Slot, table and system supplier Bally Technologies announced that it has entered into a definitive agreement to acquire Dragonplay Ltd., a leading online social casino company headquartered in Tel Aviv, Israel, with top-grossing applications for Android, as well as a significant presence on Facebook and Apple iOS.
Launched in 2010, Dragonplay ranks among the 10 top-grossing game developers in the social casino genre with approximately 700,000 daily active users (DAU) and nearly 3 million monthly users across all platforms. In the “Card” category on Google Play, Dragonplay’s poker game Live Hold’em Pro is ranked number one in the top-grossing category. In the “Casino” category on Google Play, Dragonplay Slots is a top 10 performer in terms of active users
“With over three years of topping various performance charts on Google Play, Dragonplay has successfully and consistently demonstrated its ability to acquire, monetize and retain social gamers by creating compelling games with staying power in the social casino space,” said Bally Chief Executive Officer Richard Haddrill. “We expect this strategic acquisition to help position Bally at the forefront of social casino gaming by leveraging our world-class content, including proprietary table games and award-winning video slots, on Dragonplay’s increasingly popular social casino.
“Additionally, with the majority of its revenues generated from smart phones and tablets, Dragonplay has proven remarkable foresight and leadership in the mobile space, which is the fastest growing segment of social gaming.”
Total consideration includes approximately $51 million in up-front cash, plus the amount of net working capital, payable to Dragonplay’s shareholders in exchange for all of the issued and outstanding equity, and approximately $49 million in additional earn-out consideration and employee retention payments over the next 18 months subject to Dragonplay meeting certain financial performance targets.
Bally expects to fund the transaction from cash on hand and proceeds from its revolving credit facility. For the 12 months ended March 31, 2014, Dragonplay generated over $10 million in EBITDA (earnings before interest, taxes, depreciation and amortization, including share-based compensation).
Dragonplay Chief Executive Officer Sharon Tal said, “Dragonplay and Bally share complementary cultures focused on innovation and user experience. Both companies are committed to providing unique and stimulating content to players across the globe that enjoy playing entertaining casino-style games. I am confident that leveraging Bally’s vast library of proven slot and proprietary table game content will provide our loyal player base with an even more robust experience, which is expected to augment Dragonplay’s growth trajectory.”
Subject to completion of certain customary closing conditions, Bally expects to close the acquisition of Dragonplay in July 2014 and expects the acquisition to be accretive to Bally’s fiscal 2015 adjusted earnings per share.
Skadden, Arps, Slate, Meagher & Flom LLP and Meitar Liquornik Geva Leshem Tal are serving as legal counsel to Bally. The Rain Group is serving as financial advisor to Dragonplay, and Fenwick & West LLP and Raved, Magriso, Benkel & Co are serving as legal counsel to Dragonplay.
Analysts were positive on the purchase. “We think the deal makes sense for a host of reasons including a modest purchase price on a valuation basis, it will be accretive to EPS, and it gives BYI a footprint in the growing social gaming space,” said Union Gaming analyst Robert Shore. “While macro fundamentals in the equipment industry remain challenged for a host of reasons, we have been observing growth in the social gaming space. We maintain our buy rating and our $81 price target.”
Shore noted that while Dragonplay generated $10 million in EBITDA, which implies a multiple of 5X, there could be an additional $49 million in payments related to future earn-out consideration and employee retention over the next 18 months. “We note the earn-outs are only triggered by meaningful upside to EBITDA, which should allow the multiple to stay around the 5X range (not 10x which seems to be a bit misunderstood). The deal won’t notably stretch BYI’s balance sheet and BYI will still be able to de-lever post the SHFL acquisition.
Shore went on to say that Bally will now be able to benefit from the social gaming boom. “The macro environment for slots is challenging,” he wrote. “There are few new casino openings/expansions on the horizon, the space is increasingly competitive, and some larger operators remain highly-levered impacting slot purchasing budgets (and frankly, large operators continue to voice apathy regarding slot cap-ex even if they had endless pools of free cash flow). However, in contrast to the environment for slots we are seeing growth in social gaming, and IGT has blazed this trail.
“The transaction should enable BYI to leverage its strong content across the social gaming platform. We also note that the majority of Dragonplay’s revenue is from the mobile space, as the company has been on the forefront of the Android space in particular. This mobile segment’s growth is outpacing the overall social gaming industry.”
