Originally published on EGR
Overarching optimism will return to bolster the US in the mid-term
The pandemic reminded us that there are always some event horizons which you simply can’t see past. However, we like to start with the framework of what we know and understand and work forward from there. With that in mind, the year ahead promises to be another exciting one for a great and resilient industry, particularly amid the evolving US landscape.
While the US has obviously lost its untouched greenfield status, huge opportunities are still abound stateside, with the outlook remaining very positive over the mid- to long-term for online sports betting and gaming. The ongoing migration of consumer behaviour from land-based retail to online and digital will carry on regardless. Naturally, that tide is only rolling one way. Ultimately, nowadays, the demand that’s driving everything hinges on frictionless and convenient access to entertainment where the digital channels offer increasingly compelling value.
Market withdrawals will continue
Short-term headwinds are undeniable, especially in a US market that has generated a level of hyper-competition whose crucible is proving too hot to handle for most. To wit, we’ve already witnessed 40-plus businesses all competing to capture market share. And a lot of those businesses were funded under a low cost of capital model that’s been prevalent in the industry over the past two to three years, when access to money was comparatively easy and cheap.
The capital markets, both private and public, have, of course, altered dramatically – and in the last six to 12 months in particular. There will be enormous pressure on the management of loss-making businesses to cut costs and show a clear and believable path to profitability. As a result, and in our view at Tekkorp Capital Advisors, there’s a large number of companies in the US that will either withdraw operations from the US or close shop completely. “De-prioritising the US” may soon be the new conscious uncoupling for many.
Strategic M&A will step in
In addition, and in response to this shorter term shuttering, selective strategic M&A will be the next travelling show to pass through town in 2023. And it should stay for a while. This trend in activity will be driven by companies with strong balance sheets and positive free-cash flow, backed by solid operating assets. These companies will be looking for strategic bolt-on opportunities and be largely funded by cash on the balance sheet (which will limit the size of deals) and at single to low double-digit multiples.
Valuation and routes to profitability are still the ultimate pressing questions for many. Nevertheless, we’re in the early skirmishes and there’s so much scope for growth from both foreseeable and unimagined sources. It’s also worth remembering that neither online sports betting nor igaming is currently legal in the three biggest states by population in the country. In short, many cards, not to mention bettors, have yet to show their hands. What we do know is that there will be fewer, more profitable, competitors in the US over the next 24 months and these companies will reap the rewards of the fastest growing large-scale market in the world.