Australia | May 16 2023
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Brokers support Aristocrat Leisure's intention to expand its real money gaming operations.
-Aristocrat Leisure’s proposed acquisition of NeoGames receives the thumbs up
-Transaction accelerates the real money gaming strategy
-To make the deal work, -$60m of synergies are required, seen as achievable
-Separately, the company’s buyback program was extended
By Mark Woodruff
Global gaming and technology company Aristocrat Leisure ((ALL)) has stated its build and buy strategy for expansion into real money gaming (RMG) is now at an end, with the proposed purchase of NeoGames offering scalability and presence globally.
Goldman Sachs had previously identified the iSlots market as a key opportunity to be targeted by Aristocrat’s online RMG business, now branded Anaxi.
Apart from Anaxi, Aristocrat’s operations also include land-based gaming under the Aristocrat Gaming title and digital gaming under the Pixel United title.
The company designs, develops and distributes gaming content, platforms and systems, and its land-based gaming products include slot machines, blackjack and roulette machines.
NeoGames would expand the iSlots opportunity more globally for Aristocrat and include the entire RMG universe, including iLottery and online sports betting, explains Goldmans Sachs.
NeoGames is comprised of an iLottery segment alongside the ‘AspireCore’ business-to-business player account management (PAM) and managed services business. The iLottery and AspireCore segments contribute 45% and 30%, respectively, to total revenue.
UBS notes Aristocrat had previously flagged the importance of PAM within the iGaming offering and Goldman Sachs notes the Aspire part of the Neogames offering was a key motivation for the acquisition.
Additionally, NeoGames has the ‘Pariplay’ aggregation platform and game development kit, along with the ‘BtoBet’ sportsbook and online betting solution. Morgan Stanley observes the Aspire and Pariplay businesses are predominately European in exposure, with North America the key market for expansion of the iGaming and sports betting offer.
According to Morgans, NeoGames is distinguished by the quality of its technology stack. As Aristocrat is considered to have some of the best iGaming content globally, it will be able to use the platform of NeoGames to deploy that content, while also accelerating growth for NeoGames across its various verticals.
Aristocrat can now market complete solutions to casino partners across the gamut of its own content, aggregation of third-party titles and PAM, explains Citi.
The deal accelerates the financial contribution of the RMG strategy and dilutes the impact of a slower digital market, which the broker has been flagging.
Citi highlights around -$60m of synergies are required (and achievable) to support the acquisition multiple.
While the acquisition multiple is high, this broker feels it can be justified if Aristocrat executes its strategy, and market forecasts for industry growth prevail.
Nonetheless, some investors may be disappointed by the apparent lack of accretion resulting from the acquisition, though Macquarie begs to differ.
This broker assumes the -$1.8bn transaction completes in early-2024 and is modestly earnings accretive in FY25 (the first full year of ownership). The deal should see upside when considering revenue synergies as a combined business.
Macquarie sees earnings upside and a compelling valuation for Aristocrat not only from these revenue synergies, but also from further M&A (content deals), along with potential for capital management.
Aristocrat simultaneously announced the expansion of its buyback program by $500m, bringing the total program to $1.5bn.
Pleasingly for Jarden, both the NeoGames transaction and the buyback extension go some way to addressing Aristocrat’s under levered, arguably inefficient, balance sheet.
The rationale for gaining exposure to iLottery
Apart from the lack of accretion resulting from the NeoGames transaction in investors minds, Macquarie alludes to potential disappointment over the mix of businesses acquired.
As mentioned previously, 45% of NeoGames’ revenue is derived from the iLottery segment.
Aristocrat has not previously played in the lotteries space, and, according to Morgans, had not given any prior indication of any interest in doing so.
Nonetheless, the broker accepts management’s argument that iLottery is often the first type of online RMG to be legalised in any given market, and so it can act as an important entry point for future growth.
Preview of First half results
Separately, Citi expect a solid first half result by Aristocrat this Thursday, driven by strength in the land based segment.
It’s felt strength in Social Casino has offset weakness in Social Casual, and the broker is forecasting first half earnings (EBIT) of $910m.
In the wake of the acquisition announcement, the average target price in the FNArena database has increased to $43.86 from $43.17, with Ord Minnett (Accumulate) the only broker of six yet to refresh research.
There are four Buy (or equivalent) recommendations, while UBS is restricted from offering a rating given it is acting as a financial adviser on the transaction.
Outside of the daily monitored database, Jarden and Goldman Sachs also have Buy (or equivalent) ratings with target prices of $45.70 and $40.50, respectively.
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