Share values for slots manufacturer PlayAGS ($AGS) have plummeted as the company revealed that it wouldn’t be sold.
Word had gotten out in August that Inspired Entertainment – best known for its virtual sports products – had offered to acquire PlayAGS for $10 a share.
PlayAGS confirmed the rumor to Reuters (without mentioning Inspired by name) on Aug 12 while also saying it had rejected the offer. Talks had continued, however, renewing shareholder interest in the company. AGS shares had bottomed out at less than $5 in the month before word of the potential deal got out, having lost more than half their value in just over a year.
After PlayAGS confirmed it was in talks, they shot back up as high as $8.40. Even at that price, speculators stood to make a good return if the acquisition had been successful.
However, those traders seem to have been betting on successful negotiations and a quick payout. Companies sometimes see their share value increase after refusing a deal since it indicates self-confidence in their future upside. Not so with AGS. Its value dropped from a close of $7.61 on Sep 7 to $6.07 by the closing bell on Sep 8, its heaviest day of trading since the mid-August surge.
It has since rebounded somewhat, to $6.58 as of early afternoon on Sep 9.
Has the Gambling Industry’s Thirst for Acquisitions Waned?
It wasn’t that long ago that big mergers and acquisitions in the gambling sector were making headlines regularly.
The trend peaked in 2019 and 2020. Major deals from that period include:
- DraftKings acquiring SBTech
- Flutter acquiring The Stars Group
- Evolution acquiring NetEnt
- Eldorado acquiring Caesars and taking on its identity
- That new Caesars announcing its acquisition of William Hill
- Twin River buying the Bally’s brand from Caesars and taking on its identity
Over the past couple of years, that trend seems to have been petering out. For one thing, there have been fewer such deals or negotiations announced.
Those that have made headlines have tended to be smaller in size. For instance, Evolution did follow up on the NetEnt purchase with two additional acquisitions of smaller rivals. However, the NetEnt deal was worth approximately $2.1 billion, while 2021’s purchase of Big Time Gaming was about a quarter of that size. This year’s acquisition of Nolimit City was even smaller at around $360 million.
Finally, such negotiations have been less likely to succeed of late. PlayAGS is far from alone in that regard. Entain rejected two big offers, first from its joint venture partner MGM Resorts, then from DraftKings.
Playtech and Bally’s have likewise rejected takeover offers. And the collapse of the PlayUp-FTX deal, though smaller in dollar terms, was spectacular in other ways.
Some big deals have gone through. Notable examples include Bally’s acquisition of Gamesys in 2021 and DraftKings’ purchase of Golden Nugget Online Gaming, completed this year. These are the exceptions, however, not the rule.
What Was Behind the M&A Frenzy of 2019-2020?
In large part, the trend was sparked by the repeal of PASPA in 2018. Hopes were high for sports betting and its impact on other forms of gambling expansion. Larger companies gobbled up smaller ones for a few reasons:
- Bringing technology in-house, rather than relying on B2B suppliers
- Market access and local expertise
- Brand power
- Building cross-vertical synergy
Although not explicitly stated, there was probably also a desire to grow bigger for its own sake, to earn the right to boast of being a market leader.
Why Don’t We See More Acquisitions Now?
So what happened? Quite a lot. Not much about the industry is the same as it was in 2020. That’s true globally, but especially so in the US.
Goals Have Been Met
For starters, many US-facing companies accomplished their M&A goals during that buying frenzy.
Once a company has a recognizable brand in the iGaming and sports betting spaces, the technology to support those brands, and market access to launch, what’s left?
Those sorts of acquisitions are one-offs. The few big purchases we’ve seen in the past two years have had specific purposes. Bally’s, as a latecomer, was still in search of technology, thus its Gamesys purchase. Meanwhile, MGM is in the process of buying LeoVegas, as an alternative way to obtain a presence outside the US. That’s likely because its “Plan A” – the Entain offer – didn’t work out.
Once a company has all those necessary components, further purchases are mostly just about scale. That makes them a lower priority, except when capital is plentiful.
US iGaming Expansion has Stalled
Although US sports betting is going well, the total online gambling market isn’t where some thought it would be. Post-PASPA enthusiasm created some early wins for online casinos in Pennsylvania, Michigan and West Virginia.
In 2020, it seemed reasonable to hope that, by now, more East Coast and Midwest states would have joined the club. Instead, we got only Connecticut, with room for just two operators.
Sports betting continues its expansion, but soon all the low-hanging fruit will be gone. Online casinos are by far the bigger money-maker, in any case. Until we see some momentum start to build again for iGaming legislation, enthusiasm about the future potential of the US market will be lower.
Capital is Drying Up
The other big trend of 2019-2020 was massive spending on promotions. That, too, was based on outsized expectations for the market’s future.
That hasn’t stopped entirely, despite some operators looking to rein it in. Shareholders have cooled on the idea considerably faster. DraftKings, in particular, has faced tremendous shareholder pressure to quit spending and start taking profits.
Acquisitions cost money. In this industry, that usually means hundreds of millions or even billions of dollars. One way or another that comes from investors. Even in the case of an all-shares transaction, the new shares dilute those of existing stockholders.
In 2020, coming by capital was easy. Now, we see companies like Bally’s returning it to their stockholders rather than spending it to keep them happy and bolster share values.
Nobody Wants to Sell Low
Finally, we’re in the midst of a global economic slowdown. Most stocks are trading below the price at which they began the year. The online gambling industry has been particularly hard-hit for the reasons we just mentioned.
Since the market goes in cycles, everyone expects a recovery at some point. How soon and how strong are matters for debate. However, it means that, at the moment, takeover offers are lowballs compared to what the companies were worth last year and what they hope they will be worth again in another year or two.
That’s probably what happened with PlayAGS. The offer of $10 per share represented a substantial premium over the going rate. Even so, it seems that the company – or its large institutional shareholders like Apollo Global Management – felt that it wasn’t good enough.
To persuade companies in a share value slump to sell, would-be buyers might need to offer even higher premiums. However, their own shareholders are unenthusiastic about paying so much more than the sticker price. In other words, the M&A market seems to be at a deadlock, in addition to the other factors.
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