Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:06] Speaker B: Welcome back to Right to the Source. My name is Robin Harrison and I am here, as ever, with Ed Birkin. I've watched you frantically prepare for this in the past few minutes before we hit record. Ed, how the devil are you?
[00:00:18] Speaker A: Hi, Robin. I'm good, thanks.
[00:00:20] Speaker B: Excellent, as you say.
[00:00:21] Speaker A: We're trying to change the format a bit, make it a bit shorter and potentially less preparation will mean that we'll talk for a shorter period of time and make it more interesting for people.
[00:00:30] Speaker B: That's a great way. I hope so. We'll see how that goes. I think we did quite well in the last episode. I think we kept that under 20 minutes. That felt short, that felt snappy. And let's see how we go on today because obviously there's quite a lot going on. There's always a lot going on in this industry, but over the past week there's been a few kind of interesting things come up on IGB and the things that we've been covering. A not least a potential sale for bet365. You know, we've always threatened to bring it back and talk about it because it's, it's always an interesting company and whenever there's a lack of information, there's a real clamor to find out what's going on. And, well, this week it's potentially got very interesting. Funnily enough, of all the. Of all the sites to cover it, it's been the Guardian. The Guardian brought the story and the story is that Senior Management at 365 have been speaking to bankers in New York about some possible sales, some possible ip. So we don't really know as. Is there one not cover. Not. Sorry, they don't comment in these kind of reports, but it's potentially coming at a very interesting time because365 has been this sort of monolithic company standing kind of atop the industry. And then in recent years, it's obviously expanded into the us. It's got leading positions across multiple European markets, it's divested the Chinese business and it's making a big play for Latin America, specifically Brazil. I think it's also Mexico. Not sure what it's doing in Peru, if it's even in there, but it's got a lot going on and. Oh, yeah, I mean, what, what, what do you make of this? Do you feel that an IPO is possible for a company that's been so private for so long?
[00:02:19] Speaker A: I mean, if you'd asked me a year ago whether I thought bet365 was going to do something like this, I'd have said no. I think when you saw in the annual accounts that the football club had been spun out, that could just be, for whatever reason, want to keep it separate. Then when you heard they're pulling out China, it made people question things. And I don't think this therefore come as a big surprise or at least it makes it believable. My concern with an ipo straight up, or I think it's less likely and a partial sale was meted by the Guardian, is that there would be concerns as me as next analyst about, you know, it's been run by Denise and John for so long, you know, how much are they going to want to stay around? How important are they? I think to get the maximum value there needs to be some transition of management. And that's why I think it actually sounds more believable and either partial stake or private equity, not listening to need of money, but in terms of get them in to get a management transition so that they know this business can, you know, continue to run and be this behemoth in the industry without Denise and John being there, pulling all the streams and relying entirely on them. The other bit I say is I remember speaking to them when I was a junior analyst in banking and speaking 15 plus years ago, actually somebody said to me, do you think we should ipo? And I said, for me personally, it'll be great because having you in the sector would be fantastic. I said, but if I were you, I'd be the last thing I'd do because you don't seem to need the money. And why do you want some snotty nosed little analysts like me, you know, questioning what you do if you slightly miss numbers or growth is down on a course, the earnings call, when at the moment you can just do what you believe is right for the business longer term and not have to answer to any, any little shits in the industry, in the banking industry. So. And he laughed and said, yeah, I completely agree. So it's interesting they are, you know, looking down this route because it is a, it is a massive change from, as you say, a private company to being public and then answerable to people is huge. And that's why, you know, they're talking about potential private equity stuff. I think that could be the way to go. But if you are going to IPO and it makes sense than to do the US market because one, you get better valuations.
Two, I mean, if I were an investor looking at the US market and we do not do investment Advice on this. But if I were doing so, you know, who's got the most potential in the US market as far as I'm concerned about 365.
I mean, you know, they've got two point something market share at the moment in sports betting. You know, could they double that? Yeah. Could they quadruple that? Yeah, I don't think it's unheard of in the us And Joule can't double their market share. They definitely can't quadruple it because that'd be more than 100%. Neither can DraftKings. I think we see BET MGM doing it. I mean, we can kind of forget about Penn for a moment. So who do you actually see as an operator in the US who is any meaningful size tool who can double triple their market share?
Fanatics. Yeah, that's fair.
[00:05:19] Speaker B: I think Fanatics is worth bringing them into the conversation.
They're a challenger brand. But the other thing, when you look at fanatics, you've got Matt King, you've got Ari Barod, you've got Brand Tydon, you've got Ted Moss, you've got a bench, you've got a lot of people that you can see playing leading roles in that company for a long period of time. With 365, it's very much the quotas family, I'm sure. Like there are great people there, but when it comes to leadership, it always goes back to the family. Yeah.
[00:05:50] Speaker A: Why? I said I think it'd be difficult for them to, to operate. I've been on now, I was involved in the Betfair ipo. You know, management is a, is a big thing and continuity, you know, I, look, I, I don't know them, you know, but you know, I'd be very surprised if I'm running a business like that, you know, and then wanting to, let's say from the IPA and then have people question, hey, you kind of want to get out in my view. You're not involved in that, of course.
And a lot of them, let's be honest, there's some good analysts out there, but some of the questions that get asked, they'll be being asked questions and feeling they have to answer them about people and they go, they don't even know what I'm on about. Why am I, this isn't even a question. Why am I having to try and explain my business to you? So, yeah, and then the other thing about the US is, let's be honest, I mean it's not just so, okay, Asia's China's gone so if you look at what at least I estimate the next biggest markets is. So you've got the uk, right? Brazil, Argentina, Canada, Ontario. They're still market leader, you know, for this US companies going in and you know we're going to go into Canada and do that. No they're not at least in supports but they have a pretty short overall market leader. I mean they got Spain, you know, doing well but they've got the US online. So they do have this latam area that is a big growth driver and material part of their business.
Why would he list in London? I don't get it. So all of the stuff in the story kind of makes logical sense to me.
[00:07:08] Speaker B: Do you feel they need to bring in more talent at that high level? Going back to what I was saying about the fact that it always comes back to the family. Does bet three need a bigger bench rather than admittedly the outstanding CEO of online gambling going back to the early days, the one executive that has been there the entire time that has evolved with the market. Do they need to bring in more talent at that high level or at least make that talent more visible? Because let's face it, while they're not visible, they have outstanding talent because just look at the business, you know, across tech, across regulatory affairs, across product, across operations, there have to be a lot of outstanding people there.
[00:07:53] Speaker A: Yeah. And obviously like you know I don't think anyone can question anyone saying can question Denise's talent but that's, you know there's co CEOs as well. So obviously John's, John's done a lot to build that business. But yeah, I mean whether one or two of them. So without doubt if I were looking as an analyst, if I were writing a report on the valuation of this pre ipo, the big red flag will be how can this business run? Are they going to stay around Regardless of what they said, are they going to stay around? How can it run with that one? Because as you say there has to be some other exceptional talent in that business. You don't become you know, biggest brand. Okay, so that I've got number three in the UK market share but in terms of individual brands, number one obviously Entane, flatter, have multiple plans. Brazil were number one. I think they can mark number two. Now we have the topic, you know Mexico actually have them as number two behind Caliente Argentina. I think that these licensed number one, Ontario number one, Spain number one. You know that's just not two people. But yeah, they'll have to try and say showcase that or to be honest, I just don't really see how. I think it's difficult for them to maximize the value of this while not having external management in. And external management have also shown they're able to run it, which is why I'd be surprised if they're able to get away with a full IPO as is. And I think a partial thing is more likely.
[00:09:05] Speaker B: What about a combination with another brand? I mean, one of the, one of the companies that has been cited just, you know, just by, you know, sources that we've talked to when we were covering that story is DraftKings. Because DraftKings is very much a U.S. business. Absolutely. U.S. business.
Does a combination with the 365 which essentially internationalizes something of that nature. Do you see any scope for that sort of deal? Do you even think the DraftKings is the right company to combine with? I mean, the US gold rush is plateauing. You know, we're on track to have no new states come online in the current legislative session. So does that then mean that they should be looking for a combination with, I mean, someone like a Super Beta Botano, you know, these, these real kind of rising stars that are essentially taking, you know, kind of. I suppose where I'm getting with that is these companies that we've seen, the super bets, Botanos, they've really kind of following the same approach as the established kind of endemic industry brands. They've grown market share, they've taken the expansion opportunities and they've executed on them perfectly. They've done really well. They built up this position, this brand recognition arguably for someone like Botano, culminating when they are all across the Copa America and the Euro is two biggest football tournaments that happened last year. Poker for US listeners, Botano are everywhere. All the pitch side hoardings, they were everywhere. Do you see these companies as potentially a more logical combination?
[00:10:45] Speaker A: That was a long question. So, I mean, okay, if you talk about work backwards. So Patano, yes, they were everywhere. Super pair everywhere in Brazil, you know, with the, the Rio Carnival sponsorship. I think just throwing money at sponsorship doesn't necessarily work or bonuses. You need a decent product. But I think these two have it. I mean, if you look at, if I'm looking at, you know, the earnings that William Hill and Tane even flutter outside of Fanduel were making, you know, 10 years ago when I was in the city and look at them now.
And then you look at Super Bet, that was a, you know, one brand. I don't even know if they were even online In Romania back in, back in 10 years ago now doing about a billion or so of revenue tizen Tano doing 3 billion. I mean like they really have just completely outstripped operationally everything all the kind of old guard so to speak. So I think they are, they are interesting companies and great companies. They clearly have good products and so if you are a draftkings either them or 365 would it be an attractive deal us market we can probably touch on a little bit because I don't think you're allowed I don't think Megan let you but I'm off to Miami with some of your IGB colleagues next week for conference and you know the sports isn't where, where do you see the growth coming from sports. So if you look at Q1 yes, it's not terrible. GGR is up 13 still a couple of states to report March data handle up 12 but I gaming's where, where the growth is. You know that's up 27 in Q1 March up 26 year on year brand new, you know new record high in every single market that has igaming so that's a growth driver which I know it's got golden nugget and kind of like pushing it in igaming you know on the sports side do you see. Do you see loads of growth? I know they're blamed margins hold margins for stuff but you know hold margins aren't going to expand forever and actually if you look at what's what it's done in the last 612 months it's kind of the same as it was the year before. So you know you can't just take the a good month of whole margin and say this is you know margin expansion, underlying margin expansion and the bad month is just sports results, you know nine and a half percent. Is that kind of where they're getting I mean I don't see going massively up especially if they're going to push in play which I see as a big driver and the simple bet acquisition, you know that's all about micro betting so draftkings are they going to try and grow from that micro betting in play? Well that's lower margin so you know compared to you know same game partners and they can get in in play parlays but so I don't think that whole margin bit so yeah if you're looking at international businesses can they then afford it? You know about 365 and I'm not going to comment the valuation but because things will move very Quickly. But it's about 9 billion. Is it 9 billion sterling, $12 billion, something like that?
[00:13:33] Speaker B: Yeah, I think it was name billion we're talking about.
[00:13:35] Speaker A: You know, how do DraftKings do that? Because if I'm in the case family, I'm not accepting DraftKings actually. Like look what happened when they tried to do it with, you know, books and then entertain and all that and then they turned it down and then the share price cuts like 80%. Now I'm not saying it's going to happen again, but you kind of.
Would you swap. Would you swap equity in a business that you've built up that you know, is as far as you're concerned, as solid as anything equity and something that a lot of value is based on some EBITDA target in a slowing US market, you know, three years from now. So they'd have to raise more cash. I think so. I think that'd be very difficult.
You know, super bet one. This feels weird talking about this given when I was in banking we weren't allowed to suggest any NA thing in case, you know, compliance and all that.
[00:14:22] Speaker B: Oh, the gloves are off now.
[00:14:24] Speaker A: Can they do secret bet? Well, who owns Super? Is it Blackstone?
[00:14:27] Speaker B: Yeah, Blackstone have an equity stake and.
[00:14:30] Speaker A: Didn'T they say they're spending a billion euros in marketing this year, 200 million of which is in Brazil, to like really kind of push or something like that to kind of really push expansion. So they're going to want to get hell of a good return. The valuation on that isn't going to be cheap.
I mean trying to buy Kite because all we have a state that they in. In. In it. And so, you know, given how they're growing again, all these 3 billion of revenue, are they and growing. I just don't really see. Unless people are willing to accept DraftKing, I don't really see how they're gonna will be able to afford something of that size personally. But there's a lot of people paid a lot of money on Wall street to come up with clever ways to raise money for it to happen. Speaking of which, we haven't really heard about SPACs for a while, have we?
[00:15:11] Speaker B: No. The special purpose acquisition company for anyone who's forgotten, that whole era came and went very quickly. It was very much. It felt very much a pandemic. Baby, you had DraftKings at the end of 2019 with a. Was it Diamond Eagle, someone like that?
[00:15:29] Speaker A: Yes, Diamond Eagles was. Yeah.
[00:15:32] Speaker B: And well, you had that era. But thinking back, the returns weren't really that Great. There was a few companies that listed through that I think have done reasonably well. I think Rush Street Interactive is a kind of criminally underrated business. I think they've done an incredible job. But looking at the other companies, it moved very quickly from these deals popping up to the SPACs being formed and then doing nothing, essentially missing out in the window to set to agree the reversed acquisition and things really have tailed off. There was a point, the Banerjee deal, the big TV broadcaster which obviously includes bitclik, Everest Group, when that came to Europe, there was, there was of course speculation about further deals of that type, but we haven't seen that either. I mean, I think, I think that SPAC boom feels well and truly over.
[00:16:29] Speaker A: On which actually a couple of things I pushed onto. So I agree. I think Rush street is, is something that's doing, you know, I won't call it undervalued. So I'm not going to go into equity valuation. But in terms of what they're doing and again talking about investing in the US their focus on Latin America, you know, I think they're doing very well. And we're. This segues into. Almost as if we actually did rehearse this segues into a lot of stuff we're doing on Latin America. And we've actually got survey data through now for Mexico, Peru, Chile, Argentina, Paraguay and Colombia on top of the Brazil stuff, which will be launching the next two or three weeks.
Part that's unprompted brand awareness. And you kind of look at, look at how Rush street are doing there. Rushback in, in Colombia, in Mexico, I think it's slowed down a little from Mexico, but some of the growth they were seeing, 90% sequential growth, 60% sequential growth. You know, it's a brand that seems to resonate and you know, I think they're primed to, to, to do well in Latin America. And at a time when you've got, you know, DraftKings and Frial, you know, maybe looking there at some point, I think Rush street, especially in terms of what Latin America can be for them as a proportion of their earnings compared to the U.S. you know, traffickings isn't going to go into Mexico and suddenly become a material part of their business. For Rush Street Latin America, I believe already is material partners but, you know, can be a lot more. So I think that's an area of huge focus. Obviously it's an area of focus for Padano. It's an area of focus for super bets a certain extent scenario focus bet365 bets that have just come out and they've been in there for a long time but now they're really setting up. You know this is an area and Rush street are I think well positioned there.
So yeah, I think that's good. As part of that actually talking about. Talking about COVID babies, you know esports and esports betting, that was the big thing we put data set together. It was always overestimated how much it is. I've seen a lot of companies fail so entang another one of their great ideas that they did work on it but actually we've been doing looking at Latam and esports and there's some. Some interesting data that's that's going to come out of that around, you know, people betting on esports, what they bet on, why they don't bet it. You know, 57 of people who like esports who don't bet on it. So they just don't know enough about it for betting. Maybe 20 said they don't that they don't trust the outcomes because of integrity. So there's still the concern about match fixing and then a lot of esports is actually what you wouldn't necessarily classes e swaps like CSGO data but actually FIFA or NBA 2K which is FIFA is often on a football tab and it's kind of being used instead of or as an alternative to virtuals. You know there's no live football soccer games on and do that. So I think especially in Latam that's growing and that's. That's quite an interesting trend to kind of track which we'll be doing. I don't know if there's anything else you asked. I completely.
[00:19:15] Speaker B: It was another long question. But that's quite a nice a moment to move on because we are racing through time. We're over 20 minutes already. And let's talk about the US specifically Nevada more in the next episode because we've talked a lot about that already today in a slightly different context but on Latin America and I hate to bring it up again because we always bring it up but the illegal market so coming out of Peru this week a minsatur the Ministry for Tourism which is also a takes responsibility for gambling regulation. They claim to have cut illegal size by I think it was 40% since regulatory framework came in. I'm keen to get your thoughts on that because Peru is an interesting one in that the path to regulation felt much more efficient, much less torturous than it did in Brazil. It has an established local market, has international competitors Such as Betson which I mentioned earlier and also outstanding local brands like Apoesta Total which I think is now majority controlled by circa. So from the numbers, I mean are you seeing, does that 40% figure sound in any way accurate in terms of cutting that offshore market share?
[00:20:33] Speaker A: I suppose the question is what do they mean by that? Is it someone who didn't have a license before who's now got a license? If you look at our total account, obviously you're not operating there for a long time. We've got land based shops, market leader. Is it now under a license regime and therefore that comes from offshore to onshore? You could probably say yeah, if they're just talking about the number of. Because they've talked about how many sites they've closed as well. If they say, if they're saying they've cut the offshore market by 40% purely and not because of people now being regulated, but purely because of how many sites they've blocked, then we're going to the usual thing where a regulator thinks that blocking your website is going to stop people using that exact domain name and there's no other way to get there. And affiliate traffic doesn't stick it to a link with a x y3 at the end or so in that case. No, that number does not sound remotely plausible. As part of this latam thing we are kind of redoing all our illegal market numbers and putting in monthly data for legal and legal estimates.
Don't quite have that answer yet but hopefully in a couple more episodes time or a couple more months we'll kind of have that and track more accurately. And also just trying to get a handle on the, the legal market data because they do, they do include the tax revenues now. So surprisingly they didn't have. Even though land based bookmaking has been around for how many years there, there was no tax data on it, there's no actual data on the official size of the market. So now we've got that included.
It was just on the slots but the tax data for this has been included at a high level with the slots. So there's no actual split out. They have this stuff coming out the market where they talk about how much has been taken from the sports betting tax so we can kind of make estimates. But I haven't seen any proper official data saying this is the actual split. This is just kind of a minister coming out and including a quote. So we are, we are starting to see some, some actual data and it will be interesting to see how that develops. I mean it's quite interesting on our survey, if you look at Peru, we've got an average weekly spend per user of $30 which is almost identical to Chile, Paraguay, Colombia. Argentina's lower. But I mean to be honest with the hyperinflation Argentina and the devaluation of currency then it's anything US dollars is a bit difficult. Brazil's a bit higher. So it is really around these other markets that's a similar propensity to smallest average spend.
And yeah, I think could be a good market. It's obviously smaller just because of population etc so you do need more of a share. You can't, you know, Brazil, you can probably make a very good living on half a percent market share. You can't do that in Peru. But it's, I think Latin America is interesting. You know, it's an exciting time for things now that people have talked about it for a long time, didn't really happen and now it's something that's happening in these different countries. But the legal market is still a huge issue and it will be maybe less so in Peru just given it's probably not one that's targeted as much given its size and there are a few big ones. But the likes of Argentina with its potential regulation, Mexico slightly lesser extent and all these other markets, I think it's.
Yeah, there's a lot of work that needs to be done as you've seen in Brazil and blocking some websites is not going to cut it.
[00:23:36] Speaker B: No, that feels like a good point to end on because we are well over 20 minutes so there's going to need to be a few edits made. Hopefully when you're watching this it is around or just under 20 minutes but just a little shameless plug for next week it is going to be at SBC Americas in Miami. So if you see him wandering around looking confused, staring at a floor map or standing outside looking harassed, go over and say hello and I will unfortunately not be there.
Well actually I'm going to Paris for a. I'm actually traveling not for work so that's very exciting. So we will be back probably in around two weeks time. We are hoping that we can maybe have Ed and Kyle Goldsmith from my teams sub in on a special on the ground episode for some impressions. What's going on at the conference next week. But everyone as ever, thank you so much for listening. This has been another episode of Right to the Source with Robin Harrison and Ed Birkin. See you next time.
