Ever since Bwin.party edged out 888’s offer for bwin.party in early September, the value of 888’s old offer and GVC’s winning offer have almost converged in terms of total value. GVC’s offer was 25 pence and .231 GVC shares for each BPTY share. At today’s prices, that puts the total at £768.23M in equity and £207M in cash, for a grand total of $975M in cash and equity. 888’s original offer is now worth £540M in equity and £326.5M in cash, for a total of £866.5M, for a difference of only £108M. But since 888’s more recent offer was even higher, the total value of both final offers are almost equal.
While the GVC offer is still a bit higher, its value has been diminishing since the bwin.party board agreed on the deal. 888’s offer is still around the same as it was back on September 4th since 888 stock hasn’t moved much since. It’s quite a long shot to say the least, but bwin.party shareholders have yet to approve the GVC deal. If GVC shares keep migrating down and 888 jumps higher before that meeting, 888’s last offer may end up actually being more valuable and with more cash to boot. What will bwin.party shareholders do then? Will they stop the deal? Probably not, but it will be quite interesting to see.
There’s more to say on bwin.party’s mistake besides GVC’s unregulated business model and the risks it presents for bwin.party. The logistics of the move have GVC moving its sportsbook into the bwin.party platform, but that platform is old and judging by the numbers, not very efficient. Sports is bwin.party’s strongest segment and it barely grew by 1% last year. 888’s sportsbook revenue grew by 81% last quarter. Its platform just works better.
The evidence of a well-functioning back office is organic growth. It means that the software driving life time value for each customer is actually working. This, bwin.party has obviously not had for a while, which is why it was seeking to be bought out so someone else could tackle the problem. While GVC does have some organic growth, much of it is in markets with little competition, and a lot of GVC’s growth has been by acquisition. This says nothing of the platform that will be driving GVC/bwin.party’s players. Is it equipped to fully optimize the combined customer base? The case isn’t too compelling. Why would you want to migrate sportsbook into a platform that doesn’t seem to be working very well?
The other glaring problem is that both bwin.party and GVC are strongest in sports. The two will be combining what they are already good/decent at, but what about their weaknesses? Those being casino, bingo, and poker. How does a GVC/bwin.party merger help either company in any of those three areas?
Financially, GVC’s debt, the Cerberus Loan of €400M carries an interest rate of EURIBOR plus 11.5% for two years, which will eat up most of the company’s earnings for those two years, and they have to pay that loan on time or lose bwin.party.
But there’s more. Due to a fluke regarding the differences in regulations between the main London Stock Exchange that 888 trades on and the Alternative Investment Market (AIM) that GVC trades on, GVC was able to count cost synergies in its offer for bwin.party that including a round of layoffs the company already took into account before the offer was ever tabled. Regulations for the main LSE forbade 888 from counting layoffs it would have made after acquiring bwin.party because cost synergies are not allowed to be counted for moves that could theoretically be made by either company while the two companies are still separate. The logic of that regulation I will never understand, but that’s government.
Taken all together, you have a migration into a subpar platform; a two year loan that will eat into earnings through 2017; a GVC premium over 888 that has all but evaporated since the offers were initially made; the merging of two companies that specialize in sports while falling behind in casino, poker, and bingo; and double counted cost synergies. Nothing about this deal makes sense.
Taking the other side now, 888 has a modern back office built under a very competitive atmosphere and all of its growth is organic. There have been no major acquisitions by 888 since 2010, and even that one was very minor at $18M for Mytopia. This is concrete proof that its back office works well. Besides that, 888 specializes in casino, not sports. 888 could have cross marketed bwin.party’s sportsbook into its casino using its own modern back office and really upped the lifetime value of bwin.party’s players for the combined company.
Almost every part of 888 is growing. Casino active players were up 22% last quarter, 888poker active players were up 4%, keeping it at number 2 in liquidity behind Pokerstars, bingo players are up 18%, and sports up 81%. 57% of revenue comes from regulated markets as opposed to 90% unregulated for GVC.
In the end, 888 does not need bwin.party to grow. It is growing on its own. It would have simply given 888 an adrenaline shot and they would have taken the entire base and run it through their own back office. Instead, GVC and bwin.party will have a very strong sportsbook but not much else. In the end, their casino, poker, and bingo players may end up drifting elsewhere.
None of this takes into account what happens if GVC’s core markets in Turkey, Germany, and Brazil get shaky. We’ll see what happens when bwin.party shareholders finally vote on the deal. Don’t expect any surprises though.
