Welcome to the February 2022 newsletter for the Waterhouse VC Fund.
The Fund specialises in global publicly listed and private businesses related to wagering and gaming. The Waterhouse family has been involved in these industries for over 100 years, and the family’s experience, contacts, and capital provide opportunities that most investors would neither appreciate nor have access to.
Since inception in August 2019, the Waterhouse VC Fund has achieved a total return of 2,113% (assuming the reinvestment of all distributions) as at 31 January 2022. See our long-term performance table at the end of this newsletter.
Product offering and scale win
As the wagering industry continues to consolidate, particularly in the US, operators are increasingly looking for service providers that offer a high-quality, turn-key solution. Such a solution should support their growth and allow them to compete with better capitalised operators such as DraftKings and Flutter.
When assessing B2B suppliers, we look for two key characteristics:
An excellent defensible product offering (for example, best-in-class managed trading services or player risk management)
Scale, achieved through multiple clients and/or product offerings
We believe that similar to the past consolidation of mature wagering markets in other countries, the US market will have a handful of firms earning the majority of revenues and profits. However, smaller operators have an extraordinary opportunity to win share in a market touted to exceed US$20 billion per annum by 2025. Considering the incredible marketing budgets (see our September 2021 newsletter) and in-house technological capabilities of the largest operators, smaller operators are effectively limited to competing only on product.
Rather than integrating with multiple suppliers, those that offer full turn-key solutions are very valuable to smaller operators. We believe that B2B suppliers will also consolidate to form full turn-key solutions rather than just offering some of the required components. This recently played out with Aspire Global (Aspire), a core holding of the fund.
Aspirations over
We first covered Aspire Global (STO:ASPIRE) in our February 2021 newsletter. Aspire offers B2B products and solutions for launching and operating online casinos and sportsbooks. The company can handle all operational components of a site, effectively as a ‘one-stop-shop’. Aspire offers products for the customer-facing components, such as casino, sports betting and bingo platforms, as well as outsourcing solutions for ‘back-office’ operations like customer support, payments, compliance, CRM services, VIP management, and data analysis.
We first invested in Aspire in November 2020 at an attractive valuation of 1.2X Revenue and 7.7X EBITDA. We were confident in further growth as the company focuses on the US opportunity, with a still undemanding valuation of 13.0X EBITDA. The company’s strong product offering, astute M&A activity and talented management team made us very excited for Aspire’s future.
However, as we recently experienced with Playtech, our journey with Aspire is likely to come to an end through M&A activity. In January, NeoGames (NASDAQ:NGMS) offered to acquire Aspire Global for $480m / 111SEK per share through a combination of 50% cash and 50% equity. The offer represented a significant 41.4% premium to Aspire's last closing price and Aspire’s current price reflects a 171% return on our investment. Whilst we had a long term investment horizon, we will still be delighted if this outcome eventuates.
Aspire and Neogames together again
Neopoint Technologies was founded in 2005 by Barak Matalon, with two key business segments: iGaming and iLottery. Aspire Global (the iGaming segment) was subsequently spun out and listed publicly in 2017, whilst Neogames (the iLottery segment) listed in 2020 and received an investment from William Hill. Since acquiring William Hill, Caesars now owns 8.43% of Neogames. Aspire’s original four shareholders own 60% of the company and other members of Aspire’s management team own over 5%.
Aspire is very illiquid, with only around 100m shares of free-float and little traded volume. The acquisition by Neogames effectively shakes out the few outsider shareholders.
Neogames believes that the combination with Aspire will add to their proprietary technology and full turn-key solutions for its global lottery customers, whilst providing end-to-end technology across both lottery and iGaming. Neogames has found that lottery and iGaming are converging, with the acquisition of Aspire giving Neogames an attractive offering to operators who focus on both verticals.
We are excited by the accelerating M&A activity throughout the gaming and wagering industries, particularly in the United States. Businesses operating at scale with the best technology are well-positioned to deliver outsized returns to their investors.
Media: Asia Gaming Brief
In January, Tom was interviewed by Asia Gaming Brief - ‘Online M&A likely to pick up pace in US as costs rise’.
The discussion covered why 2022 is likely to be marked by increased M&A activity in the United States as companies scale up to win market share, whilst carrying the burden of rising customer acquisition costs. As discussed, the Fund has recently benefited from M&A activity through Aspire Global and Playtech. Other discussion points include current value in the gaming and wagering ecosystem as well as exciting opportunities for the fund.
Please note the above information in relation to Aspire Global and NeoGames is based on publicly available information in relation to the companies and should not be considered nor construed as financial product advice. The Fund currently has a position in Aspire Global. The information provided in this document is general information only and does not constitute investment or other advice. Readers should consult and rely on professional investment advice specific to their individual circumstances.