CVC Private Equity Sky Bet Poker Face Yields a Jaw-Dropping Payout Stars

(Bloomberg Gadfly) -- The house wins. Private equity has hit the jackpot with a deal to sell Sky Betting & Gaming to Canada's Stars Group Inc. for $4.7 billion. The jaw-dropping returns achieved here are down to a dose of good fortune as much as judgement.

CVC Capital Partners bought an 80 percent stake in the business from its founder, U.K. satellite broadcaster Sky Plc, in 2015. That transaction ascribed this fledgling business an enterprise value of 800 million pounds ($1.1 billion). CVC recouped its approximate 300 million pound starting equity investment via a dividend last year.

While the buyout firm's stake has been diluted by share awards to Sky Bet's management team, the sale to Stars stands to give it cash and stock in the acquirer worth around 1.9 billion pounds. CVC's final return will depend on what it sells its Stars shares for. But it stands to make a multiple of its original investment in just three years.

Sky Plc must be kicking itself it didn't retain a larger stake. It's not as if CVC provided new management. Sky Bet's boss, Richard Flint, was already running the show. The business is highly cash generative and hasn't needed much capital. Yet it has thrived outside its parent.

CVC was doubtless more tolerant of sports betting's volatile cash flows, which can take the occasional hard knock when results aren't as expected. In turn, that meant it was more willing to invest in new tech and motivate the staff.

Of course, CVC's original purchase looked pricey, at 15 times trailing Ebitda. It now turns out to be a bargain. Stars is paying a notch higher multiple, although the valuation drops to about 13 times after factoring in the benefit of cost cuts. Assume around 200 million pounds of operating profit and add 50 million pounds for those savings, and Stars should earn a return of around 6 percent on its investment from the outset.

Returns substantially exceeding Stars' 7 percent cost of capital will depend on Sky Bet continuing to grow. The business has expanded Ebitda by about 40 percent per annum in recent years. That pace cannot be sustained. So Stars will want to lure Sky Bet punters to try their hand in the casino as well as on the pitch. They may not bite -- the acquired business's success is based on appealing to recreational punters who place relatively smaller wagers.

Meanwhile, net debt will rise to an uncomfortable 6 times Ebitda. That would be intolerable in a business purely exposed to the outcome of unpredictable contests. But Stars has a dominant online poker business which isn't exposed to that kind of risk -- though it has to worry about the creditworthiness of its players.

CVC, which is taking just under 25 percent of its payment in Stars paper, won't be too concerned. Even without the stock component, it has made a return that eludes most buyouts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2018 Bloomberg L.P.

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