Morgan Stanley Expects Consolidation in Online Gambling Market to Continue

February 1, 2021 9:42 AM EST

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In a research note sent to clients today, Morgan Stanley analyst Ed Young expects that the trend of consolidating within the US online gambling market to continue.

Online gambling operators are looking to diversify their revenues and achieve scale benefits amid the rising tax and regulatory headwinds in core markets, according to Young.

“Over the past 5 years, the combined revenues for the top 5 operators in global online gambling have tripled to £12bn from £4bn. Put another way, we expect the largest operator, Flutter, to generate more revenue than the top 5 operators combined did in 2015. While this change has been partly driven by market growth (~70% in this timeframe), the majority has come from M&A,” Young said.

The bank forecasts the US market TAM going from $1 billion in 2018 to $15 billion in 2025 in the light of fast state liberalization and early-stage revenues that have beaten expectations.

“European gambling sector market capitalisations are now over double what they were prior to the repeal of PASPA in May 2018 ($86bn vs $37bn), with Flutter and Evolution the main beneficiaries. This compares to flattish in the US peer group ($112bn vs $109bn) with DraftKings and the significant appreciation in Penn National offset by lower market caps in Las Vegas Sands and Wynn Resorts.

“As evidenced by the Caesars-William Hill transaction and (the rejected) MGM-Entain offer, M&A appears likely to continue to play a role as companies position themselves to develop appropriate product, technology and operational capacity to succeed in the market, as well as the right ownership structure to see this recognised in stock valuations. Large US casino operators had historically mostly focused on brick-and-mortar opportunities, but given the explosive growth of US online, they have looked at ways both big (above examples) and small (WYNN's merger with BetBull) to best position themselves for the new market reality,” he adds.

The future deals are likely to seek cost synergies, which have previously amounted to 4-6% of combined group revenues, or 15-20% of EBITDA. Moreover, Young believes the sale of William Hill’s non-US assets could “significantly alter the competitive landscape.”

“William Hill is the fifth largest operator globally by online revenues and could therefore concentrate share for a large operator or vault a smaller operator into a significantly larger scale position. We assess the performance of and considerations around William Hill's Online and Retail divisions, and show it could also feasibly be split into as many as five different parts,” he added.

Overall, consolidation of the market is likely to lead towards better leverage over pricing negotiations with suppliers.



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