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Catena sets sights on US for profit growth

Insight | Analysis

For gambling affiliate sector watchers, this is a golden age of discovery. The rise of the super-affiliates and the listing of key sector leaders on various exchanges is bringing unheralded levels of disclosure.

Within the space of a fortnight in November, the third quarter results for three of the most active affiliate consolidators were published. The biggest of the trio, Catena Media, embarked upon a short series of Capital Markets Days in London and Stockholm to better explain to investors the company’s prospects.

The revenue and operating profit growth numbers from all three were certainly impressive. Raketech saw revenue rise 43% for the first nine months of the year to €17.9m, while adjusted EBITDA was up 30% to €9.9m. Better Collective more than matched those numbers with revenue for the first nine months of the year up 68% to €28.3m and EBITA rising 45% year-on-year to €10.7m.

But it is the sector behemoth Catena Media which is truly exhibiting what might be termed an affiliate network effect. In its presentation to analysts in London, the company pointed to a compound annual growth rate of 113% between 2015 and 2018. At the third quarter run-rate (where revenues for the three months to September hit €27.7m, up 60%), annualised revenue stands at €110.8m, while the EBITDA run-rate stands at €54.4m.

Much of Catena’s growth is due to acquisitions; according to the presentation, it has completed 34 deals in its relatively short corporate lifetime. Yet organic growth would appear to be harder to come by. In the first nine months of the year, the company said that it grew 17% organically which is somewhat in-ine with Better Collective, which reported an organic growth rate of 19% for the first three quarters of 2018.

In both cases it is a decent, though far from spectacular, outcome and helps explain the somewhat lacklustre share price performances of both in the year to date.

Until now the focus for both companies, and indeed the whole online gambling affiliate sector, has been on the consolidation. Yet, while Better Collective, Catena and Raketech have played their part in the process to date, it is noticeable that the last deal spoken about by any of them came in July, when Better Collective splashed out €4m on the Greece-focused WBS Online Marketing Services and KAPA businesses.

As for Catena, its last acquisition was the somewhat ill-timed ASAP Italia deal which saw the company fork out €16m in cash a matter of days before the populist Italian coalition government announced a ban on all forms of marketing for gambling.

Italy got very little by way of attention in the Capital Markets Days presentation, with the company blandly stating that it would be business as usual in Italy – until next year when the new rules come into force.

Whether chastened by that experience – or more likely because of the smaller field of attractive opportunities and the chilling effect of tighter regulatory backdrops in various jurisdictions – Catena indicated that its focus has altered significantly. Previously the company boasted of having a roster of up to 4,000 sites working in the gambling space.

Now chief executive Per Hellberg pointed to a slimmed-down stable of around 1,200 sites, adding that the company saw 80% of its revenues come from 30 to 40 key brands, including AskGamblers, JohnsSlots and BettingPro.

This is quite a change of focus. The acquisitions of the past three years or more have largely been paid in shares and as such have been highly dilutive.

“We’ve not increased EPS (earnings per share) too much, that is why we need to change the way we do things going forward,” Hellberg said. “Margin percentages have decreased so what we want to do is focus on fewer brands (and) grow more efficiently.”

As was noted in a previous column, one such dilutive shares issue came from the renegotiations of the PlayNJ acquisition from December 2016.

This is perhaps the final reason for the shift in focus away from M&A.

In a twist of fate PlayNJ, bought with New Jersey and Nevada’s online casino and poker sectors in mind, came with additional assets that have now cemented Catena’s position as by far the largest affiliate player in the still-nascent regulated sports betting market in the US.

To an extent, the post-PASPA US sports betting developments have fallen into Catena’s lap and the company is certainly not about to look this particular gift horse in the mouth.

Catena isn’t alone in this. Better Collective also made much of the post-PASPA opportunity saying that it had made its first revenue from US sports-betting and would be setting up offices in the US next year.

But as Catena’s new-ish US general manager for iGaming Michael Daly said, his company is “in pole position” for the US opportunity which, as he pointed out, will be see revenue at least double next year, without counting any further states opening up.

“US sports betting is the most interesting thing in the gambling world right now,” he added.

Whether by luck or judgment, the US potential means Catena is now firmly on course to hit its medium-term target of €100m in EBITDA by 2020 without necessarily having to add any further acquisitions.

“One year ago, we thought we would have to acquire a lot of businesses to get to €100m,” said Hellberg. “But now we think that can come from the current business.”

Such comments are instructive and will be read with interest by the rest of the affiliate sector. Those involved in the consolidation game within the affiliate sector will note, perhaps, that the 500lb gorilla has just left the room. What that does for M&A multiples within the space will be an area worth watching next year.