Playtech Makes High in the Italian Market

Posted by Harry Kane on Monday, May 7, 2018

In some respects, it’s tempting to consider the online gambling market in the UK as being omnipotent. After all, virtual gambling now accounts for 34% of the industry as a whole, while it generated a whopping £4.7 billion in the year ending October 2017.

The UK market is also renowned for its progressive legislation, which empowers operators and enables customers to gamble safely and with genuine peace of mind.

While these observations are entirely true, there are other regions and marketplaces in Europe that also boast exceptional growth. Take Italy, for example, which is home to one of the most flexible and lucrative gambling markets in the world and continues to attract investment from Europe’s biggest players.

How the Italian Market Has Grown in the Last 2 Years

On a fundamental level, the gambling market is Italy has enjoyed exponential growth over the last two years or so. In 2017, for example, it recorded a 25% increase in operator revenue from the previous year, establishing itself as the second most generative marketplace across an entire continent (second only to the UK at this stage).

In total, the Italian marketplace generated a staggering €1,026 billion during this period, which according to figures represented a full, one-quarter increase on 2015’s numbers.

Against a backdrop of progressive regulatory measures and a relative lack of competition, Italy has continued to enjoy prolific growth into 2018. As a result, it has now emerged as Europe’s largest market, and one that is estimated to be 25% bigger than the UK. This trend shows no sign of abating either, with this gap having the potential to increase incrementally in the near-term.

Of course, such relentless growth has transformed the Italian marketplace into a magnet for international investors, along with dominant casino brands and prominent game developers. If anything, this has perpetuated the cycle of growth, with even companies based in the UK and the Isle of Man looking to invest heavily in the region and capitalise on a lack of established sports betting and casino platforms.

Playtech Makes a Splash in the Italian Market

Gambling software development firm Playtech is the latest firm to make such a move, having recently spent a huge amount of capital on buying out its Italian rival Snaitech. In one fell swoop, the brand has created a dominant presence in this growth market while also eliminating one of its most prominent rivals, as it continues its drive to become the leading player on the continent.

Playtech, which was founded in 1999 by the billionaire entrepreneur Teddy Sagi, announced the deal last week, confirming a total investment of €846 million (£732 million). The magnitude of the transaction was reflected by the fact that Playtech moved from having €300 million in cash on its balance sheet to a net debt position once it was concluded, with the company having invested all of its available capital in a bid to drive future growth.

Although such an investment represents something of a risk given its scale and the constantly evolving nature of the marketplace, it’s a calculated one that Playtech believes will deliver huge returns in the future. The structure and the timing of the deal can certainly be described as shrewd, with a relatively low percentage of Italy’s gambling activity conducted online and the market crying out for a leader in the virtual realm.

This is reflected by the fact that Playtech will instantly become the largest sports betting operator in Italy, and potentially the second largest from the perspective of betting machines.

In terms of the intricate structure of the deal, the total price paid by Playtech includes €413 million of equity value, with the remainder made up of the debt that existed on Snaitech’s books at the time of the transaction.

This must also be aligned with an estimated €10 million of cost synergies, which is standard in deal of this type and will do little to counter the notion that the potential revenue gains will be significantly higher.

Overall, Playtech appeared to have timed its move into Italy burgeoning gambling market at the ideal time, while the financial benefits to the brand are likely to far outweigh the total cost of the deal and the shift from being in a cash positive position to encumbering a significant burden of debt.

Looking Forward – What About Brexit?

In the immediate aftermath of the deal, investors reacted extremely positively to the deal, with Playtech’s shares increasing by nearly 5.4% to 802.8 pence in a little more than 24 hours.

Some eyebrows have been raised following the deal, however, with some questioning how Playtech will eventually be impacted by Brexit. The UK is set to leave the EU on March 29th, 2019, at which point UK firms will no longer be eligible to receive free access to the single market and nations such as Italy.

Still, they have managed to establish themselves in the Italian market while the UK remains an EU member state, however, and this should protect the firm and its investment when Britain eventually exits the Union. This is a key consideration, particularly given the rules of EU membership and the transitional period that will follow immediately after the Brexit deadline date.

One remaining cause for concern is the potential impact of Brexit on Playtech’s stocks. While the firm was initially thought to be largely immune from any leisure stock losses in the wake of Brexit, this was based in some part on the firm’s large cash holdings. These have now been diminished, so the firm will be keen to secure some kind of return on its investment sooner rather than later.

The Bottom Line

While high value, cross-border deals of this type always carry some form of risk (particularly against the backdrop of Brexit), it’s hard to consider this deal as anything but positive for Playtech and the UK gambling market as a whole.

Sure, low cash flow could hamper Playtech in the short-term, but having established itself in one of Europe’s largest gambling markets it has the potential to make huge gains over a prolonged period of time.

Similarly, Playtech will be able to leverage progressive regulations and a relatively untapped online market to their advantage, creating a strategic position that is truly empowering in the current climate.