- It's early days but one thing is clear: The virus contagion could produce "shut-in" gambling bursts to online platforms globally. TSG and William Hill are two companies to watch.
- Flutter's acquisition of 55% of TSG won't close until late this year: Could a new bidder show up with a bigger premium?
- Both TSG and William Hill have a strong existing footprint in the US regional gaming space.
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Theory of the investment: Online gaming platforms will see volume bumps during duration of coronavirus outbreak.
The Stars Group Inc. (NASDAQ:NASDAQ:TSG) and William Hill US (OTC:OTCPK:WIMHY) online gambling platforms are poised for strong quarters ahead in the teeth of the ongoing coronavirus epidemic. Both companies are the logical home of gamblers scared off by regular visits to casinos during the crisis. If the spate of current cancellations of public events, shows and the massive hit to travel-related companies continues, the logical move will be to bet online or open new accounts online. Either way, these two leaders in the online space have a story for investors now. Note below that TSG is holding near the Flutter buy in premium and not impacted by virus fears.
The American Gaming Association research shows that 124m Americans were expected to visit a casino during 2020, an estimated 20% spike from 2019. That number represents roughly 49% of the adult US population. Of this number, Las Vegas alone was expected to welcome more than 42 million visitors. These forecasts clearly will be dramatically impacted by the severity and duration of the spreading virus threat. At this point there's no reliable answer to the most burning of all questions: How long and how deep will the virus dominate global health and economics? Until the answers become clearer, we will continue to see draconian precautions mount in all businesses which live and breathe on places of public gathering. The specter looms of pro sports games being played before empty arenas, deserted movie theaters, cancelled concerts and cruise ships sitting in ports, along with empty casino floors. (Below: The AGA's sports betting map. Up to 20 states possible in next two years. Source:AGA)
For casual seekers of gaming entertainment, staying home poses little disruption of their normal entertainment cycles. There’s always TV, YouTube, and more social media to pick up the amusement slack during the crisis. But for consumers for whom gambling is a lynch pin activity of their regular entertainment diet, i.e., sports bettors, it’s a different story. They can bet online in those places where it's legal. Online sports betting represents 75% to 80%% of all the revenue, so while the live sports books will take a hit, mobile won’t be affected, unless the leagues begin canceling games. Regardless of what LeBron James says about not playing before empty arenas, the NBA is most likely to continue its schedule even though its teams could well be playing to thin crowds, if any attendance at all.
Most at risk here is the upcoming NCAA basketball tournament because universities present a much more socially complicated decision matrix than pro sports owners. But empty arenas or not, if the games are played, the online betting volume will continue, if not increase.
You can be certain that in places where sports betting is legal, both in the US as abroad, the potential revenue spike is sitting there as the virus continues and contagion seems to rise. We see two companies poised for revenue bumps at the moment. Both have good fundamentals, both we believe pre-virus were undervalued for various reasons obviously unconnected to the crisis. And both have nimble managements we believe who understand the possibility that for at least the next two quarters, aside from humanitarian considerations we all share, opportunities to grow volume and customer acquisition are plentiful.
The Stars Group Inc. and William Hill: Our choices
We have been fans of TSG since it exited its former Amaya management and name in the late summer of 2017. Followers of the stock will recall that under the prior management, the company made a David eats Goliath $4.9B buy of PokerStars in 2014. After the transaction, Canadian regulators swooped in and charged its executives with insider trading, eventually forcing them out. A new, energetic, tech-savvy and financially-sophisticated c-suite team came into place and since then has grown the company organically as well as with huge acquisitions. Most recently, TSG sold itself in a $6B all stock deal to Flutter, the Irish/UK betting shop and online giant. After the deal closes, Flutter will own ~55% of TSG. (Below: The Flutter deal would make it the world's largest online betting operator. But as long as the deal cooks, there's room for mischief: Source of graphic: TSG.)
The deal makes Flutter the world’s largest online betting operator with projected revenues of $4.7B. The deal expresses growing fears about a series of regulatory hits to online and live sports book shops they have taken from the UK government, and that has body slammed the parent’s future. It’ pivot to the US’s burgeoning legal sports betting market foretells a North American strategy to counteract the assault on its core UK and Ireland businesses. The Flutter deal, an exchange of stock, values TSG at $20.41 a share, a small premium over the $19.84 price at which the shares traded pre-announcement. By any measure, we believe Flutter got a great deal. TSG is probably undervalued.
The deal is expected to close sometime toward the end of this year. Meanwhile, TSG stock continues to trade on the NASDAQ. We believe that the deal story may not be over and done. Strategically this is a smart deal for both companies. But the low premium in the deal leaves me to suspect that we could see another aggressive buyer sitting in the weeds, scribbling numbers as we speak. Then there's government action. We checked with antitrust lawyers we know who all agreed that while there's always a threat of federal mischief in deals like this, the sports betting space already is crowded. Bettors have such massive choice that it's unlikely the deal could trigger protests from government agencies on antitrust theory.
A bidder from the competitive circle, or in fact, an activist big enough to lay more money on the table for TSG shareholders, is another matter. There's a possibility that the stock could be in play before the deal is signed. Perhaps a long shot, but particularly raised interest among Flutter’s UK competitors, who face the same regulatory realities. They have the cash, the resources and the skill sets in integrating these kind of acquisitions. We could see one of the UK giants poke a toe in the water and that could move the shares higher.
Part of a higher valuation could well come from results TSG turns in which could support the idea that the virus scare has increased online action for TSG in 2Q and 3Q, producing strong earnings beats. Bear in mind too that TSG is a global online presence. It's very strong in Italy, which has been disproportionately battered by the virus. Its PokerStars business has the broadest global reach among competitors, but by far its strongest potential lies in the explosive growth of US online sports betting.
Right now sports betting is legal in 14 states with another three expected to legalize this year. We see 20 states in the hopper by 2022 and a US sports betting revenue potential of $18 to $22B.
A quick glance at TSG
After the reorganization, several acquisitions, (including the huge $4.7B Skybet deal last year) and a rapid rise in debt, we still believed the market had not quite grasped the potential of this company. We suspect part of the problem was skepticism about the company being able to handle the immense debt load after finally paying off the PokerStars deal in 2017. And the considerable dilution of the stock on other deals it has made or securities issued.
On January 1, 2018, TSG shares hit $36.30, a five year high.
Price at writing today: $22.
52 week high: $25.34
Price just before virus news hit: $22.17
Long term debt: $5B
Estimated revenue consensus: 2020: $2.74B
Our call: We think the “virus bump” could contribute 5% to total 2020 TSG online gaming revenue. 2019 showed a 2.22% decline year-over-year due to some problems in Europe. We are translating a 5% bump into $137M in “bonus” revenues from “shut in” gamblers. That, along with revenue streams from new jurisdictions could bring the 2020 revenue to $3B. This could push 2020 EPS over $2.00 a share.
Earnings: $0.49, a 7c beat. Vis $0.52 y/y
Earnings surprise: 16.67%
Revenues: $687.M up 2.2% y/y.
Consensus EPS 2020: $1.90
Debt: The company repaid $450M in debt in 2019 and says it has achieved $100M in synergies since the SkyBet acquisition.
In November of 2018, TSG signed a deal with El Dorado Resorts (ERI) that gives it an option to take over Caesars Entertainment's (CZR) second skin online betting platforms across its regional network. TSG issues 1 million shares of its common to ERI priced at $23.22 for a value of $25M with a further option for ERI to acquire $5m more later.
The deal gives TSG access to sports bettors in 11 states where ERI has casinos or all states where sports betting goes legal thereafter. The new CZR will have 60 casinos in 18 states.
The deal will enable ERI customers with mobile accounts to bet on games from their phones anywhere. If ERI casinos in those states experience a drastic decline in arrivals, their sports betting customers will still be able to place their action on all the big sports events coming up on the calendar between Q2 and Q3: The Final Four, The Masters Golf Tournament, The Kentucky Derby, NBA and NHL playoffs and the early months of the MLB season.
ERI and soon to be CZR CEO Tom Reeg sees the post-merger company as a “national player” in sports betting. Right now Reeg has a massive buffet plate before him to consume. Decisions loom on major issues like which CZR properties to keep, which to lateral to a REIT, which to unload. He has said sports betting is a priority for post-merger teams already in place.
TSG FOX Sports Deal
Last May TSG closed a deal with Fox Sports to get exclusive use of their brand images, logos and most importantly, the right to partner on FoxBet, a site that will take real money wagering in all states where sports betting has been legalized. TSG also will have access to all Fox game-related media including the NFL. (Below: The Fox Sports deal expands the TSG footprint in a massive media partnership as well as a Fox branded betting site.)
One of the core bugaboos of the online gaming business is the extremely high cost of customer acquisition. As we have written, the competition is so fierce that all operators in the sector have become so aggressive in signing up new accounts that they are giving away the store to some extent. Now, sadly of course, the virus fears that will keep customers away from casinos will attract them to remote betting and an incentive to sign up.
With its large national footprint and huge database, ERI will have the ability to market to masses of sports bettors forced to stay at home at a much lower marketing cost. And that arm will be TSGFoxBet.
TSG is a global betting platform. That means that during the duration of the virus, mobile betting should grow wherever they have platforms throughout Europe as well.
Add the potential here to the fact that there could well be crouching tigers waiting to pounce given TSG’s attractive entry point. Now somewhat insulated from dependence on live sports books casino footfall, you have a strong case for buying the stock at its current price.
William Hill US (OTC:OTCPK:WIMHY)
Hill is a unit of the UK giant of the same name. And like Flutter, faces severe challenges to its main street sports books. Like Flutter it sees the expanding US sports betting market as a natural compensatory growth area for any lost business it will sustain due to the crackdown on betting limits and credit card use in the UK. (Hill's US subsidiary dominates Nevada and has moved to states like New Jersey where it's among the revenue leaders. Source: Wm Hill.)
Hill’s US subsidiary has a dominant position in Nevada, running sports books in more than 100 casinos. It also has platform deals with casinos in US regional jurisdictions where sports betting is legal. It recently made a deal with CBS Sports to partner on media and sports betting initiatives.
It has a $1.5B market cap, a low beta of 0.61. Its earnings (TTM) ran at -5.54. Its 52 week range was $6.64-$10.07.
Price at writing: $7.03. In our view, this is a screaming buy right now. We think Hill US has a shot to break even or better this year.
Given the burst that a move from live to online real money betting can get during the virus crisis and the low valuations of Hill stock, the powerful financial presence of its parent, we think this belongs in the no-brainer category for investors looking for strong buy in the dip stocks as the market tanks more each day.
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This article was written by
Howard Jay Klein has 30 years of experience as an executive and consultant in major casino operations. His background includes: Ballys, Trump Taj Mahal, Mohegan Sun, and Caesars Palace in Las Vegas. He is a value investor first, using management quality to inform his investment ideas. Howard is the leader of the investing group The House Edge where he shares actionable research for investing in the casino and entertainment industries.
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