Playtech plc (ALL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's presentation detailing Aristocrat's offer to acquire 100% of Playtech. My name is Trevor Croker, Aristocrat's CEO, and joining me today is Julie Cameron-Doe, Aristocrat's Chief Financial Officer; and Mitchell Bowen, Aristocrat's Gaming CEO and Chief Transformation Officer. Before we begin, please note the usual disclaimer statement on Slides 2 and 3 of the presentation materials. Due to legal restrictions, we are unable to discuss the equity raising other than the basic terms, so we would appreciate it if no questions are asked on this call about the equity raising beyond the basic terms. I'll now move to today's agenda on Slide 4. This morning, we'll be providing a summary of the offer to acquire Playtech, together with detail on Playtech's business, the strategic rationale for pursuing the acquisition, the characteristics of the combined group and details of funding arrangements, including an overview of the proposed capital raising. We will then comment on our trading update before opening the floor to your questions. I'd also note a number of slides in the appendix to this presentation, which I want to speak to, which may be helpful in providing extra context to the proposed acquisitions. All amounts referred to are in Australian dollars unless otherwise specified. Moving now to Slide 6, which provides a summary of the proposed acquisition on a page. I'll speak to a few key points only. In line with today's announcement, Aristocrat offered to acquire 100% of Playtech at a cash offer price of 680 pence per share for total consideration of AUD 3.9 billion. Playtech is a leading technology provider that develops platforms and content for the global gaming industry. The transaction represents a multiple of 11.4x Playtech's June 2021 LTM EBITDA and is expected to generate mid- to high single-digit EPSA accretion in the first full year of Aristocrat ownership in FY '23, including cost synergies. The anticipated EPSA accretion includes the estimated impact of the combined growth potentially exiting certain jurisdictions, which may not be consistent with Aristocrat’s risk appetite and approach to compliance, which may reduce Playtech's earnings by EUR 50 million to EUR 80 million or AUD 78 million to AUD 125 million in annual EBITDA. The acquisition will be funded by our fully underwritten $2.05 billion Term Loan B get facility along with a $1.3 billion fully underwritten pro rata accelerated renounceable entitlement offer called PAITREO and $1.1 billion in cash. Aristocrat's expected pro-forma net debt to EBITDA is expected to be less than 2.5x at completion. The transaction is subject to approval by the Playtech shareholders, the function of the all of main core and certain antitrust, start investment, gaming regulatory and financial regulatory consents and other approvals being obtained alongside certain more general conditions. The transaction is also subject to the sale of Finalto which was announced by Playtech on 29 September 2021, being approved by Playtech shareholders and that there be no amendments or non-compete or exclusivity arrangements agreed by Playtech in connection with its structure agreement with Caliente. As you will see in the presentation, Aristocrat has received letters of intent or irrevocable undertakings from a number of major Playtech shareholders to vote in favor of the transaction. Moving now to Slide 7 for a summary of the strategic and financial rationale of the acquisition. The acquisition of Playtech offers compelling strategic and financial benefits. It will provide Aristocrat with material scale in the already large and growing iGaming and online sports betting segment selectively referred to as online RMG. This represents an estimated total addressable market of USD 70 billion globally and is predicted to grow in line with broad consumer and technology trends, which has only accelerated through COVID together with the regulation of additional jurisdictions. Online RMG offers new and complementary growth channels for Aristocrat’s land-based gaming business and content. The acquisition will deliver medium-term revenue and earnings growth, in particular, in the fast-growing North America online RMG segment, combining Aristocrat's strength and exceptional gaming content, long-term customer and regulatory relationships with Playtech's technology and platform. This is one of the key upsides. On a combined basis, Aristocrat and Playtech distribution, technology and content will meet a much broader range of customer and player needs and deliver new and connected experiences, unlocking additional value across Aristocrat's portfolio and deepening customer engagement. Through Playtech’s Snaitech business, a leading Italy exclusive omnichannel gaming operator Aristocrat will have the opportunity to operate and innovate in multiple European markets across the entire value chain and free of channel conflict. The transaction is expected to be mid- to high single-digit EPSA accretive in the first full year of Aristocrat ownership financial year '23. Per forma, the annualized cost savings and the estimated impact of risk that potentially withdrawing from certain jurisdictions, as previously referenced, Aristocrat is also expected to maintain a conservative gearing position and is committed to maintaining its current strong credit ratings. Turning now to a recap of Aristocrat's proven growth strategy on Slide 8. Many of you will have seen our strategy previously. It describes our approach to growth at Aristocrat. We have an unwavering focus on share taking through sustained investment in great products, the best people, and capability and strong business fundamentals. We deliver above-category organic growth and accelerate our process through strategic, accretive M&A, in particular, where that delivers us new capabilities and access to new segments. Our focus is long-term as we demonstrated by maintaining investment in D&D as well as our people, culture and talent throughout the recent COVID impacted period. The acquisition of Playtech is highly aligned with this strategy. We believe that online RMG represents the next logical adjacency for our gaming business and strongly supports our customer and player focus. Leveraging our balance sheet strength, we'll achieve instant scale and capability in this fast-growing global segment, further expanding our recurring revenue base and continuing to diversify our operations for sustainable long-term growth. Turning to Slide 9. This slide highlights how Aristocrat and Playtech's distribution, technology and content capabilities will combine to meet a broader range of customer and player needs. It also shows the size of estimate of opportunities across the gaming value chain and in key segments. The gray boxes highlight Playtech's capabilities, and the shaded boxes highlight potential further capabilities for segments that could be addressed as future adjacencies. I won't talk through all the details, but the message here is that our businesses are not only highly complementary, but we come together to deliver a powerful integrated network of connected gaming experiences for customers and players that will be ideally positioned to meet emerging trends and demand. I'll now turn to an overview of Playtech's business on Slide 11. Playtech is a leading technology provider that develops platforms and content for the global gaming industry. as well as engaging directly with players as a B2C operator in select segments, as I mentioned. Listed on the FTSE and headquartered in London, the company generated $1.7 billion in revenue and $396 million EBITDA in the 2020 financial year. Nearly 100% of its revenue is recurred derived primarily from 2 key divisions, B2B and B2C. Playtech's B2B business covers all key RMG segments, including by gaming, live casino, poker, bingo and sports betting. Monetizing by our revenue share model, It provides proprietary online gaming technology and capabilities to gaming operators globally through an information management system, or IRS, and covers the end-to-end gaining value chain. Playtech's B2C business leverages its proprietary technology and capabilities to operate online gaming machines and retail bidding directly as an operator. It predominantly consists of Snaitech. Aristocrat supports the sale of Finalto as previously announced by Playtech, and we have, therefore, excluded the business from these materials and the acquisition case. Turning to Slide 12. Playtech provides proprietary B2B technology, leading game content, and operational services globally. Playtech is also a B2C operator that provides structured agreements and B2C solutions to global casino and gaming operators, including bet365, Caliente and Snai. Through its service offerings, Playtech is able to reach a broad spectrum of end users in casino games, poker, bingo and sports betting. Turning to Slide 13. As I mentioned, this acquisition presents an opportunity to enter the attractive online RMG segment at scale. Online RMG is comprised of iGaming, online sports betting and [indiscernible]. For Playtech and Aristocrat, the main focus segments within online RMG are iGaming and online sports betting. This is what we mean when we refer to online RMG. Online RMG is a complementary adjacency to Aristocrat existing gaming and digital businesses and provides another distribution channel for our world-leading content. As previously referenced, we believe it has a very strong growth trajectory driven by underlying structural trends. With product innovation, customer demand and the opening of regulated jurisdictions, we believe the current USD 70 billion addressable market has the potential to grow in line with broader consumer and technology trends, which has only accelerated through COVID. The North American market is forecast to see the strongest growth over the medium term. Slide 14 highlights Playtech's scale and presence in attractive online RMG growth regions is over 170 global licenses and operate in over 30 regulated jurisdictions with significant growth opportunities in North America. Moving to Slide 15 in more detail on Playtech's B2B business. These figures provides proprietary online gaming technology and capabilities through the IMS platform regaining operators globally. Playtech is a top 2 global provider of live casino platforms, approximately 45% of B2B revenues derived from casino and is highly complementary with Aristocrat's existing gaming operations. In addition to the underlying technology platform, Playtech also provides access to more than 3,800 games through its platform as it develops games in-house across 7 studios. Moving to Slide 16. Playtech's IMS allows single user accounts, increased cross-selling and includes cutting edge tools to support responsible gaming outcome and regulatory compliance. It combines content, technology platform, licensee services and global distribution to provide a broad range of gaming solutions in over 30 regulated jurisdictions. These solutions include games management, data analytics, campaign management, loyalty programs, payments and risk enforce management, including newer customer and anti-money laundering functionality. The IMS is a one-stop shop and a complete technology solution across all the distribution channels. Turning now to Slide 17 for an overview of Playtech's B2C business. This consists predominantly of Snaitech, a leading Italy-based omnichannel gaming operator. Italy is a key European market with attractive dynamics. Snaitech is a fully vertically integrated retail and online gaming business with a parental proprietary technology, strong brand [ margin ] and large fixed cost base and operational strength. In financial year '20, B2C achieved revenue of AUD 932 million, of which Snaitech contributed 88%. From an EBITDA perspective, Snaitech contributed 95% of the AUD 217 million in reported EBITDA. Pleasingly, Snaitech generated significant growth in its online activities, accounting for 2/3 of its EBITDA profits. Other B2C brands within Playtech's portfolio include HappyBet, a retail sports betting shop business in Austria and Germany, and Sun Bingo, which Playtech operates on behalf of News U.K. As previously flagged, Playtech's B2C business present Aristocrat with an opportunity to try new capabilities and operate and innovate across the entire region in multiple European markets where we are free of channel conflict. I'll now move to Slide 19 to provide further details on the strategic rationale and why we believe this Playtech acquisition is so compelling. I previously talked through our key acquisition rationale and we're now supposed to reach a point starting on Slide 20. As mentioned at the outset, we've pursued a consistent and proven strategy at Aristocrat of growing share wherever we play, leveraging our increasing capabilities and our balance sheet to ensure adjacencies and expand our addressable market over time. In the gaming business, we've done that with the acquisition of BGT, and in mobile games, we followed a similar path to achieve growth and sustained performance. Entering online RMG with Playtech is the next logical opportunity to significantly increase and diversify Aristocrat's total addressable market and propel the next phase of growth in our business. Online RMG is currently a sizable opportunity, but significant growth is expected as I referenced due to underlying consumer technology trends and legislation in key global jurisdictions. Playtech's technology and platform will allow Aristocrat's long-term growth as more online RMG segments open up over time. Online RMG is also highly complementary to Aristocrat's existing gaming and free-to-play mobile business. It instantly increases Aristocrat's trend to around USD 300 million with further opportunity to unlock additional value across our existing portfolio. Slide 21 provides more detail on the U.S. online gaming opportunity. As U.S. states regulate to allow online RMG, our gaming customers are increasingly demanding premium RMG solutions, making it the right time for Aristocrat to enter the segment. Our gaming is currently legal and operational in 6 states in the U.S., with projections that it may reach 20 states by 2025 and obtain up to USD 25 billion to USD 30 billion by 2030. In terms of online sports betting, following the reappeal of a key legislative inhibitor in May 2018, the segment has risen up rapidly in the U.S.. It is currently legal in operation in 20 states, and currently, expectations are that this will increase to over 40 states by 2025. Slide 22 provides further color on the U.S. opportunity. I won't step through the details here other than to highlight that Aristocrat has a broad presence in U.S. gaming jurisdictions, operating in 41 states of the union along with travel jurisdictions. We are present in all 6 jurisdictions where iGaming is currently legal and available. Our expectation is that online RMG operations will enhance our existing gaming business with limited risk of cannibalization, giving complementary portfolios and strong customer engagement. We believe this combination of Playtech's proven RMG platform capabilities along with Aristocrat's world-class land-based and social gaming content, long-term regulator and customer relationships will unlock medium-term revenue and earnings growth, in particular, in the U.S. Slide 23 provides another deal of what this acquisition will deliver. We believe this opportunity will help us attract and retain even more of the industry's best content creators and talent over time. This acquisition will create a fully integrated gaming platform and we'll be able to quickly penetrate the online R&D segment globally and support Aristocrat's long-term growth operations. On a pro forma full year 2020 basis, the business delivered around $6 million in revenue with broad scope to grow from here. Turning to Slide 24. This slide provides a customer lens on the acquisition, which would allow us to utilize our world-leading concept and capabilities to meet a broader range of customers' needs and deliver connective experiences across land and digital gaming. Aristocrat's existing digital capability is also relevant, with our growing success in digitalization of land-based gaming content has the ability to create popular digital-based content. We'll bring these powerful combined capabilities to bear to enhance our existing product portfolio to deliver new gaming experience across multiple channels, deepen customer relationships and drive growth in the growing online RMG segment. Slide 25 sets out another way to think about our strategy, in particular, the growth in our portfolio and capability and the customer and player-led journey we have been on. This has been accelerated periodically through strategic acquisitions particularly Product Madness, VGT, Big Fish and Plarium, which have allowed us to broaden, and in some respects, connect our product portfolio, meeting more customer and player needs. The acquisition of Playtech allows us to take the next material step forward in this process, growth in key gaps in the effectability and portfolio in terms of online RMG. This is relevant as our gaming customers are increasingly looking for RMG solutions as the operating models continue to evolve. Finally, I'd like to further set out a strategic base for Snaitech and the B2C opportunity that is also a feature in its acquisitions on Slide 26. Snaitech provides Aristocrat with a fully scaled vertically integrated B2C operation, so I think it's the biggest contributor to Playtech's B2C division with financial year '20 revenue of AUD 816 million and adjusted EBITDA of AUD 206 million. Snaitech enjoys strong brand loyalty. It has an experienced local leadership team with an innovative infrastructure platform and proprietary technology. Snaitech had a solid performance in financial year '20 despite COVID-19 headwinds and pleasingly achieved 92% growth in online EBITDA, demonstrating the company's resilience, profitability and ability to generate cash. Playtech's business model and leading platform was rolled out to HappyBet, which is now under Snaitech management and provides an opportunity to expand the B2C business especially in select European countries. We view this B2C exposure as strategically relevant in the context of ongoing convergence and an important source of capability building for our broader organization. I'll now turn to Slide 28 and make some comments on the combined group and financial aspects of the proposed acquisition. Aristocrat has a strong track record of successful strategic acquisitions. I've referred previously to major acquisitions we have completed as part of our growth journey over the past decade for Product Managers in 2012 to Big Fish in 2018. Our approach to M&A is high discipline and anchored in an understanding of what would drive value into the future and how the acquisition accelerates our strategy. I'd also like to comment on our intentions following the completion of the acquisition and only we will undertake a detailed evaluation of the Playtech group and its businesses and operations. In particular, we'll do the following. Firstly, review projects, business in each jurisdiction to determine alignment with the risk strategy, profile and appetite of the Combined Group or its approach to compliance. Aristocrat identified existing and new growth in development products and services and now require additional investment to drive profitable growth. And finally, identify and formulate priority integration plans. Aristocrat has a focused approach to securing key talent. Access to further detailed information is required for Aristocrat to develop specific proposals with respect to Playtech's employees. We understand the importance of D&D to Playtech and its businesses. With technology platform and content innovation being a key driving factor in the success of its businesses, Aristocrat intends to continue to invest in this area. Specific areas of investment will be considered with Playtech management as part of our review. And we will apply Aristocrat's strong commitment to responsible gameplay and ensuring regulatory compliance across all operations. Slide 29 gives a view of the indicative composition of Aristocrats' Playtech acquisition. This is expected to significantly expand Aristocrat's operations in complementary segments, further diversify its portfolio and enhance its recurring revenue model. Post acquisition, Aristocrat's revenue is also expected to be diversified with outright sales and gaming operations making up 31% of pro forma financial year '20 revenue compared to 43% reported prior to the acquisition. Digital and online RMG will comprise around 69% of pro forma financial year '20 revenue compared to 57% prior to the acquisition. Recurring revenue is expected to increase from 80% to 85% post acquisition, with all of Playtech's B2C and around 95% of B2B operations considered recurring revenue. Turning to Slide 30. Aristocrat's earnings will be further diversified across segments and geographies post acquisition. Adding to the business's resilience, revenue from international regions outside of the Americas alliance has contributed 29% of total pro forma financial year '20 revenue compared to 3% on an Aristocrat stand-alone basis. Following the acquisition, gaming and digital are collectively expected to make up around 76% of the pro forma group EBITDA with RMG delivering 24%. I'll now turn to the sources and uses commentary on Slide 31. The acquisition will be financed by a combination of cash, debt and equity. An IFA is in place to do Aristocrat's committed financing available to pay the cash consideration to Playtech's shareholders as required under the U.K. Takeover Code. A AUD 1.3 billion equity raising by the way of an underwritten PAITREO will provide the fairest capable structure for Playtech's shareholders who participate in the raising. The balance of financing will come from a $2.05 billion Term Loan B debt issuance to be conducted prior to the acquisition completion and AUD 1.1 billion of existing cash held by Aristocrat. Turning to Slide 32. This is a financially compelling acquisition for Aristocrat. As previously referenced, post of the transaction, Aristocrat will review Playtech's business in each jurisdiction to determine alignment with Aristocrat's risk appetite and approach to compliance. We estimate the jurisdictions which we anticipate will be in the focus of the review contributed EBITDA of approximately EUR 50 million to EUR 80 million or $78 million to $125 million for the financial year ended 31 December 2020. The acquisition is expected to be mid- to high single-digit EPSA accretive in financial year '23, including cost synergies and inclusive of the estimated impact of the combined growth, potentially exiting certain jurisdictions as a result of the review. While the rationale for the transaction is to enhance the medium-term growth potential of Aristocrat rather than cost synergies, Aristocrat expects to achieve operating cost and scale benefits across the combined group, typical transactions of this size, including limited cost savings below the Playtech listing. The anticipated cost savings are not expected to fully offset the potential impact of the combined group exiting certain jurisdictions as a result of the review. Excluding cost synergies, the acquisition is expected to be low to mid-single-digit EPSA accretion. Aristocrat expect to deliver additional medium-term revenue and earnings growth, in particular, in the North America online RMG segment through utilizing its long-term customer relationships and industry-leading content, along with Playtech's technology and platform. At completion, Aristocrat expects pro forma leverage of less than 2.5x net debt to EBITDA, and is committed to maintain its current strong credit ratings as previously noted. Further details of the leverage impact of the acquisition are set out on Slide 33. I would just highlight here that consistent with our established track record, risk is expected resume deleveraging following the completion of the Playtech acquisition. I will now move to Slide 34 and 35, which set out the details in terms of the PAITREO and the entitlement offer timetable. Shareholders will be entitled to subscribe for one new share for each of their existing 20.56 shares under the Patriot offer to raise approximately AUD 1.3 billion. The entitlement offer will be deducted at AUD 41.85 per new share, and proceeds from the item will be used to reduce the proportion of the commitments to borrowings under ISI and for associated costs. Please note the timetable and key dates for the important offer are set out on Slide 35. On the off-set there are trading update in respect to Aristocrat's results for the 2021 fiscal year. Aristocrat expects to announce strong results for the 2021 full fiscal year to 30th of September 2021, including normalized NPATA of $864 million. This performance represents 81% NPATA growth on the 2020 full fiscal year, reflecting enhanced leading position in gaming operations measured by an inflow base of approximately 54,000 units. Game performance of industry-leading fee per day of approximately USD 51. Sustained growth in 4 share across key gaming outright sales segments globally despite some regional lockdowns, i.e., Australia. Digital bookings up 48% on financial year '20 to circa USD 1.8 billion, with user acquisition expected to be at the top end of the historical range of 25% to 28% of overall digital revenues. Average bookings per daily active user increased 25% from USD 0.59 in financial year '20 to circa USD 0.74 in financial year '21. Continued D&D investment to drive sustained long-term growth with investment up in absolute dollars and consistent with historic levels on a percentage of revenue basis. An increasing SG&A across the business as we continue to scale, invest in and improve on our growth strategy. This includes continuing to identify adjacencies to expand our capabilities to create new business and growth through product, distribution and investments, including M&A. We also maintained strong operating cash flows over the year with a cash balance of around AUD 2.4 billion and a robust balance sheet with net debt to EBITDA of 0.5x. Turning now to Slide 38. I'd note again that further information on the acquisition and the online R&G segment has been provided in the appendix for your review. In summary, and before I hand back to the operator to open the floor to your questions, let me recap the dimensions of this proposed acquisition. The proposed combination of Aristocrat and Playtech would materially accelerate Aristocrat's growth strategy and deliver shareholder benefits long term. If we deliver Aristocrat's instant material scale and capability in the USD 70 billion online real money gaming segment, the opportunity to enter the fast-growing U.S. online RMG segment at an early stage in this trajectory is particularly exciting. The combination of Playtech's proven RMG platform capabilities with Aristocrat's world-class land-based and social gaming content, long-term customer and regulator relationships will forge a true industry leader in the global online RMG space, particularly in terms of B2B capabilities. Together, we believe that we will be well placed to meet fast-evolving customer needs and client preferences, including the new and connected gaming experiences. The proposed acquisition continues Aristocrat's approach of investing in medium to long-term growth, and we're extremely excited about the opportunities that we can bring for our shareholders, people, customers and place. Finally, I want to stress that we are absolutely convinced that the benefits, the combination of Aristocrat and Playtech will deliver to stakeholders. Thank you. And with that, I'll ask the operator to open the line for questions.