Stars Group Builds Sports-Bet Muscle With $4.7 Billion Deal

(Bloomberg) -- Stars Group Inc. soared to a record high on expectations that its $4.7 billion purchase of Sky Betting & Gaming will turn the online poker giant into a major sports-betting player that could use its European foothold to cross the Atlantic if the U.S. market fully opens.

The Toronto-based operator of PokerStars, which announced the cash-and-stock deal with CVC Capital Partners and Sky Plc on Saturday, is set to win a significant foothold in the U.K. -- the largest regulated gaming market. Sky Betting & Gaming, or SBG, is growing rapidly in online casino games and sports at home and recently expanded to Italy and Germany.

If an upcoming Supreme Court decision in the U.S. allows sports betting in more states, it would be the “icing on the cake” for the combined companies, according to Simon Holliday, founder of the research firm H2 Gambling Capital.

“The US sportsbetting Supreme Court case is obviously a big part of the potential upside, with Star’s old database, SBG’s strengths and their track record solely in the U.K.,” Holliday wrote in an email. “Even without the U.S., SBG is just starting to launch in other regulated markets.”

Betting on sports in some form is legal in four U.S. states. That could change as the Supreme Court weighs New Jersey’s attempt to have a 1992 law banning sports betting beyond those states struck down as unconstitutional. If the court agrees, it could trigger a wave of states legalizing betting on football, basketball and other competitions.

“Every single new regulated market that opens up, we believe that on a combined basis we will be very strongly positioned to capture a significant market share-- U.S. included,’’ Chief Executive Officer Rafi Ashkenazi said on a call with analysts Monday. “But the trigger for this deal was not the U.S.”

Stars Group jumped 10 percent to C$41 at 9:38 a.m. in Toronto, the highest since the company went public in 2010. The gambling firm now has a market value that tops C$6 billion ($4.7 billion).

The acquisition, which follows a failed attempt to take control of Sky-rival William Hill Plc in 2016, helps accelerate Ashkenazi’s strategy to decrease reliance on the unstable and stagnant poker business, which accounted for two-thirds of its revenue last year.

Of $49.8 billion in gross winnings from interactive gambling last year, $25 billion came from betting on sports and racing, $13 billion from casinos and $3 billion from poker, according to H2.

The deal also provides Stars Group with a trove of potential new customers for its own online casino and poker offerings. SBG’s strengths include technology and marketing, according to H2’s Holliday, who says the company went from the seventh or eighth-largest operator in the U.K. in 2011 to the third largest last year.

“The strategic fit is very good, the valuation is reasonable for a fast-growing company,” said Simon Davies, an analyst at Canaccord Genuity in London.

The agreement calls on Stars Group to pay $3.6 billion and approximately 37.9 million newly issued common shares based on the closing price of its common stock on April 20. Stars Group said it has obtained debt financing of approximately $6.9 billion, including $5.1 billion of first lien term loans, $1.4 billion of senior unsecured notes and a $400 million revolving credit facility.

Proceeds will be used for the cash portion of the deal, as well as to refinance the company’s existing first lien term loan and repay SBG’s outstanding debt, it said. The company said it was committed to steadily lower a net debt to earnings ratio that is set to climb, to “below 6,” Chief Financial Officer Brian Kyle told analysts.

Sky Takeover

Private equity firm CVC agreed to acquire a controlling stake in Sky Betting from Rupert Murdoch’s Sky in 2014. Canaccord’s Davies says the betting company, which gets more than 80 percent of its revenue from mobile devices, “has performed spectacularly” despite concerns of a tighter regulatory environment in the U.K.

The deal will also bring Sky a cash infusion while it is being targeted for takeover by both 21st Century Fox Inc. and Comcast Corp. While Fox awaits a U.K. regulatory decision on its bid, Comcast is preparing to formalize its own offer after making a preliminary one at a premium to Fox’s, setting the stage for a bidding war.

The agreement follows a move last month by Stars Group to take a bigger slice of Australia’s CrownBet Holdings Ltd., which subsequently bought the Australian unit of William Hill.

Ashkenazi signaled last year that he’d be on the hunt for targets after focusing on paying down debt from the 2014, $4.9 billion acquisition of PokerStars that made the company, then called Amaya, the world’s largest online poker business. Ashkenazi took over the top job from founder David Baazov -- who resigned in August 2016 to fight insider-trading charges -- and built up a new management team.

“Sky Betting & Gaming’s premier sports betting product is the ideal complement to our industry-leading poker platform,” Ashkenazi said, calling the agreement “a landmark moment” for Stars Group.

Morgan Stanley and PJT Partners Inc. acted as financial advisers to Stars Group, while Deutsche Bank AG, Goldman Sachs Group Inc., Macquarie Group Ltd. and Morgan Stanley provided the committed debt financing.

©2018 Bloomberg L.P.

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