Kindred Group’s all cash offer for 32Red marks a meaningful and well-priced entry into the UK online casino market. With robust FY results and 20% growth in Q117 net gaming revenues, our standalone 32Red forecasts are largely unchanged, underpinned by continued margin expansion and high cash generation. Within an enlarged group, there should be additional revenue and cost synergies, suggesting upside to our numbers. Consideration is expected to be paid in mid/late May.
32Red’s FY16 results were characterised by 28% revenue growth and a doubling of EBITDA (from £5.2m to £10.6m). With high operational leverage, 32Red’s returnsdriven marketing has led to sustained underlying margin expansion and, as the business continues to scale, we forecast 2017 EBITDA of £15.6m (20.4% margin). After the deal, we would expect synergies to provide further upside to our numbers.
Kindred’s acquisition of 32Red marks a meaningful entry into the UK online casino market. 32Red believes it is the 11th most recognised UK online casino brand despite only having a 3-4% market share. On 2016 figures, 32Red would comprise c 10% of the enlarged group’s revenues, of which UK casino revenues are c 7.5%. 32Red is a high-growth, cash-generative business and Kindred expects the deal to be earnings accretive within the first financial year. The UK online casino market is highly fragmented and benefits of the enlarged group include access to Kindred’s extended range of content and a larger marketing budget.
Kindred Group is a pure online gaming operator, domiciled in Malta, with a strategy of entering only regulated or soon-to-be-regulated markets. Since 2005, it has acquired and successfully integrated eleven companies, including Stan James Online in the UK. The 32Red deal will help to reduce the group’s regulatory risk, and specifically dilute the impact of the upcoming Dutch re-regulation.
Now 32Red is trading ex-dividend, the acquisition price of 196p per share equates to 10.2x EV/EBITDA and 13.9.x P/E for 2017. This is higher than the peer group average of 7.8x and 12.5x, but given 32Red’s market positioning, regulated bias, successful ROI marketing and high cash flow generation, this premium appears appropriate.