The Stars Group Inc.
Reaching for the Stars: Initiate at Outperform with US$25.5 PT
Our view: We like Stars as a cheap way to play the potential acquisition by Flutter with the stock standing at c10% discount to the bid. This suggests some regulatory risk on completion; however, looking at precedents set by the competition authorities in the UK and Australia (the key regions of concern), we believe there is a high chance of the deal completing.
Key points:
Flutter bid: The combined group would be the online market leader in an industry where scale matters. The cross-sell synergies between Stars' core Poker base and Flutter's sports base would be huge - and extend to FanDuel and Fox Bet in the US. Flutter has good credentials in business combinations post the Betfair bid and targets £140m cost synergies in 3 years.
Risks to the deal: The combined group would have 25% of the UK online market, although 37% in sportsbook. As a precedent, Ladbrokes and Coral were allowed to merge and maintain 40% retail share. Online is also a much more competitive market with well-financed peers and visible pricing, which we believe makes the deal more acceptable. In Australia, the combined group would have c38% online share, challenging domestic leader Tabcorp. However, including retail, Tabcorp has A$5.4bn revenue (A$25bn market), while the combined group would only have A$1.1bn.
Underlying business is challenged: The group has 65% market share in Poker. This still accounts for 35% of the group and is expected to see just 1% growth pa going ahead. Stars also has the highest exposure to unregulated markets (25%) and is geared to 4.5x ND/EBITDA, although its strong cash flows should result in this falling 0.7x pa pre-merger, we believe.
Synergies yet to be unlocked from SkyBet: On the positive side, Stars is in the early stages of benefiting from the SkyBet acquisition (2018). SkyBet has impressively doubled its share of the UK online gaming market from 6% in 2014 to 12% in 2017. Management expects to reach at least $70m of cost synergies pa – before the revenue opportunity from cross-selling.
US media partnership: While it is still early days, Stars has signed a landmark partnership with Fox Sports in the US, and we believe it has a good chance at replicating the success of SkyBet. However, management forecasts 2022 breakeven for the US business – later than for peers.
Valuation: The group traded at $16 prior to the bid, 10x 2020e PE and 9.3x EV/EBITDA. Given the high gearing, exposure to poker and unregulated markets, we would expect Stars to trade at a discount to peers. However, our PT is based on the exchange ratio of 0.2253 Flutter shares per Stars share, and we believe Stars offers good value to play the deal.