In a new, regular monthly CasinoBeats column, Steve Myers is to utilise more than 20 years of experience in the gambling industry to deliver thoughts and insights on a range of issues.
When I attended the SBC North America Summit recently there was much discussion about activity in M&A markets. As the US market matures and evolves, there will undoubtedly be more consolidation, opportunistic takeover bids, and casualties in the wider ecosystem as competitive pressures increase.
Despite this activity, gaming companies face further headwinds in the form of ESG requirements as potential investors prepare to put their money where their mouth is. Whilst not as toxic as tobacco, vice, oil or currently companies that are Russian based, gambling is still considered a sin stock by many and brings an extra layer of due diligence to any potential acquisition or merger.
However, as ESG methodology embeds itself in both the investor network and the sustainability agenda, changes are afoot. Furthermore, the gambling industry is woefully under prepared to react to the requirements and faces a reality of becoming an even more niche investment. Not surprisingly, this did not feature in my New Jersey conversations.
The US has recently seen significant press coverage regarding greenwashing and the misreporting of ESG figures, but we should not be swayed by this posturing. ESG is here to stay and will affect our sector as much or more than others.
“Sustainability means plotting a non-controversial course for a business”
Some see environmental, social and governance requirements as a box ticking exercise-and as an industry, we certainly know how to tick boxes. This may be in part true for the environmental reporting, but it is the ‘S’ and the ‘G’ that will bite.
The current practice of sitting all ESG matters with compliance, the CFO, HR, or public affairs will surely backfire. Ownership is required by the ‘C’ suite, and in particular, independent, or non-executive directors. As we veer towards a more hostile and robust investment cycle, more activist investors, and litigious mindset, companies need to be conscious of their historical actions as well as their current operations.
Sustainability means plotting a non-controversial course for a business, but it can also mean positioning the company to protect against past actions to create an environment where true value can be realised in the investment cycle.
Valuation multiples are likely to be affected by skeletons in the cupboard such as grey or black-market activity, the approach taken to cryptocurrencies, problem gambling issues and current or previous conduct of personnel. It will also be interesting to see how many future employment contracts are reviewed in terms of gross negligence or disrepute clauses under the ESG umbrella.
Of course, the tier one operators will have less problems. As we see with the banking and payments industry, scale allows these otherwise impenetrable institutions to find a ‘work around’ for the good of the client. But even tier one’s should beware, and in this acquisitive period, there is even more reason to focus on the due diligence process.
“From an investment perspective, ongoing legal action or unresolved business does not help”
As we have recently seen, regulators are becoming more robust in holding licensed companies responsible for the actions of their supply chain. In future, failure to shut down any legacy issues of acquired companies will expose the parent to potential challenges.
We have already seen this to an extent in the US, and as the competition heats up in these lucrative markets, it is inevitable we will see more. From an investment perspective, ongoing legal action or unresolved business does not help. For a company wishing to sell and realise value, the same applies.
ESG is a unique skillset, and my point is that it cannot be farmed out to the most convenient part of your business as an afterthought. We see many companies now employing senior level sustainability officers, this is all well and good, but it feels as though this is just window dressing rather than real commitment.
But there are of course exceptions to this. In the gambling industry, companies such as Kindred and Entain have looked to own at least part of this space, with a structured and considered approach. Most are yet to follow.
We should also spare a thought for the poor old independent or non-exec directors. They need to get up to speed-and fast. Much of the responsibilities surrounding ESG requires some independent thought away from the day-to-day executive management. These roles need to take on a new dimension and look at things such as compliance or remuneration committees through a different lens.
“…gambling is extremely susceptible to negative headlines and a poor public perception”
The level of scrutiny for a new acquisition must increase to prevent negligence and this ultimately applies to the supply chain as well. It’s time to make sure the D&O insurance is in date and fit for purpose.
More than most industries, gambling is extremely susceptible to negative headlines and a poor public perception. Though some have tried, the ability to move the dial on this is almost impossible. The industry is averse to collaboration in almost every circumstance and likes to do its own thing.
I doubt it will corral against the forthcoming ESG implications and I fully expect to be updating this piece in five years’ time. However, if you want to create shareholder value, or maximise the value of your company, ESG is here to stay, and you would be well advised to treat it with respect from the very top of the company down.
Steve Myers of Praxis Consulting and Advisory boasts over 20 years in the gambling industry, with 13 years as Managing Director, Development for the Genting EMEA region. He is a Senior Advisor on gambling for DRD Partnership, and Co-founder of Gaming Knowledge Centers, an initiative to bring together industry, regulatory, and academic research on gambling to create best practice globally.
Steve works in igaming and land-based environments for both public and private sector clients. Increasingly, his focus is on ESG and reputation of the industry. Steve is a graduate of the UNR Executive Development Program where he also taught, and has a Masters in Major Programme Management from the University of Oxford along with a Masters in Law.