*Disclaimer: All opinions are my own
Double U Games announced today that it has acquired Double Down from IGT for $825M. The sides have also announced that they will be signing a distribution and services agreement that will give Double U access to IGTs extensive slots portfolio. The deal follows an ongoing trend of consolidation in the market and considering the size of the transaction it will go down as one of the top 3 deals in the past few years. The transaction was priced at a 10.5 EBITDA multiple and is within range of market standards. I can say that the price does not surprise me.
As I have written in past posts, the consolidation trend is expected to continue due to multiple market forces and I have no doubt that this is not the last deal of this size that will happen in the niche.
How will this deal affect market leadership?
Owning a (relatively small) 3.5% of the global Social Casino market share prior to the transaction, Double U Games generated approximately $135M in 2016 a which represents over 20% year over year growth. Double Down on the other hand had a less positive year in terms of growth and generated approximately $280M in 2016, down almost 12% from 2015.
The combined companies will own approximately 11% market share which will push Double U Games to the #2 spot up from its #8 spot. The transaction will also push down Zynga and Scientific Games to the #3 and #4 spots respectively. Playtika still maintains its long lasting #1 position and owns a staggering 25% of the global market.
Of course, all of these are the immediate shifts in the pyramid, but the real impact of the deal on the leadership structure will take time to be realized. If Double U can follow through on the transactions potential, we could see them becoming an even stronger competitor in the future. On the other hand the post transaction challenges are going to be significant and this is by definition not a plug and play deal given the cultural, geographical, and operational complexities that lay ahead of all three sides (Double U, Double Down, and IGT). The hard work has just begun.
So Why Did Double U Games Acquire Double Down?
Several strategies are at play here but I will focus on the two most obvious ones: market share and content.
Content: Those who know the industry well understand that Social Casino is first and foremost a content based industry and that there is such a thing as a bad, mediocre, and great slot machine. A passionate slots player (a.k.a a whale) will always gravitate towards quality content and quality content is by definition not something every company in the niche can claim to have. By acquiring Double Down and gaining access to IGTs proven slots portfolio, Double U Games gains a significant competitive advantage that they did not have in the past. We can work under the assumption that the distribution and services agreement signed between both sides will allow Double U to launch IGT slots in all their social casino games and not just in Double Down Casino. If executed correctly this will drive loyalty, allow for better/cheaper user acquisition, and of course will directly increase revenues.
Market Share: I discussed market share above at a high level but there is another sub-strategy that isnt as obvious from just the leadership numbers. Social Casino players are a loyal bunch and tend to play and pay in a small number of games at any given time. More so there is a limited amount of whales in the market. Double Down Casino is one of the first games ever launched in the niche and given its early entry point back in 2010 it was able to acquire lots of early adopters who are passionate slots players. Given the loyal nature of Social Casino players we can assume that many of these whales are still playing and paying in Double Down Casino. By acquiring Double Down, Double U has acquired a very lucrative segment of users which would be almost impossible to acquire (or just too expensive) via standard user acquisition. Even if they don’t cross promote between their games, Double U has acquired one of the best player bases in the market which will strengthen its position as a market leader.
Why Did IGT / Gtech Sell Double Down?
Established in 1975, IGT has been a leader in the slots manufacturing industry for many years. When the Social Casino niche was emerging in 2010, IGT was one of the first companies to identify the potential and acquired Double Down Interactive (for approximately $500M) which was one of the first companies to develop a social casino game. IGT employed the exact same content strategy that I believe Double U will be doing now. It took its proven offline slots games and integrated them into their new social casino product. The strategy proved itself and Double Down became one of the most powerful companies in the niche.
One of the unfortunate developments during the first years was the Double Downs original founders left the company and it seems that as a result IGT was forced to intervene in the subsidiary. Without speculating too much about what happened inside the Double Down team as a result, Ill say that something went wrong and they lost their business momentum. Their decline over the past couple years speaks for itself. Despite being positioned early on to aggressively compete with Playtika they just couldn’t hold their position.
Fast forward to 2015, IGT itself was acquired by Italian Gtech for $6.4B making Gtech one of the largest players in the global gambling market (reminder: Social Casino is not in the gambling industry). Double Down became a less significant driver of growth for IGT/Gtech because its relative size compared to other subsidiaries. Given the management challenges and declining results, I must assume that IGT/Gtech began to see Double Down as a headache. Its probably at that moment that they decided to sell and focus their efforts on their core business. Of course lets not forget that the timing of the deal was right as well given recent comparative deals which set the price benchmarks higher than in the past.
Why this is a great deal for IGT/Gtech?
Other than having sold the company at a profit (which is always nice), IGT/Gtech gets to maintain some exposure to the social casino niche via the distribution and services agreement. Though the sides have not announced the terms of this agreement we can assume the upside for IGT/ Gtech is significant and thus allows them to generate social casino revenues without the “headache” of operating a social casino business.
What are the challenges that lay ahead?
There are many. As I said above, the hard work has just begun and many questions need to be answered and their answers need to be executed correctly. Here are just a few high level challenges they will be facing.
Cultural challenges: Cross national M&As often come with cultural challenges. Will the new owners know how to bridge the Korean / US cultural gaps? Will the US based team know how to work with the new Korean owners? Of course this challenge is further amplified via not just regional cultural differences but corporate cultural differences as well.
Operational challenges: How will the new organization be structured? Will Double Down Casino operate as a stand alone unit? Or will it be integrated into Double U Games current operations? How will reporting lines be structured and what affect will it have on operational efficiency and game quality?
Content Integration: Unlike in a standard M&A deal where the seller and buyer eventually separate, the distribution and services agreement means IGT/Gtech remains an interested party throughout the agreements term. This brings with it many potential challenges, including technological ones, IP related challenges, relationship management challenges, and much more.
So whats the bottom line?
The bottom line is that time will tell whether this was a good deal or not for Double U (much like every every M&A). On paper, the deal makes sense for all parties and if executed correctly over time will strengthen Double U, revive Double Down, and will generate a short and long term upside for IGT/ Gtech.
As always, I want to congratulate everyone on the deal and wish luck to all my friends in the respective teams.
This post is part of an ongoing series of deal reviews. Here are past reviews: