Merger and acquisition activity in the gaming industry is set to continue following Paddy Power's planned tie-up with Betfair, particularly among small-caps.
Irish bookie Paddy (LON:PAP) provided the sector’s latest takeover interest as it announced the planned deal with Betfair (LON:BET), which the pair said would create one of the world’s biggest online betting and gaming firms.
Paddy's move means four big deals are now in the pipeline and analysts say others are unlikely in the short term.
But smaller AIM-listed players are tipped to make more bolt-on acquisitions and regulators could force changes to the planned mega-mergers, sparking asset sales.
Online gaming group 32RED (LON:TTR) has made a couple of buys in the last year while interactive gaming group Netplay TV (LON:NPT) snapped up digital marketing firm Otherside earlier this month.
Online bingo group Stride Gaming (LON:STR) , which floated on AIM in May, also announced the acquisition of International Mobile Social Gaming Company for up to US$39.2mln on July 31.
Sophie Blandford at Daniel Stewart & Co said: “I think you will still see some deals at the lower end of the market.”
Paddy's play for Betfair marks the fourth major deal currently taking place in the industry as firms try to cut costs in the face of new gaming taxes.
Ladbrokes (LON:LAD) has announced a plan to merge with Gala Coral and Bwin.Party (LON:BPTY) is in talks with rival bidders GVC Holdings (LON:GVC) and 888 Holdings (LON:888) about a potential tie-up.
Canada's Contentious Gaming has also made a play for football pools operator Sportech (LON:SPO).
M&A activity gathered pace after the government introduced a new 15% “point of consumption” tax on gaming firms in last year.
Firms saw tie-ups as a way to cut costs and develop the financial muscle to cope with the new duties.
William Hill (LON:WMH) failed to take over 888 in February after the latter rejected its approach as inadequate.
But takeover speculation resurfaced in June, with Paddy Power talked about as a potential bidder for Ladbrokes.
Ladbrokes later announced a possible deal with Gala Coral while Bwin, which has been in talks with various parties since last year, is discussing a tie-up with GVC following an earlier bid by 888.
Robert Stokes at Davy Stockbrokers in Dublin said the Paddy Power/Betfair combination was “a match made in heaven” which he expects to go through.
But he stressed that all the deals on the table still have to be agreed and signed off and there was still potential for rival bidders to enter the race.
The proposed tie-up between Ladbrokes and Gala Coral could also face competition questions because of the size of the pair’s shop estates.
William Hill and Paddy Power could be interested in buying shops from the pair if regulators force them to sell some of their outlets.
“Paddy Power is still looking to open 25 shops a year for the next three to four years,” he said.
Nigel Driffield, Professor of Strategy & International Business at Warwick Business School, said the Paddy Power/Betfair deal was ”a simple case of consolidation”.
He said: “There are simply too many betting shops that do not pay their way, and online there are huge economies of scale. Online betting encourages people who make small bets ‘for fun’ but still have to be processed.
“Betfair’s niche is that they make smaller margins than the high street bookies, and are one of the strongest online providers with the exchange service, as well as pioneering initiatives others have copied like cash out.
“Paddy Power typically have their roots in horse racing and seem to be struggling to establish a presence in other sports - the growth in sports betting in the last 10 years has been in football.”