Online gaming M&A levels up

The online gaming industry has flourished amid stay-at-home orders

Few industries are as well-insulated from the ongoing pandemic as gaming. Stay-at-home orders have pummeled brick-and-mortar-based industries such as manufacturing and hospitality, but have left digital industries comparatively unscathed.

With consumers having more free time, being confined to their homes and seeking distractions, gaming has been one of the prime beneficiaries of the COVID-19 crisis. 

EA Sports, one of the world's top ten games publishers, reported revenue of US$1.46 billion in Q2 2020, its best performance in its 38-year history. This was a nearly 21% increase on the same period last year and came despite the absence of any blockbuster releases from the developer. Instead, its live service titles outperformed amid quarantine measures.

Gaming as a whole had already eclipsed both the music and movie industries combined prior to 2020. The global games market was estimated to generate US$152.1 billion in revenues last year, according to industry data provider Newzoo. This compares with US$41.7 billion generated by the global box office and US$19.1 billion in music industry revenues.

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Sony has been active on the M&A front, making a US$250 million investment into Epic Games, the developer of Fortnite, a game that counts 350 million registered users across all platforms, including mobile. Fortnite is so popular that despite its revenues falling by 25% in 2019 it still managed to earn more than US$1.8 billion.

The Sony-Epic alliance is the latest example of traditional console and PC gaming firms moving into the mobile arena, one of the most prominent examples being the 2015 merger between Activision Blizzard—maker of the hugely popular console and PC titles Call of Duty and World of Warcraft—and King Digital, the developer of Candy Crush Saga, the most downloaded mobile game in the world.

Mobile is big business—it is estimated that 45% of the gaming industry's revenues in 2019 came from mobile, owing to the ubiquity of smartphones and the relatively low cost of mobile apps, which results in huge sales volumes.

Zynga, maker of social media game Farmville, has been highly acquisitive. In June 2020, the US-based mobile game company acquired Turkey’s Peak Games for US$1.8 billion, expanding its active daily users by 60% with the deal. And in August, Zynga acquired 80% of Rollic, a mobile games developer and publisher with a portfolio of popular hyper-casual games, for US$168 million, and will acquire the remaining 20% of Rollic over the next three years.

Another mobile game developer that has continued to be acquisitive during the COVID crisis is Sweden’s Stillfront, which in addition to the US$400 million acquisition in January of US-based Storm8 also bought Candywriter in April for US$74 million. Meanwhile, in May mobile advertising firm AppLovin Corp. acquired social games developer Machine Zone in a US$500 million deal.

Gambler's dilemma

As with online video gaming, online gambling has been another beneficiary of the coronavirus pandemic. With casinos and other venues closed amid quarantine measures, more gamblers have been forced onto the internet. This has helped to ensure that major deals that were signed before the crisis successfully completed in spite of economic uncertainty.

Among the largest is Irish group Flutter's US$10.4 billion acquisition of Canada-based Stars Group, which owns several online gambling brands including PokerStars. The deal, announced in October 2019 and finalized in May 2020, has created the world’s largest gambling business by revenue.

Meanwhile, Diamond Eagle Acquisition Corp., a special purpose acquisition company (SPAC), combined with US-based DraftKings and Isle-of-Man-based SBTech, both online sports betting operators, in a US$2.7 billion reverse takeover. The deal was announced last October and closed in April, allowing the new entity to begin trading on the NASDAQ despite COVID-19 putting most major sports tournaments on hold.

Online gambling comes with a unique set of challenges that sets it apart from the video game space. While some markets such as the UK are subject to light-touch regulation (age restrictions, for example), the situation in the US is more complicated. There is no federal law against online gambling, so placing bets on the internet is permitted—but only on sites based outside of the US. And state-level legislation is even more complex than the federal rules.

In New Jersey, home to Atlantic City, online table games have been legal since 2013. In Nevada, home to gambling mecca Las Vegas, online poker has been permitted since 2013, but other casino-style virtual games continue to be banned. Meanwhile, sports betting is a market in the process of being liberalized after the Supreme Court overturned a federal ban on sports betting on May 14, 2018. Since the ruling, 18 states have legalized the practice, including New York, New Jersey, Nevada, Oregon and Pennsylvania, with more expected to follow.

It is this deregulation in the US that made the DraftKings deal a compelling proposition for investors in Diamond Eagle SPAC. Since the Supreme Court's decision two years ago, traditional casino operators like MGM Resorts and Caesars Entertainment have expanded their sports-betting operations beyond Las Vegas.

In September 2019, Fox, the Murdoch family’s media conglomerate, added the service to its offerings. At the same time, DraftKings and direct competitor FanDuel have pivoted from fantasy leagues into sports betting across the country as the market opened up. In the three months following the listing of DraftKings in April, its share price more than doubled, a testament to the investment thesis.

The pandemic has suspended major sporting tournaments, temporarily limiting the number and type of matches that users are able to wager on. The NFL, MLB and NBA are all attempting to progress with their competitions while protecting the wellbeing of their players, with varying degrees of success. This uncertainty has negative short-term implications for sports betting companies.

But with an estimated US$150 billion black market sports betting industry in the US, ongoing deregulation suggests that the long-term potential will drive considerable revenue growth and, with it, M&A interest.

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