Why poker machine maker Aristocrat Leisure is splurging $5b to get into 'real money gaming'
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Three times bigger than Qantas, five times the value of Harvey Norman and worth 10 times what AMP is, gaming company Aristocrat Leisure could be the most valuable local company you've never heard of.
Now, it's betting the house on a $5 billion acquisition that will put it at the centre of real money gaming (RMG) a controversial type of digital gambling that's illegal in Australia.
"RMG is highly accessible, high speed, and at the moment there aren't any limits on what you can bet," says Dr Charlies Livingstone, one of the nation's foremost experts on gambling and associate professor in the School of Public Health and Preventive Medicine at Monash University.
"So you can do it anytime you want.
"It's on an app, you get into it and you're in a casino where you can bet on slot machines (pokies) and casino style games very rapidly, and bet an unlimited amount.
"And keep doing it for hours at a time until you run out of money."
Most Australians wouldn't know Aristocrat Leisure, even when it sits comfortably inside the top 20 biggest companies on the nation's stock exchange, with a market capitalisation that values it at nearly $30 billion.
Colin Mansfield is a director in the US corporate finance group at Fitch Ratings. Even though he's based in Boston, he keeps a close eye on the company, which is based on Sydney's North Shore.
"Yeah, they're really substantial," the analyst says.
"They're actually one of the largest gaming suppliers in the world.
"They compete with the likes of other large global players like International Gaming Technology, Scientific Games, Konami, Ainsworth – and they have meaningful market share in both the US and in Australia as well."
Aristocrat is one of the world's biggest manufacturers of electronic gaming machines, called EGMs or pokies. But they're for physical casinos, clubs and pubs.
Now the company is making its biggest bet yet: the $5 billion purchase of real money gaming goliath Playtech.
If successful, the technology will give it dominance in the electronic world of phones, tablets and computers.
Playtech is listed on the London Stock Exchange, but the Australian company wants to buy it outright, with an offer that values the shares 58 per cent higher than they were trading at before the bid was revealed.
A vote by UK shareholders is required to seal the deal.
There could yet be a bidding war, because other parties have expressed interest, but Aristocrat is in the box seat with the support of the Playtech board.
Figures revealed last month show Aristocrat's revenue from digital gaming grew 15 per cent to $2.6 billion, and made up more than half of the company's after-tax profit of $820 million.
Real money gaming is set to massively expand. Mr Mansfield says that while it is currently only legal in six of America's 50 states, he sees that changing as cash-strapped jurisdictions seek money.
"Now, in the US, it's about a $4 billion market and future growth really hinges on more and more states legalising real money gaming," he explains.
"There's not a lot of momentum yet in other states (to make it legal) but over a long enough time horizon we do expect more states will get comfortable with this type of gaming and eventually legalise it."
In a note to clients, Morgans senior analyst Alexander Mees argues RGM – in the United States of America alone – could be a $US70 billion ($98 billion) business in a few short years.
Mr Mees predicts the proposed deal could lift Aristocrat Leisure's earnings before interest, taxes and amortisation by 17 per cent in the financial year of 2023.
"We expect the strong sector growth to be driven by a North America market growing at a compound annual growth rate of close to 50 per cent as more US states liberalise and allow online iGaming and online sports betting," he notes.
Not everyone is pleased by the development.
"Real money gaming is the most pernicious, dangerous gaming there is. It means that I can literally lose my home without leaving my home."
Reverend Tim Costello is chief advocate for the Alliance for Gambling Reform, an umbrella organisation for more than 60 groups that aim to prevent harm from betting.
"I can be sitting here – alone, drinking – playing real money gaming, which just means actual cash," he warns.
"Presently illegal here, things like roulette and casino games in my home. It is devastating."
When Andrew Wilkie took on the country's most persuasive political operators, he wasn't prepared for the bloodbath that followed.
With RMG illegal, Australians can play online casinos to win "tokens" but not actual money.
But just last month a Tasmanian woman pleaded guilty to stealing $940,000 from her employer to fund her addiction to an online gambling game that does not pay out real money.
Federal government agency the Australian Institute of Health and Welfare estimates Australians lost approximately $25 billion on legal forms of gambling in 2018-19.
This is the largest per capita loss in the world, meaning Australians lose more money gambling — per person – than any other country in the world.
If Aristocrat buys Playtech, Mr Costello sees inevitable pressure from the company for Australian states and territories to make RGM legal.
"This is really profoundly dangerous," he says.
"They are so cashed up, they will be so powerful, that our politicians will just fall by the wayside."
A spokesperson for Aristocrat said the acquisition would combine its knowledge and relationships with regulators with Playtech's RMG technology and its existing consumer base in the US and Europe.
"The combined group would offer a broad portfolio of end-to-end solutions for gaming customers around the world, as well as seamless player experiences," the statement noted.
"Underpinned by a shared focus on responsible gameplay and innovation."
Playtech shareholders will vote on the deal on January 12.
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