material proportion of the expected synergies have been realised. Should that realisation be delayed or ultimately fall short this would negatively impact the company’s ability to re-instate its dividend as planned. Failure to refinance the Cerberus loan on attractive terms could also impact the timing and size of the reinstatement of the dividend. GVC’s dividend record has been very consistent, and management have strongly stated a commitment to returning to the dividend payers register. It should also be noted that following the Sportingbet acquisition, GVC realised the anticipated synergies quicker than originally anticipated.

Currency: Both GVC and bwin operate in international markets. About a third of GVC’s revenue is euro denominated and the two other most important currencies are the Turkish lire and, to a lesser extent, the Brazilian real, which it does not hedge. Both currencies have devalued materially over the past year. GVC has indicated that 40-50% of the enlarged group’s earnings will arise in euros (the reporting currency).

 

Valuation

GVC is an established company in a competitive sector. Therefore we believe that peer group comparison is the most appropriate method by which we should assess its valuation. We consider Stockholm-listed Betsson to be the closest peer to the enlarged group, although it derives a much higher proportion of its revenues from unregulated markets (80-90% on our estimates), including a B2B business in Turkey (25%e of gross profit). Unibet is also pure online sports-led businesses with sizeable operations in unregulated markets and are closer comparators than the much bigger Ladbrokes and William Hill with their land-based estates and 888, which is casino led.

Exhibit 5: Peer group comparison

 

Price

Market cap

EV/EBITDA (x)

P/E (x)

Company

(£m)

2015e

2016e

2017e

2015e

2016e

2017e

GVC

509.5p

1,486

7.2

10.6

8.8

10.8

24.2

13.5

888 Holdings (888-LN)

171.6p

539

9.6

8.9

8.0

17.8

16.5

14.4

Betsson (BETSB-SK)

SEK131.4

SEK16,051

16.6

13.8

12.4

19.6

16.2

14.6

Ladbrokes (LAD-LN)

122.3

1,245

10.3

9.0

8.3

25.7

18.6

15.1

Unibet (UNIB-SK)

SEK90.8

SEK20,895

22.0

15.8

15.3

15.4

20.8

19.7

William Hill (WMH-LN)

375.4p

3,321

10.3

9.7

9.1

16.1

14.9

13.5

Peer group average*

13.8

11.4

10.6

18.9

17.4

15.5

Source: Bloomberg, Edison Investment Research. Note: Prices as at 3 February 2016.

GVC has historically traded on a valuation discount of approximately 20% to its peer group (on an EV/EBITDA basis) in recognition of its relatively higher exposure to unregulated markets and small size (pre-deal market cap c £280m). However, the bwin deal reduces the proportion of revenues that the company derives from such markets and materially increases its scale. As a result we believe this warrants a positive re-rating in GVC’s share price, as does the move up to the Main Market - something which has started to happen in early trading following the completion of the deal.

Based on our forecasts, GVC trades at a slight EV/EBITDA discount to the peer group on FY16e numbers, although we believe these forecasts understate the steady state profitability of the enlarged business, and at a 17% discount on 2017e. The gap widens in 2018 (not shown here) when we expect the full effects of the expected synergies to be achieved. Any positive newsflow regarding the success of the integration process is likely to act as a near-term catalyst which we believe will narrow the forward discount.

 

Financials
Strong 2015 performance going into deal close

We commented on both GVC and bwin’s 2015 recent trading updates in our Update note dated 11 January. We expect the combined GVC and bwin businesses to report pro forma revenues of €831m for FY15. Within this GVC has reported in its trading update on 11 January 2016 that it achieved NGR of €247.7m. This compares with our last published 2015 revenue forecast (July 2015) of €240.0m and constitutes y-o-y growth of 10% over the €224.8m achieved in 2014. Revenue was split broadly equally between Sports (€116.0m) and Gaming (€131.8m) with each demonstrating solid growth of 5.3% and 15.0% respectively. This was despite significant currency headwinds in some of its most important markets (the Turkish lira fell by c 15% y-o-y versus the euro while the Brazilian real fell by c 30%). Also 2015 lacked a major summer football tournament and the resultant boost to demand for sports betting. The enlarged group will benefit from the UEFA Euro 2016 this coming summer.

We believe that GVC will have delivered a clean EBITDA margin of 20.6% in 2015e. This is slightly down on the 21.9% achieved in 2014, largely reflecting the increased tax burden resulting from additional VAT payments in some European markets including Germany and the UK POC tax that was introduced in December 2014.

bwin reported 5% growth in Q415 revenue (with strong performance in sports and casino), which points to full-year revenue of c €583m, including an estimated €223.2m from sports betting, €196.0m from casino, €60.5m from poker and €53.3m from bingo. This constitutes a fall of 6.3% (€36.1m) when compared to 2014. The majority of the fall in NGR comes from the company’s continued struggles in poker, which mirror wider structural industry challenges in the poker vertical, while the fall in ‘other’ revenues reflects the sale of a number of non-core businesses such as Winners, World Poker Tour and Win.

Exhibit 6 shows both pro forma and reported numbers for 2016e to illustrate both the underlying 12-month trend and our forecast reported numbers which incorporate 11 months contribution from bwin consistent with the 1 February deal close.

Exhibit 6: Combined GVC/bwin.party financials

2015

2016P

2016e*

2017e

 

2018e

€m

GVC

bwin

Proforma

GVC

bwin*

Group

(11mth)

GVC

bwin

Group

Group

Sports NGR

116.0

223.2

339.1

123.6

232.1

355.7

336.3

135.4

251.8

387.2

407.9

Sports margin

9.3%

8.9%

9.1%

9.5%

8.9%

9.1%

9.1%

9.5%

9.0%

9.2%

9.0%

Gaming NGR

131.8

196.0

327.8

136.4

201.9

338.3

321.5

143.1

214.0

357.1

375.0

Poker NGR

0.0

60.5

60.5

0.0

48.4

48.4

44.4

0.0

43.6

43.6

45.7

Bingo NGR

0.0

53.3

53.3

0.0

54.0

54.0

49.5

0.0

58.0

58.0

60.9

Total NGR

247.7

533.0

780.7

260.0

536.3

796.4

751.7

278.0

567.3

845.9

889.5

Other revenue

0.0

50.0

50.0

0.0

28.0

28.0

25.7

0.0

28.0

28.0

35.1

Revenue

247.7

583.0

830.7

260.0

564.3

824.4

777.3

278.0

595.3

873.9

924.6

EBITDA

51.0

107.0

158.0

53.5

105.0

158.5

149.7

55.5

109.5

165.0

167.4

Synergies

0.0

 

38.0

38.0

 

71.5

110.0

Clean EBITDA

 

 

158.0

 

 

196.5

187.7

 

 

236.5

277.4

Clean EBITDA margin

20.6%

18.4%

19.0%

20.6%

18.6%

23.8%

24.2%

20.0%

18.4%

27.1%

30.0%

Dep'n/amort own work

(4.4)

(44.0)

(48.4)

(4.6)

(45.5)

(50.1)

(46.3)

(4.6)

(43.3)

(47.9)

(47.0)

Clean EBIT

46.6

63.0

109.6

146.4

141.4

188.6

230.4

Net finance charges/other**

(5.3)

(56.5)

(52.0)

 

(24.9)

(14.3)

Clean PBT

41.3

89.9

89.4

 

163.7

216.1

Restructuring costs

(27.0)

 

(55.0)

(55.0)

 

(5.0)

0.0

Other exceptionals ***

(27.0)

(50.0)

(50.0)

 

0.0

0.0

Tax (normalised)

(0.8)

 

(4.5)

(4.5)

 

(8.2)

(10.8)

Clean PAT

40.5

 

85.4

85.0

 

155.5

205.3

Number of shares dil (m)

64.9

 

318.6

299.6

 

318.6

318.6

Clean EPS dil c

62.4c

 

26.8c

28.4c

 

48.8c

64.4c

Net dividend declared

56.0c

 

0.0c

0.0c

 

44.0c

56.0c

Net dividend paid

56.0c

 

 

0.0c

0.0c

 

 

32.0c

52.0c

Source: GVC, Edison Investment Research. Note: *2016P includes 12-month pro forma contribution from bwin. **2016e includes 11-month contribution for bwin to match expected reported number.

2016/17 revenue outlook

We expect pro forma 2016 NGR to rise modestly by €15.7m to €796.4m. This constitutes underlying growth of 2% y-o-y of the group’s core gaming revenues, with the legacy GVC business contributing 5% while we hold bwin broadly flat. This recognises the fact that the UEFA European Championships 2016 will take place this year, but also allows for a further fall in bwin poker revenues, albeit at a reduced rate, together with a small amount of player attrition, which we believe is an unavoidable part of any platform migration. At the group level, we expect pro forma revenues to fall slightly by €6.3m to €824.4m, reflecting our forecast decline in ‘other revenue’ resulting from the full-year effect of the 2015 disposal of non-core businesses.

We subsequently expect a pick-up in growth and forecast 6.1% of revenue growth at the group level in 2017, as the positive effects of GVC’s management plans start to be felt, including the planned optimisation of bwin’s marketing expenditure and an increased level of cross-selling across the group.

Costs synergies to be realised by end 2017e

In the prospectus GVC identified €125m of cost synergies. However, this took 2014 as the base year. bwin’s management has already reported that it achieved c €15m of synergies in 2015 as part of its existing cost-cutting programme. We expect GVC’s management to significantly accelerate this efficiency drive, assisted by the synergies made possible by the coming together of these complementary businesses.

We have forecast recurring synergies of €110m (off the 2015e base), which will ramp up between 2016 and 2017. We assume €38.0m in 2016, calculated on the basis of a 58% run rate by the end of 2016 (but with most falling in the later months of the year). The full run rate should be achieved by the end of 2017 (we assume €71.5m to allow for the monthly ramp-up towards the total of €110m by the end of 2017, which is fully recognised in 2018). The restructuring costs required to achieve these synergies are estimated to be €60m which we estimate will be spread €55m in 2016e followed by €5m in 2017e. Assuming that these synergies are achieved in line with management’s current timetable, we would expect the clean EBITDA margin to rise to 23.8% in 2016p before settling at around 30% in 2018.

Sharp upswing in normalised EPS to 2018e

We expect normalised EPS to fall in 2016 due to the dilutive effect of the deal in the short term. We then expect EPS to rise sharply over the subsequent two years due to the recurring nature of the synergies and a falling interest expense. We have assumed that depreciation will continue at around historic 2015 levels but recognise that this may be change subject to possible post acquisition asset write-downs. We have also assumed a new €200m debt facility to replace the Cerberus loan in 2017e. Exhibit 6 also shows an 11-month representation of the group’s financials to illustrate our forecasts for expected reported earnings. It includes €38.0m of estimated synergies which we expect to start to be realised some months after the 1 February deal completion.

Cash flow – debt repayment and reinstatement of dividend

Online gambling is a highly cash-generative business and GVC’s management is recognised as being amongst the most efficient operators in the industry with a high level of costs discipline. We forecast a cash outflow of €107.3m in 2016, allowing for deal fees (€77m), restructuring/other charges (€55m) and interest charges of €50.0m (the Cerberus loan of €400m at 12.5%; our P&L forecast also includes €6.5m of capitalised interest). Management has stated that it intends to take a dividend holiday in 2016e as one of the conditions of the Cerberus loan agreement. The Cerberus loan was arranged quickly to ensure that the bwin deal could proceed in a timely fashion and as a result we believe that the 12.5% coupon is higher than a company with GVC’s expected high level of cash-flow generation would ordinarily pay. We are confident that GVC should be able to refinance it at a much more attractive rate. Consequently we have reduced the rate of interest payable to 7.5% from March 2017e (on an assumed €200m of refinanced loans) and expect net finance charges to fall to €20.8m (€24.9m including capitalised interest) as a result. This is a fraction of the €221.5m of operating cash flow that we forecast for 2017, providing plenty of headroom for management to return to the dividend payers register in 2017. We expect c 44c per share to be declared in 2017e (with 32c paid). We subsequently expect the dividend to return to its pre-deal level of 56c per share in 2018e (with 52c paid in that year).

Balance sheet to be restored by 2018e

Both companies have historically operated with conservative capital structures, with GVC carrying a nominal level of net debt on its balance sheet (mainly the William Hill loan re: the Sportingbet deal) and bwin bringing in estimated net cash of c €26m. The overall impact of the bwin acquisition means that we expect end-2016 net debt of €120m, which falls significantly in 2017 to €56.1m and then to only €7.6m in 2018 (despite allowing for €161m of dividend payments in that year). We believe that this level of cash generation gives GVC plenty of financial flexibility to participate further in future industry M&A.

Exhibit 7: Financial summary

€m

2014

2015e

2016P

2017e

2018e

Year end 31 December

(IFRS)

(IFRS)

(IFRS)

(IFRS)

(IFRS)

PROFIT & LOSS

Revenue (reported)

 

 

224.8

247.7

824.4

873.9

924.6

Cost of Sales

(101.5)

(115.7)

(412.2)

(436.9)

(462.3)

Gross Profit (contribution)

123.3

132.0

412.2

436.9

462.3

EBITDA

 

 

49.2

51.0

196.5

236.5

277.4

Depreciation and amortisation

 

 

(5.5)

(4.4)

(50.1)

(47.9)

(47.0)

Operating Profit (norm)

 

 

43.7

46.6

146.4

188.6

230.4

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptional/ one-off items

0.0

(27.0)

(105.0)

(5.0)

0.0

Share based payments/ options cash out from 2015

(0.7)

0.0

0.0

0.0

0.0

Operating Profit

42.9

19.6

41.4

183.6

230.4

Net interest

(0.1)

(5.3)

(56.5)

(24.9)

(14.3)

Other financial expense

(1.6)

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

41.3

41.3

89.9

163.7

216.1

Profit Before Tax (FRS 3)

 

 

41.3

14.3

(15.6)

158.7

216.1

Tax

(0.7)

(0.8)

(3.0)

(8.2)

(10.8)

Profit After Tax (norm)

40.6

40.5

85.4

155.5

205.3

Profit After Tax (FRS 3)

40.6

13.5

(18.1)

150.5

205.3

Average Number of Shares (basic) (m)

61.1

61.3

292.8

302.5

314.4

EPS - normalised diluted (c)

 

 

61.4

62.4

26.8

48.8

64.4

EPS - (IFRS) (c)

 

 

66.4

22.0

(6.2)

49.8

65.3

Dividend per share - declared (c)

55.5

56.0

0.0

44.0

56.0

Dividend per share paid (c)

55.0

56.0

0.0

32.0

52.0

Gross Margin (%)

54.8

53.3

50.0

50.0

50.0

EBITDA Margin (%)

21.9

20.6

23.8

27.1

30.0

Operating Margin (before GW and except.) (%)

19.4

18.8

17.8

21.6

24.9

BALANCE SHEET

Fixed Assets

 

 

159.2

161.0

1,484.0

1,482.0

1,482.0

Intangible Assets

154.3

156.0

1,400.0

1,400.0

1,400.0

Tangible Assets

1.1

1.2

80.0

78.0

78.0

Deferred tax asset

3.8

3.8

4.0

4.0

4.0

Current Assets

 

 

49.5

59.2

521.0

368.9

372.4

Stocks

0.0

0.0

0.0

0.0

0.0

Debtors

31.7

34.0

110.0

115.0

120.0

Cash

4.8

11.7

286.0

123.9

117.4

Customer balances

13.0

13.5

125.0

130.0

135.0

Current Liabilities

 

 

(50.4)

(52.6)

(496.0)

(395.0)

(370.0)

Creditors

(46.4)

(48.3)

(290.0)

(295.0)

(295.0)

Short term borrowings

(4.1)

(4.3)

(206.0)

(100.0)

(75.0)

Long Term Liabilities

 

 

(8.8)

(23.2)

(215.0)

(94.0)

(64.0)

Long term borrowings

(3.1)

(20.0)

(200.0)

(80.0)

(50.0)

Other long term liabilities

(5.7)

(3.2)

(15.0)

(14.0)

(14.0)

Net Assets

 

 

149.5

144.4

1,294.0

1,361.9

1,420.4

CASH FLOW

Operating Cash Flow

 

 

48.5

35.5

51.0

221.5

267.4

Tax

(0.5)

(0.6)

(5.0)

(10.0)

(12.0)

Net Interest

(0.1)

(0.1)

(46.0)

(20.8)

(11.3)

Capex

(5.3)

(6.5)

(30.0)

(33.0)

(35.0)

Acquisitions/disposals

(8.0)

(2.4)

(1,517.0)

0.0

0.0

Financing

0.9

0.0

1,439.7

0.0

0.0

Dividends

(33.6)

(34.3)

0.0

(93.8)

(160.6)

Net Cash Flow

1.9

(8.4)

(107.3)

63.9

48.5

Opening net debt/(cash)

 

 

4.3

2.4

12.6

120.0

56.1

HP finance leases initiated

(0.6)

(1.3)

0.0

0.0

0.0

FX/ Other

0.7

(0.5)

(0.1)

0.0

0.0

Closing net debt/(cash)

 

 

2.4

12.6

120.0

56.1

7.6

Source: GVC Holdings, Edison Investment Research. Note: 2016P is pro forma, including bwin.party for 12 months; reported results will include it for 11 months, from 1 February 2016 (see Exhibit 6).

Contact details

Revenue by geography

Milbourn House St George’s Street Douglas, IM1 1AJ Isle of Man +44 1624 652 559

www.gvc-plc.com

Contact details

Milbourn House St George’s Street Douglas, IM1 1AJ Isle of Man +44 1624 652 559

www.gvc-plc.com

Revenue by geography

Management team

Chairman: Lee Feldman

Chief executive: Kenneth Alexander

Mr Feldman joined GVC in December 2004. He is the managing partner of Twin Lakes Capital, a US private equity firm focused on branded consumer products, media and business services. He is also the CEO and a board member of MacKenzie-Childs and Jay Strongwater, American luxury home furnishings and personal accessories companies.

Mr Alexander has been chief executive of GVC (formerly Gaming VC Holdings) since March 2007. He was formerly finance director, then managing director, of the European operations of Sportingbet, which he joined in 2000. He is a member of the Institute of Chartered Accountants of Scotland and previously worked for Grant Thornton.

Group finance director: Richard Cooper

Chief operating officer: Shay Segev

Mr Cooper has been group finance director of GVC (formerly Gaming VC Holdings) since December 2008. Before GVC, he was a founder director of Trident Gaming in 2005, which bought, developed and then sold the Gamebookers business. He is a member of the Institute of Chartered Accountants in England and Wales.

Shay Segev will join GVC in March 2016 and will be responsible for strategic and operational direction across the enlarged group and will lead the integration of the GVC and bwin.party technology platforms following completion of the recommended merger. He was formerly COO of Playtech and more recently chief strategy officer for Gala Coral Group.

Management team

Chairman: Lee Feldman

Mr Feldman joined GVC in December 2004. He is the managing partner of Twin Lakes Capital, a US private equity firm focused on branded consumer products, media and business services. He is also the CEO and a board member of MacKenzie-Childs and Jay Strongwater, American luxury home furnishings and personal accessories companies.

Chief executive: Kenneth Alexander

Mr Alexander has been chief executive of GVC (formerly Gaming VC Holdings) since March 2007. He was formerly finance director, then managing director, of the European operations of Sportingbet, which he joined in 2000. He is a member of the Institute of Chartered Accountants of Scotland and previously worked for Grant Thornton.

Group finance director: Richard Cooper

Mr Cooper has been group finance director of GVC (formerly Gaming VC Holdings) since December 2008. Before GVC, he was a founder director of Trident Gaming in 2005, which bought, developed and then sold the Gamebookers business. He is a member of the Institute of Chartered Accountants in England and Wales.

Chief operating officer: Shay Segev

Shay Segev will join GVC in March 2016 and will be responsible for strategic and operational direction across the enlarged group and will lead the integration of the GVC and bwin.party technology platforms following completion of the recommended merger. He was formerly COO of Playtech and more recently chief strategy officer for Gala Coral Group.

Principal shareholders of GVC Holdings at 31 December 2015

(%)

Richard Griffiths and controlled undertakings

13.3

DBS Advisors

10.8

Marathon Asset Management

6.0

Mr Mark Blandford

4.3

Henderson Volantis Fund

4.3

M&G Investment Management

3.8

Capital Research & Management

3.3

Principal shareholders of bwin.party digital entertainment at 31 December 2015

(%)

Henderson Global Investors

7.9

Janus Capital Management LLC

6.8

Standard Life Investments

6.0

SpringOwl Gibraltar Partners B

5.2

Androsch Privatstifung

4.0

Orbis Investment Management

4.0

Companies named in this report

888 Holdings (888-LN), Betsson (BETSB-SK), Ladbrokes (LAD-LN), Unibet (UNIB-SK), William Hill (WMH-LN)

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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NSW 2000, Australia

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New Zealand

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