When IGT announced it is selling DoubleDown Interactive for 5 million it gave a bump-up to the stocks of other companies with significant social casino operations such as Scientific Games, Churchill Downs and Aristocrat.
At a price of 10.5 times trailing EBITDA, IGT gave investors the ability to calculate the value of other social gaming operations, and they quickly did as their stocks attested.
Aside of those quick calculations and investor responses, the longer-term questions are where is social gaming headed now? and who will the winners be?
One clear winner is IGT. The company booked a nice profit on a company it bought five years earlier for $500 million and got to generate a lot of EBITDA from it in between.
Plus, IGT gets two future benefits: lower interest expense as it uses the proceeds to pay down debt, and royalties DoubleDown purchaser DoubleU will pay in future years. Adam Krejcik of Eilers & Krejcik Gaming estimates that DoubleU will pay 10 percent to 15 percent of net revenues. DoubleDown generated about $260 million in revenues in the past year.
In addition, by selling DoubleDown, IGT achieves two strategic accomplishments:
• It simplifies a company that had become very complex after the Lotomatica/GTECH-IGT merger.
• IGT can no longer be said to be competing with its casino customers who have their own online gaming operations.
But the biggest impact might be the long-term growth of royalties to IGT.
Two statistics reported by Krejcik are of interest here:
• Asia accounts for just 16.7 percent of global social gaming revenue on mobile devices compared to 73.7 percent from North America.
• Slot games generate 78 percent of all social gaming revenue.
Given Asia’s much greater population and the comfort that population has with mobile devices, the potential for social gaming is clear.
And because it will have exclusive use of the vast IGT game library, South Korea-based DoubleU no doubt expects to grow far beyond last year’s $142 million of revenue.
The potential for social gaming in Asia is, naturally, obvious to other Asian companies.
That is why Shanghai Giant Technology paid $4.4 billion to Caesars to buy Playtika, the largest of all social gamers.
It is why fellow Korean company Netmarble paid $800 million for Canadian Kabam, and will amass what Krejcik says will be a $4.4 billion war chest for more acquisitions after it IPOs next month.
Note, there are plenty of companies to acquire in a very fractured industry where five publishers, as they are called, control more than 50 percent of the market—Playtika, Scientific Games, Zynga, Aristocrat and DoubleDown.
With North America growth slowing, there could be incentive for some operators with tiny market share to sell, especially at valuations of 10.5 times EBITDA. At this point, it is worth noting that valuations might actually be higher. Playtika sold for 13 times EBITDA, and some analysts say that DoubleDown is really selling for 12 to 14 times based on estimated 2017 EBITDA.
Finally, Aristocrat and Scientific Games might look at IGT’s deal as a model for themselves—get cash now, gain a royalty stream, simplify the business model.
Sci Games especially could have incentive given that, like IGT, its business has become more complicated thanks to mergers, and the company wants to reduce debt from its lofty levels around eight times EBITDA.
