Yesterday, Evolution made a bid on NetEnt to acquire all shares and offer 0.1306 Evolution shares for each share in NetEnt, which corresponded to a premium of 43 % compared to NetEnt´s closing price. Due to the pure share offering, the shares will likely trade around the same relation 0.1306 (closed at 0.1297) until the finalization of the deal. Any discrepancy will be related to uncertainty regarding an increased bid or canceled bid.
NetEnt has had a quite poor share development in the last few years due to high expectations and the absence of growth. However, in the last twelve months, the company has turned things around, and we have seen several things driving the improved momentum during 2020.
This makes NetEnt a good acquisition as it stands. However, as we see it, NetEnt was, together with PlayTech, the closest competitors within the Live Casino segment that also had the financial power to improve it further. With this threat erased, it is likely that the margin pressure and decreased market share that we estimated within the long-term will be much less.
The addition of NetEnt will also change the power balance between the operators and the suppliers as Evolutions position will improve further. Earlier, operators could argue that NetEnts or PlayTechs live casino offerings were good enough. However, no serious operator could say no to both Evolution and NetEnt as it would miss out on both the best live casino offering as well as the best slot offering.
This will also change the online casino industry as a whole. We expect that regulations will continue to pressure the margins of the operators. With the improved position of Evolution, we expect that it will be more difficult for the operators to lift over some of this pressure to the suppliers. As a result, we believe that operators need to scale their businesses even more, which will lead to increased consolidation pace, as we mentioned in our latest article.
From a competitive view, it is not unlikely that the competition regulating authorities will have a look at the merger. However, from a historical perspective, the authorities will only intervene in rare cases.
We regarded M&As as an essential catalyst for Evolution as we saw substantial synergy opportunities in its vast network. However, we expected that Evolution would have started off with testing out a smaller acquisition within the slots vertical first. Going the other way and acquire one of the largest slot developers can be connected to several factors. But the fact that NetEnt was making some real efforts towards the live casino segment could be one reason.
One worry is that Evolution will start to lose focus on the live casino segment, which is not an uncommon effect when companies is broadening its business into new verticals. Therefore, we believe it is crucial for the company to hold the companies separate on an operational level.
All in all, we regard the merger as value-adding for Evolution, and we will have to make substantial estimate changes. As a result, we will make a thorough research update to capture the full impact of this game changing bid and we will most likely increase our fair value.
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