Vice President: Aum Raithatha
Analysts: Jason Tu, Sahil Kumar, Luca Moretto, Abhishek Gopinath
Deal overview
Acquirer – Aristocrat Leisure Limited
Acquiree – NeoGames S.A
Deal size – $1.2 billion
Sell side advisors – Stifel
Aristocrat Leisure Limited (ASX: ALL) on the 15th of May announced its plan to acquire 100% of NeoGames S.A. through a Business Combination Agreement. The proposed cash price for each NeoGames share is US$29.50, valuing the company's fully diluted equity at around US$1.0 billion ($1.5 billion). This offer represents a premium of about 104% over the 3-month volume weighted average price of NeoGames shares up to 12 May 2023, which was approximately US$14.45. The entire transaction implies an enterprise value of US$1.2 billion ($1.8 billion). The completion of this Acquisition is contingent upon NeoGames' shareholder approval and certain regulatory approvals. The valuation multiple for this deal stands at approximately 15 times NeoGames' Adjusted EBITDA for the twelve months ending 31 December 2022. The NeoGames Board has deemed the proposed terms of the Acquisition fair and has recommended that NeoGames shareholders vote in favor of it. A significant portion of NeoGames shareholders, holding approximately 20.4 million shares, representing around 61% of the outstanding shares, have already committed to voting in favor of the Acquisition. Aristocrat plans to fund the Acquisition using existing cash. After the deal is finalized, the company expects to maintain a robust balance sheet, with a pro forma net debt/EBITDA ratio of about 0.7x as of 30 September 2022 (Aristocrat, 2023).
This plan is in line with Aristocrats build and buy strategy to grow the RMG (real money gaming) sector, worth $81 billion, for the past few years and includes the acquisition of Roxor gaming in September. The takeover will give Aristocrats entry into the attractive but highly regulated iLottery market. The three areas in the RMG space are iGaming, iLottery, and online sports betting. Aristocrats expect to make a add to its profits from the acquisition in the year 2025. (Reuters, 2023) Additionally, it also announced an increase $339.2 million to its existing share buy back program. Under the terms of the acquisition agreement, NeoGames will relocate its legal headquarters and central administration from Luxembourg to the Cayman Islands. As a result of the acquisition, NeoGames will become a wholly owned subsidiary of Aristocrat. Following the completion of the merger, NeoGames will transition into a privately held company and will no longer be publicly traded on any stock exchange. The acquisition is expected to be completed in 2024, subject to gaming regulatory, anti-trust and foreign investment approval (timesofIsreal, 2023). Stifel is acting as NeoGames’ financial advisor and Latham & Watkins LLP and Herzog Fox & Neeman are acting as legal counsel to NeoGames (Globalnewswire, 2023).
Business overview
NeoGames
NeoGames is a leading technology-driven company that specializes in providing iLottery and iGaming solutions and services for regulated lotteries and gaming operators worldwide. They offer a comprehensive suite of solutions, including proprietary technology platforms, two dedicated game studios with a wide variety of engaging games, and additional value-added services. As a global provider to both government and business clients, NeoGames delivers a complete package for offering lottery games on personal computers, smartphones, and handheld devices. Additionally, they offer an innovative sports betting platform, advanced content aggregation solution, and a full range of B2B gaming technology and managed services. Revenues during the fourth quarter of 2022 were $69.2 million (NeoGames, 2023). The NeoGames group of companies include Aspirecore, Pairplay and BtoBet.
AspireCore is a prominent online RMG technology platform that offers a comprehensive technology platform and managed services to iGaming and OSB operators worldwide. Their services include Player Account Management (PAM) and managed solutions like Customer Relationship Management, Know Your Customer (KYC) / Anti Money Laundering (AML) compliance and business intelligence tools. As a leading PAM and managed services provider globally, they serve 88 brands and over 30 partners in Europe and North America.
Pariplay is a global leader in aggregation and content development for the iGaming industry. They specialize in distributing iGaming content through a proprietary aggregation platform, operating their own in-house content studio, and assisting others in creating games through their game development kit. Supporting over 140 operator customers with more than 15,000 games, they serve over 1,000 brands and handle 1 billion bets monthly.
BtoBet provides a complete sportsbook solution for the global OSB industry, offering a comprehensive platform and services. They serve over 20 partners and 50 brands, operating across Africa, Europe, and Latin America.
Aristocrat
Aristocrat Leisure Limited is an Australia-based gaming content and technology company. The Company is a publisher of free-to-play mobile games. The company has two operating units: Aristocrat Gaming and Pixel United. Pixel United encompasses the Product Madness, Plarium and Big Fish Games businesses. Plarium business has a portfolio of engaging social Web and mobile games across multiple genres. Big Fish business offers a diversified portfolio of games, including social casino and games. Its Aristocrat Gaming is a content and technology provider, operating in over 300 gaming jurisdictions globally. It has three geographic divisions: Americas, Europe, Middle East and Africa, and Asia Pacific. Aristocrat Gaming includes slot machines, blackjack, craps, roulette and house-banked card games, which includes games that are neither class one nor class two. It offers a range of products and services, including electronic gaming machines, casino management systems and digital social games (Financial times). Segment revenue increased $837 million or 18% in reported currency (12% in constant currency), driven by growth across North American Gaming Operations and global Outright Sales. While total revenue grew, the percentage derived from recurring sources in the period decreased to 75.5% from 79.9% in FY21. This primarily reflected an increase in Outright Sales across Aristocrat Gaming, particularly as North American customers committed more capital to Aristocrat’s high performing products following the lifting of COVID-19 restrictions (Aristocrat, 2022).
Industry Overview
The Real Money Gaming (RMG) sector is experiencing rapid growth, driven by online gaming platforms that offer players the chance to wager and win real money. This thriving industry encompasses various activities, including casino games, sports betting, poker, fantasy sports, and other interactive gaming options. Technological advancements, increasing internet accessibility, and shifting consumer preferences have fueled its significant expansion and evolution.
According to a report by Allied Market Research, the global online Real Money Game market is projected to reach a staggering $127.3 billion by 2027, with RMG revenues accounting for 57% of the market size. Pioneering companies like Enjin have already made strides in transforming the gaming landscape. Enjin's platform enables users to create digital assets, such as art NFTs or digital vouchers, that they can utilize based on their preferences (Allied Market Research, 2022).
Blockchain technology has emerged as a game-changer in the real money gaming industry. By enhancing transparency and security and enabling faster and more secure transactions, blockchain is gaining popularity among RMG companies. As more players embrace this technology, we can expect increased security measures and improved user experiences on their platforms.
Governments worldwide are recognizing the potential of the RMG sector and are investing in its growth. Several countries have established funds to support local gaming businesses, with notable examples being France, the UK, and Germany. The pandemic further accelerated the rise of real-money gaming as its popularity soared among gamers, expanding the vision of these governments even more (Statista, 2022).
Looking ahead, the future holds limitless potential for new online and real-money gaming companies. To remain relevant in this competitive landscape, innovation and distinctiveness will be crucial. The AVGC (Animation, Visual Effects, Gaming, and Comic) industry has already displayed impressive yearly growth rates of 25-30%, attracting a surge of new entrants into the market (IBEF 2022).
As the RMG sector continues to thrive, driven by technological advancements and favorable government support, industry players must adapt, innovate, and differentiate themselves to seize the abundant opportunities that lie ahead.
Financial Analysis
DCF Valuation
Using the perpetuity growth method, we came to an intrinsic value of $28 for NeoGames’ share price, using a WACC of 7.99%. NeoGames’ financial performance was heavily boosted in 2022 by their acquisition of Aspire Global, which more than tripled their revenue. After accounting for this event and scrubbing their financials, the normalized rate of growth is roughly in line with the market’s expectations of the company.
Comparable Companies
In the process of valuing NeoGames, we also utilised a Comparable Company Analysis approach. This analysis involved selecting five comparable competitors, ensuring they exhibit similar characteristics and market dynamics to NeoGames. The market data used in our valuation is the most recent, reinforcing the accuracy and relevance of our results.
In our assessment, we primarily focused on the EV/Revenue multiple. We opted for this specific ratio because the alternative—EV/EBITDA—yielded an unduly low implied share price. This misalignment with our analysis may stem from NeoGames' considerable Net Debt and comparatively low EBITDA.
To arrive at the implied value for NeoGames' shares, we first computed the industry average EV/Revenue multiple, which we subsequently multiplied by NeoGames' trailing twelve months (TTM) Revenue. From the resulting implied Enterprise Value, we subtracted NeoGames' Net Debt. The outcome was then divided by the number of outstanding shares to determine the implied per-share value.
Based on this method, we deduced an implied share value of $10.94. This figure suggests that NeoGames' shares may currently be overvalued. The overvaluation could be due, in part, to the market's reaction to the recent announcement of NeoGames' merger with Aristocrat.
It's important to emphasize that these calculations reflect a snapshot in time and should be viewed within the broader context of market volatility and evolving business conditions.
In addition to the Comparable Company Analysis, we used a Precedent Transaction approach to cross-validate our valuation of NeoGames. This method involved reviewing the five most recent mergers within NeoGames' industry, providing us with a complementary perspective. Similar to the previous method, we relied on the EV/Revenue multiple as the EV/Ebitda resulted in an unrealistically low share value for the reasons detailed earlier.
To calculate the implied share value, we derived the mean EV/Revenue multiple from these transactions. After following the same steps as before - multiplying the obtained multiple by NeoGames' TTM Revenue, subtracting the Net Debt, and dividing by the number of shares outstanding - we arrived at an implied share value of $12.97.
Although this value is somewhat higher than our previous estimate, it's still substantially lower than the current market price of $27.16. This divergence suggests that the market may be factoring in other considerations, such as anticipated synergies from the merger with Aristocrat, future growth expectations, or the strategic value of NeoGames to Aristocrat.
As always, valuations are not an exact science and are dependent on various assumptions. Therefore, this analysis should be viewed as one piece of the overall investment decision-making process.
Deal Rationale
Revenue Synergies
Entry into Attractive iLottery Market and International Expansion
The acquisition of NeoGames by Aristocrat not only enables entry into the lucrative iLottery market but also creates a powerful synergistic advantage. By merging Aristocrat's industry-leading gaming content and strong customer relationships with NeoGames' cutting-edge technology and platforms, the merged entity can deliver a comprehensive and fluid online RMG solution to operators worldwide. This integration of complementary businesses unlocks expanded market opportunities and revenue potential for the new entity.
Through access to NeoGames' expertise, Aristocrat gains a strategic advantage in navigating the highly regulated iLottery landscape, effectively mitigating potential regulatory challenges. The fusion of NeoGames' advanced technology with Aristocrat's top-tier gaming content enhances the overall product offering, attracting a broader customer base and fostering heightened player engagement.
Furthermore, the merger goes beyond individual capabilities, creating a harmonious synergy that allows operators to access a convenient one-stop-shop for iGaming, iLottery, and Online Sports Betting solutions. Such enhanced market differentiation positions Aristocrat as a frontrunner in the nascent iLottery segment, providing a competitive edge in the rapidly evolving industry.
On top of the compelling benefits within the existing market, the acquisition also opens doors for international expansion across the online RMG industry, with a focus on the nascent North American segment, Europe, and Rest of World markets. NeoGames' established presence in various regions significantly facilitates Aristocrat's expansion into new territories, paving the way for tapping into new customer bases and emerging markets. This international expansion bolsters the growth prospects of the combined entity, cementing its position as a global leader in the online RMG industry.
Cost Synergies
Strong Management Team and Cultural Alignment
The acquisition of NeoGames by Aristocrat is expected to bring about significant cost synergies, leading to enhanced operational efficiencies and financial benefits. Through the consolidation of overlapping functions and streamlined operations, the combined entity can eliminate redundancies and reduce administrative costs. NeoGames' contribution to the combined business extends beyond cost savings, as it brings an experienced and proven management team to bolster Aristocrat's online RMG growth. The amalgamation of talents and expertise from both companies creates a dynamic leadership group that can drive innovation, capitalize on market opportunities, and navigate the complexities of the online gaming industry.
Moreover, the cultural alignment between Aristocrat and NeoGames ensures a smooth integration process and shared values, including a commitment to sustainability and responsible gameplay. This alignment fosters a cohesive work environment, where employees can collaborate seamlessly towards common goals and maintain a focus on ethical business practices. By operating with a shared sense of purpose, the combined entity is better equipped to uphold industry best practices and strengthen its reputation as a responsible gaming provider.
Other Synergies
Improving Financial returns and growth
Aristocrat is trying to accelerate growth with the acquisition of NeoGames, aiming to capitalize on the vast potential of the online RMG industry, estimated at approximately $81 billion, however the acquisition not only unlocks promising growth prospects but also promises attractive financial returns for Aristocrat. With the deal expected to be accretive to EPSA from the first full year of ownership (FY25), it demonstrates the potential for immediate profitability and increased shareholder value. Beyond the immediate financial impact, the combined entity's revenue opportunities extend further, empowering the company to explore new revenue streams and capitalize on synergies created by the integration of Aristocrat's gaming content and NeoGames' technology and platforms. This strategic alignment not only ensures a strong financial outlook for the future but also strengthens Aristocrat's position as a market leader in the competitive realm of online RMG.
Risks
Aristocrat is paying a premium of about 104% over the pre-bid average price of NeoGames shares, which was approximately US$14.45. This means both that Aristocrat strongly believes in this acquisition and in the potential growth opportunities of Neogames, but at the same time that the acquisition carries risks and uncertainties that could impact the deal’s outcome.
For example, potential delays or non-completion of the transaction, coupled with uncertainties regarding obtaining necessary governmental and regulatory approvals, may hinder the smooth completion of the deal and adversely affect business operations and securities prices. Additionally, the possibility of requiring the Company to reincorporate in Luxembourg introduces further complexities and potential challenges.
Post-closing integration of the acquisition may pose unexpected difficulties and delays, surpassing current expectations. Unforeseen restructuring costs or undisclosed liabilities could emerge, potentially impacting the combined entity's financial outlook. The retention of key personnel and customers after the merger could prove challenging, potentially affecting the company's stability and customer relationships. Furthermore, diverting management's attention from ongoing business operations during the integration process may introduce risks and hinder operational efficiency. Exposure to inflation, currency rate fluctuations, and other economic factors may influence the financial performance of the combined company, leading to unforeseen financial challenges. Unfavorable changes to tax structures or regulations in certain markets could add to the complexities and impact the company's profitability. Additionally, actions by competitors may negatively impact results, affecting the company's market position and revenue potential.
Forward-looking statements accompanying the acquisition should be approached with caution, considering the multitude of risks and uncertainties that could influence the deal's outcomes. While the acquisition presents compelling growth prospects, it is essential for Aristocrat to diligently manage potential risks and uncertainties, ensure effective integration, and maintain a strong focus on regulatory compliance and market dynamics to unlock its full potential and deliver sustainable growth in the online RMG industry.
Conclusion
The acquisition of NeoGames by Aristocrat is driven by the strategy of bringing the company into a leadership position within the competitive online real-money gaming (RMG) industry. The integration of Aristocrat's world-class gaming content with NeoGames' advanced technology and expertise creates a seamless and comprehensive online RMG solution, elevating the company's market differentiation and establishing it as a frontrunner in the nascent iLottery segment.
Moreover, the deal unlocks avenues for international expansion, capitalizing on NeoGames' established presence in diverse regions and opening doors to new and promising markets. With a focus on sustainability and responsible gameplay, the acquisition aligns with Aristocrat's commitment to ethical business practices, further enhancing its reputation as a responsible gaming provider.
The combined entity's powerful synergistic advantage provides a solid foundation for accelerated growth and attractive financial returns. As Aristocrat leverages NeoGames' expertise and technologies, it is well-positioned to capitalize on emerging market trends and solidify its position as a global leader in the dynamic online RMG industry.
In conclusion, the acquisition of NeoGames marks an important move for Aristocrat, continuing with its growth strategy and fortifying its presence in the rapidly evolving online RMG landscape. The combined entity is hoped to ensure sustained success, delivering superior gaming experiences and driving shareholder value.
References
Aristocrat (2023). Proposed acquisition of NeoGames and increased on-market share buy-back program. [online] Aristocrat. Available at: https://www.aristocrat.com/proposed-acquisition-of-neogames-and-increased-on-market-share-buy-back-program/ [Accessed 10 Aug. 2023].
Dyer, G. (2023). Aristocrat Itching to Have a Flutter Online. [online] ShareCafe. Available at: https://www.sharecafe.com.au/2023/05/15/aristocrat-itching-to-have-a-flutter-online/ [Accessed 10 Aug. 2023].
finance.yahoo.com. (n.d.). NeoGames S.A. (NGMS) Stock Price, News, Quote & History - Yahoo Finance. [online] Available at: https://finance.yahoo.com/quote/NGMS/.iGaming NEXT. (n.d.). Aristocrat Archives. [online] Available at: https://igamingnext.com/news/tag/aristocrat/ [Accessed 10 Aug. 2023].
Investor Aristocrat accelerates its online RMG growth strategy with the proposed acquisition of NeoGames. (2023). Available at: https://ir.aristocrat.com/static-files/51ff481d-1f34-4fe3-a8fa-a071f216efc8 [Accessed 10 Aug. 2023].
NeoGames S.A. (2023). SEC Filings - NeoGames S.A. [online] Available at: https://ir.neogames.com/financials/sec-filings?field_nir_sec_form_group_target_id%5B%5D=471&field_nir_sec_date_filed_value=&items_per_page=10#views-exposed-form-widget-sec-filings-table.
NeoGames Shareholders Approve Business Combination Agreement with Aristocrat Leisure. (2023). Bloomberg.com. [online] 18 Jul. Available at: https://www.bloomberg.com/press-releases/2023-07-18/neogames-shareholders-approve-business-combination-agreement-with-aristocrat-leisure [Accessed 10 Aug. 2023].
Phil (2023). NeoGames shareholders approve merger with Aristocrat Leisure. [online] Newswire. Available at: https://g3newswire.com/luxembourg-neogames-shareholders-approve-merger-with-aristocrat-leisure/.
Singh, U. (2023). Australia’s Aristocrat Leisure to buy Israel’s NeoGames for $1 bln; shares soar. Reuters. [online] 15 May. Available at: https://www.reuters.com/markets/deals/australias-aristocrat-leisure-buy-software-firm-neogames-1-bln-2023-05-14/ [Accessed 10 Aug. 2023].
Wargo, B. (2023). Amid just-announced takeover by Aristocrat, NeoGames executives meet Nevada regulators this week. [online] CDC Gaming Reports. Available at: https://cdcgaming.com/amid-just-announced-takeover-by-aristocrat-neogames-executives-meet-nevada-regulators-this-week/ [Accessed 10 Aug. 2023].
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