US online gambling opportunities to drive operator consolidation, Morgan Stanley says

Driven by M&A, Flutter is expected to generate more revenue than the top 5 operators combined did in 2015


organ Stanley released a new research report Monday, “Online Gambling: Exploring Consolidation Opportunities”.

The prestigious financial services compamy expects the US online gambling and sports betting opportunities to sustain the momentum of operator consolidation

Over the past 5 years, the combined revenues for the top 5 operators in global online gambling have tripled to £12bn from £4bn, according to MS research. The firm expects the largest operator, Flutter, to generate more revenue than the top 5 operators combined did in 2015. It said while this change has been partly driven by market growth, the majority has come from M&A, as operators have sought to diversify their revenues and achieve scale benefits in the face of rising tax and regulatory headwinds in core markets. “With the prospect of further headwinds in the coming years (particularly in Europe), this trend appears set to continue,” Morgan Stanley says.

Furthermore, the report says the potential of the US market has been increasingly recognized as the state-by-state legalizations have accelerated and early-stage revenues have beaten expectations. MS notes that European gambling sector market capitalizations 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.

That gap is lower the case of the US 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, Morgan Stanley notes. Based on recent examples like the Caesars-William Hill transaction and the rejected MGM-Entain offer, “M&A appears likely to continue to play a significant role.” 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 and small to best position themselves for the new market reality. 

In addition, MS says the forthcoming 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.”

According to the report, “consolidation should give operators better leverage over pricing negotiations with suppliers, and in the short-term, we have seen operators able to choose the more favourable of their existing contracts as deals have been concluded.”

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