Wednesday, June 19, 2024

Move over America – there’s a new gambling market in town

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  • The US market is dominated by a handful of operators
  • Brazil is a newly regulated sports betting and gaming market

William Hill owner 888 (888) announced last week that it could sell its US business-to-consumer (B2C) unit, highlighting the difficulties smaller operators face in high-growth markets across the Atlantic. But investors’ understandable US focus shouldn’t obscure the rising opportunities south of the border.

The company’s strategic review could lead to a B2C exit from four US states, and it has terminated an agreement with Authentic Brands Group to use its Sports Illustrated moniker, at a cost of $50mn. In 2023, its entire US business only generated around £20mn of revenue and recorded an adjusted Ebitda loss of £12mn, according to Jefferies’ estimates.

The leading sports betting and gaming operators in the US market are in a different league to 888, and profitability looked increasingly unlikely. Flutter Entertainment (FLTR)-owned FanDuel and DraftKings (US:DKNG) are the market leaders, with analysts expecting them to deliver Ebitda of £504mn and $479mn respectively in 2024, according to FactSet consensus forecasts. Flutter Entertainment started trading in New York in January through a secondary listing and hopes to move its primary listing there this year. BetMGM, a joint venture between Entain (ENT) and MGM Resorts International (US:MGM), is the third largest US business. 

However, 888’s move should be seen in the context of increased concentration and consolidation in the US market. Berenberg analysts flagged in a note last autumn that many smaller sports betting operators have “exited, divested, been acquired, or changed strategy in the US”.

Stockholm-listed gambling business Kindred (SE:KIND)  which is being acquired by La Francaise des Jeux (FR:FDJ) – said in November it would pull out of North America as part of a “re-allocation of financial and tech resources towards existing core markets”. Privately owned Fanatics beat DraftKings to acquire the US operations of PointsBet (AU:PBH) last year, while Golden Nugget Online Gaming and theScore were snapped up by DraftKings and Penn Entertainment (US:PENN), respectively, back in 2021. 

US states continue to open up and even Mickey Mouse has got involved through a licensing agreement between Walt Disney Company (US:DIS) subsidiary ESPN and Penn Entertainment. Berenberg has raised its total addressable market forecast to $33.2bn in 2027, anticipating that 40 states will roll out sports betting and 12 states will give the green light to i-gaming. It thinks leading operators can hit cash profit margins of 30 per cent, albeit slower than previously anticipated.


Other Americas markets

Despite the crowding out in the US, there are interesting developments in other markets that investors shouldn’t ignore. 

Brazil, a rapidly growing gambling market, legalised sports betting in 2018, and a new framework to regulate sports betting and iGaming is a big step forward. There is a lot of potential for operators in this populous, football-mad nation. Market data business H2 Gambling Capital forecasts that online regulated gross gaming revenue will surpass $3bn in 2025.

Privately owned British operator Bet365 enjoys a leading online market share position, but there are ways to get exposure to this newly regulated and growing market through London-listed options. 

Entain reported a 14 per cent decline in net gaming revenue in Brazil in its annual results last week in what it called “an intensely competitive market”. But it now has new leadership in the region and is hopeful that its Sportingbet brand can rebuild market share growth, while its $150mn acquisition of 365Scores last year has given it another way into the market. 

Over at Flutter Entertainment, chief executive Peter Jackson told analysts earlier this year that he is “very pleased with the performance of the Betfair and PokerStars brands in the local market” and indicated the possibility of some Brazilian M&A to increase its scale there.

Playtech (PTEC) trades in Brazil through its Galerabet brand and also has B2B partnerships in the market. Management said last year that Galerabet is “on track to establish a leadership position” there. 

The company also offers exposure to another Americas market, Mexico, through its joint venture partner Caliente. And although the pair are currently involved in a legal dispite, we argued in a recent idea on Playtech that even if it is forced to sell its Caliente stake its shares look undervalued at nine times forward consensus earnings. 

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