Why Selling Playtika Is A Win-Win For Caesars And The Chinese

| About: Caesars Entertainment (CZR)

Summary

Caesars is selling Playtika to the Chinese for $4.4 billion in the biggest social gaming deal ever.

This is a net-positive for both sides in that Caesars can pay down debt, while the Chinese gain a really good social gaming platform.

Growing Chinese interest in casino content could potentially make Scientific Games and NYX Gaming attractive targets.

Caesars Interactive (NASDAQ:CZR) is selling its Playtika Social Game for $4.4 billion to a group of Chinese investors led by Shanghai Giant Network Technology. If you are a big fan of mobile casinos games like me, you would know that Playtika develops some of the best games on the market, such as World Series Poker, Bingo Blitz, Slotomania and House of Fun. Although online gambling is illegal in China, social casino games is actually very popular with companies such as Boyaa Interactive (OTC:BOYAF), a Hong Kong-listed company getting a lot of investor attention for its poker and slots games.

For those investors who are not familiar with Shanghai Giant Technology, it is a subsidiary of Giant Interactive that was previously listed in the US. This is deal is actually quite good for Caesars in that it frees up a lot of cash that can be used to settle with bondholders of its largest division that filed for bankruptcy in early 2015.

Playtika is a global leader in the social gaming space which also counts Churchill Downs' (NASDAQ:CHDN) Big Fish and International Game Technology's (NYSE:IGT) Double Down. The company was founded in 2010 and launched Slotomania as its first game, and later was acquired by Caesars for $85 million. By late 2012, Playtika acquired Buffalo Studios, which made Bingo Blitz, and later in 2013, it acquired World Series Poker app from Electronic Arts (NASDAQ:EA). The most recent acquisition was in late 2014, when Playtika acquired Pacific Interactive, maker of Fun House. This deal is actually the biggest in the industry, recalling that Churchill Downs purchased Big Fish in 2014 for $835 million, while IGT purchased Double Down in 2012 for $500 million.

I believe the real winners of this deal are the Chinese that are looking to gain expertise in social casino games which could eventually be used to real-money online gambling in China when the Chinese government begins to regulate the industry. Keep in mind that online gambling is illegal in China, but social casino games are legal. The difference between social casino and real-money casino games is that players purchase virtual currencies in the social casino to play the game as opposed to using real money. The experience would be similar to that of actual gambling, but the players are not winning real money. This distinction is important, because it is a key reason why the Chinese government allows social casino games in the country.

Currently, the leader in social casino games is Boyaa Interactive, whose poker games are very popular. However, I believe this deal could shake up the industry dynamic, because Playtika games are far more superior and engaging than the ones made by local Chinese companies. This deal could potentially spark an M&A war among the Chinese game developers as they look for interesting content in overseas market. If this turns out to be the case, then this could make companies such as Scientific Games (NASDAQ:SGMS) and NYX Gaming (OTC:NXXYF) two potential targets for the Chinese. Keep in mind that China is also considering expanding its gambling hub beyond Macau in places such as Hainan, and this could mean more interest in foreign casino and online gaming technology companies.

Overall, this deal is a win-win for both Caesars and the Chinese, and we could see more M&A and Chinese interest in this space going forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.