Transformative M&A Deals in Social Casino

Adam Krejcik

Principal

Eilers & Krejcik Gaming, LLC

Session OverviewAddress the following key topics:

• Why has there been so much M&A activity in this sector?• What are the key attributes to successful deals?• What are key underlying themes for consolidation?• Will M&A theme continue and who will be the future buyers?• How can smaller / private companies positon themselves for M&A?• Key industry themes impacting future M&A in social casino

Social Casino M&A Flurry (CY11-16)

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Social Casino M&A Details• Approx. $7bn worth of M&A transactions over the past 5-years in

social casino gaming, incl. mega-$4.4bn sale of Playtika to Chinese consortium.• M&A deals have typically involved upfront payment and earn-out.

Average multiple for upfront component is 5-6x TTM EBITDA or ~2x TTM Revenues.• There has been considerable amount of consolidation over the past 5-

years resulting in a “top-heavy” industry and now very few private companies with meaningful scale.

Social Casino M&A DetailsKey factors that typically impact valuation:• Revenue, growth rates, and diversification• Profitability & scale• Talent, R&D, and Platform (front & backend)• Mobile vs. Web revenue mix• Geographic revenue concentration• Existing game portfolio and pipeline• KPIs = DAUs, monetization (ARPDAU, ARPMUP), retention (D1, D7, D30), paying

player conversion rates (DAUP/DAU, MAUP/MUU), LTV, cohort data & trends

Why has there been so much M&A?1. Revenue predictability – perhaps more then any other social game

genre, the revenue curve associated with casino games is “long” and fairly predictable. Slotomania (from Playtika) is arguably the best example:

Source: company filings, Eilers & Krejcik Gaming, LLC

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Slotomania (Gross Revenues)

Why so much M&A? (Cont.)2. Immediate and meaningful opportunity for traditional Gaming (real-money) companies to go “digital”.3. Synergies and advantages for gaming equipment suppliers leveraging their real-world slot content.4. Economies of scale – especially as it relates to user acquisition expenses.

The Various M&A Waves + Themes:• The Early Mover: Caesars acquisition of Playtika for $103m is arguably one of the best deals ever done

in social/mobile gaming. Key theme: being early on a sector call and successfully executing can pay huge dividends over the long-run.

• Gaming Equipment Suppliers Getting Social: IGT’s acquisition of DoubleDown, WMS acquisition of Phantom EFX, Aristocrat’s acquisition of Product Madness, Bally’s acquisition of Dragonplay. Key theme: gaming equipment suppliers acquiring platform / team / technology to leverage their portfolio of land-based slot IP. Land-based content proven way to improve usage and monetization in social.

• Acquiring RMG Talent: Zynga’s acquisition of Spooky Cool and Rising Tide Games, Caesars/Playtika’s acquisition of Pacific Interactive. Key theme: acquiring studios with developers / professionals with former real-money gaming experience. Helps ensure better math / designs / content leading to increased chances of success.

• Operators Getting Into Social: Churchill Downs acquisition of Big Fish, Crown Resorts acquisition of DGN Games, and Penn Gaming’s acquisition of Rocket Games. Key themes: way to expand digital strategy and cross-sell /market to your existing casino database.

• The Chinese Buyer: Shanghai Giant Technologies acquisition of Playtika. Key theme: deep pocketed buyer, can they help open the social casino market in China?

A Closer Look at Recent Playtika Sale…

Acqusition details ($ in m)Upfront cash $4,400Earn-out NATotal $4,400

Estimates ($ in m) TTM CY16ERevenues $838 $943EBITDA $339 $391

EBITDA margin 40.5% 41.5%

UsageDAUs (000s) 6,431 6,438 MUPs (000s) 883 897

Valuation TTM CY16EEV/Revenue 5.3x 4.7xEV/EBITDA 13.0x 11.2x

EV/DAU $684 $683EV/MUP $4,984 $4,907

Playtika Deal Key takeaways:• Major validation for social casino sector• Record valuation is testament to unbelievable team / track record

at Playtika

Key risks:• How do you maintain entrepreneurial environment and attract

key talent• Can Playtika maintain its dominance (i.e. 25% market share)

Key questions:• More Chinese buyers out there… Has the bar been reset for

multiples / valuation expectations?• Can Giant help open social casino market in mainland China?Source: company filings, Eilers & Krejcik Gaming, LLC

Social Casino: Key Themes Impacting M&A1. Signs of a maturing market:

The “easy” growth is likely now behind us as it’s becoming increasingly difficult to drive significant DAU growth, especially in key markets such as North America and Australia. Future revenue growth will largely be driven by improving paying player conversion rates, higher monetization rates, and penetrating new markets (Asia, LatAm, Eastern Europe).

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DAU TrendsPlaytika IGT/DoubleDown SciGames Interactive Aristocrat/Product Madness

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ARPDAU TrendsPlaytika IGT/DoubleDown SciGames Interactive Aristocrat/Product Madness

Source: company reports, Eilers & Krejcik Gaming, LLC

Social Casino: Key Themes Impacting M&A2. Increasingly complex & challenging UA Marketplace:

• User acquisition remains an integral part of the social casino ecosystem, but currently its the Wild Wild West…• 3rd party ad networks such as: AppLovin are playing an increasingly bigger role, but growing concerns

over data leakage, user traffic fraud, data ownership, and control. How will sale of AppLovin and potentially other ad networks to Chinese impact industry?• Facebook remains a powerhouse and now collects more in advertising $ from mobile game publishers

vs. what it generates from its own platform (PC) gaming division.• Over the last 8-12 months Google’s mobile app inventory has been working really well for a lot of social

casino companies.• New emerging UA channels including: Instagram, Pinterest, and playable ads.• CPI remains elevated making it very difficult for sub-scale companies to effectively compete.

Social Casino: But Still Ways to Succeed3. Scale through Innovation, Product Niche, Geography, and Rewards:

Despite an increasingly competitive market, there have still be successful new incumbents who have been able to scale through innovation, niche products, targeted geography, and reward programs.

Innovative game from Murka that combines RPG elements into a slot game

Product niche from Rocket Games that capitalizes on classic / 3RM slots games

Geography from Product Madness & IGS, focuses on Asian themes slot games

Rewards program from PlayStudios incorporates ability to win real-world items

Examples:

Summary• There has been a flurry of M&A deals over the past 5-years. Key M&A themes: early mover

advantage, gaming suppliers leveraging their content, gaming operators entering space, acquiring RMG talent, and now deep pocketed Chinese buyers.• Acquiring social casino assets has been attractive for many reasons including: revenue curve &

earnings predictability of casino games, represents an immediate and large “digital” opportunity, and economies of scale. Valuation is impacted by a number of factors including: revenue growth, profitability, underlying KPIs, and game pipeline, but average multiple for upfront component has been 5-6x TTM EBITDA. • Lots of looming questions about Playtika deal (e.g. will this help open Chinese market, does this

represent high water mark for industry, can they maintain historical dominance), but they’ve raised the bar in terms of valuation and deal is huge validation for legitimacy of the Industry.• Despite an increasingly competitive and maturing market there is still room to succeed. Some

notable new incumbents: Murka, Rocket Games, Super Lucky, Huuuge Games – have all found ways to carve out a niche and enjoy success (3 out of the 4 still private).• Still expect future consolidation / M&A, but deal flow is likely to slow down and we expect

future buyers will mostly be foreign, and likely Asia domiciled.

Contact InfoAdam Krejcik

Eilers & Krejcik Gaming, LLCEmail: akrejcik@ekgamingllc.com

Office: (714) 619-9330Twitter: @akrejcik

Website: www.ekgamingllc.com