Great Acquisition, page-112

From the AFR...

The sight of a train carriage full of people hunched over their smartphones must warm the heart of Aristocrat Leisure chief executive Trevor Croker.

On Thursday Croker delivered a strong set of numbers for the 2017 financial year and something of a surprise deal – the $US990 million ($1.3 billion) acquisition of Big Fish Games, a US-based maker of smartphone games and social casino apps.

If you haven't played games such as Gummy Drop or Fairway Solitaire, then you're bound to know someone who has spent hours trying to get to the next level on their small screen – and spent a bit of money on the in-game purchases frequently offered.

But for Croker, the real gem inside Big Fish is its social casino market. While Aristocrat might be best known as one of the best gaming machine makers in the world, this deal will make it the world's second-biggest player in the social casino market, with a share of 13 per cent.

From a business perspective at least, social casinos have one of the great models of all time.

Players spend real dollars to buy chips or credits and then play online casino games such as slot machines – some featuring the same content and gameplay Aristocrat offers on its "landed" machines in pubs, clubs and casinos around the world – blackjack and roulette.

But if a punter has a big win, their winning credits cannot be redeemed for real cash – the house, in this case, is truly unbeatable.

Make no mistake, this is a big business. Aristocrat puts the size of the social casino market at $US4.3 billion. By 2020, that is tipped to rise to $US6 billion.

And those smartphone games? They're big business too. The mobile gaming market is expected to grow even faster, rising from $US46 billion in 2017 to $US65 billion in 2020.

Croker, who took over as chief executive from Jamie Odell in late February, has accelerated Aristocrat's push into these markets, which started in 2012 with the purchase of a company called Product Madness.
Croker bought Israeli online gaming group Plarium in August for $600 million and unveiled this second deal just a few months later.

Digital gaming revenue at the company will go from $383 million before the Plarium deal to $1.3 billion post the Big Fish acquisition, or 38 per cent of total group revenue.

That's a dramatic change in the space of six months, and judging from the 6.8 per cent fall in Aristocrat stock on Thursday, investors might need a little time to digest it.

The Big Fish and Plarium deals see Aristocrat's net debt rise from $664 million to $2.7 billion, although its net debt to EBITDA ratio sits at 2.2 times, which the Aristocrat camp is very comfortable with.

There has been some consternation, too, about Big Fish's recent performance; the social casino business had what one insider conceded was a "speed wobble" in late 2016, when the company's parent dropped its marketing spend in the social gaming market. Aristocrat says this has been corrected and the performance has improved in three straight quarters.

Still, with Aristocrat priced for success – its shares are up 171 per cent in the past two years, and it is trading on 28 times earnings – little issues can get magnified.