Teddy Sagi, the fearless Israeli billionaire of Playtech fame and sixth richest man in Israel according to the latest Israeli version of Forbes Magazine, has been keeping a low profile of late, but news leaks from his global organization are one thing that this intrepid CEO cannot control. Rumors have continued to find their way to industry rags in both the trading and gambling sectors that his flagship enterprise is going through a rather painful downsizing, one operating unit at a time. After spending much of last year conducting a high-profile acquisition spree, only to be thwarted in his efforts by domestic regulators that disapproved of his sordid past, Teddy’s team has now refocused on the knitting.
No matter what the particular industry might be, conventional wisdom has always stated that you must keep your eye on the prize and on the bottom line, especially if you are in a very lucrative and competitive business. Innovation trends, typically driven by the latest technology, can overwhelm entire industries in a short period of time, reshape the profit dynamics going forward, and leave previous winners gasping for air at the back of the pack. Such is the case with the revolutionary spread of online technology, as it has destroyed millions of jobs in its wake, while creating new opportunities at every turn. If companies are not quick to address these trends, which often eliminate labor costs from the profit equation, their competitors can overrun them in a flash.
Mr. Sagi’s strategy in 2015 was actually well thought out. His empire dealt mostly in the background, supplying software and automated solutions for thousands of betting terminals, primarily in the UK, but also across the European continent and beyond, as well. His gambit was to diversify his activities to include online gambling and investment trading, a multi-channel strategy that would increase growth possibilities and vest his organization on a more modern track, one that leveraged innovation in the online space. His treasury was full of cash, his lines of credit could choke a million horses, and his rapacious appetite hit the streets, hungry for merger candidates of all sizes. The only problem with Teddy’s plan was that regulators in Ireland and the UK did not approve.
The last time we checked in on the exploits of this clever entrepreneur, he was licking his wounds from his regulatory skirmishes, but also sharpening his teeth for more fresh acquisition meat. Press accounts linked Teddy to discussions with IronFX, Amaya, and OpenBet, another UK-based enterprise. There was another suitor for this latter company that assembled a higher bid, but analysts felt the FCA would block Sagi’s takeover bid, if one had ever materialized. IronFX has been in the news as the primary target for a complex reverse merger, and Amaya, a Canadian based giant in the online poker industry, remains independent and active.
How are changes in the gambling industry impacting Playtech and its plans?
The nature of the gambling industry from a profit perspective has changed dramatically over the past decade. Casinos may still hold sway, but the advent of the Internet and mobile phones have had an enormous effect on existing business models. Major shifts are occurring between how gambling is conducted, how customers are defined, and even where and when the gambling takes place. As in other industries, the Internet does not require traditional brick and mortar establishments. As populations age, the tend to switch to newer technologies, causing a dichotomy between old and new ways of doing business. The challenge for betting shops is how to remain relevant.
The numbers tell the story. Per one reporter, “The internet and mobile phones have changed the face of the gambling industry. Mobile gaming rose by 75% in 2012, and was predicted to increase an additional 84% between 2013 and 2015 with mobile gambling more than doubling in 2014 alone. Now, the amount of bets placed on mobile devices is said to hit $100 billion, with 164 million people using mobile devices to visit a mobile casino, place a bet, or purchase a lottery ticket. By 2018 the mobile gambling industry is set to take 40% of the total online gambling market.”
The industry is ripe for consolidation, restructuring, and innovation. Market shares are up for grabs, an environment where larger and better-capitalized firms gobble up smaller fish in the sea. Playtech will be a lasting player in this arena, sporting a current market capitalization of $3.7 billion. For calendar 2015, the company witnessed a 38% growth in revenues to €630 million. Net profits grew by 8% to €205.9 million, a hefty profit margin of 32.7%. With margins like these, Playtech is a cash generator that will not quit. Its free cash position at yearend stood at €858 million
As for internal demographics, Palytech’s Casino Gaming Division remained its largest contributing vertical, growing at 26%, while the new Financial Division, the result of the TradeFX/Markets.com acquisition, outperformed expectations, despite the Ava Trade and Plus500 deals that fell through. Revenues grew 40% to €90 million. From a financial perspective, Playtech was more than prepared for battle in 2016.
What has Playtech achieved thus far in calendar 2016?
After the drama that took place in 2015, Playtech has been a bit more cautious, as might be expected in the current year. Teddy Sagi, the ever present and gregarious leader of his gambling juggernaut, seems to have learned to keep his mouth shut. The Press, however, has not ignored him, but in order to have storyline material, reporters have had to dig a little deeper. Surprisingly, the prevailing reports have had to do with what have been termed “massive layoffs” and “major cost-cutting moves” that seem to imply that the firm may be on the financial ropes.
Such is not the case. The Markets.com and X-Wise business units have undergone cutbacks in sales personnel, 80 for the former and 150 for the latter, primarily direct calling salesmen located in the Israeli offices for the company. Industry regulations and a shift to more automated marketing methods have been cited for the reasons. Cold calling units domiciled in Israel for numerous global brokers have recently come under fire from foreign regulators for shady business practices. The Times of Israel has been running a series of articles detailing aggressive marketing practices and outright fraud. It may also be that Mr. Sagi would like to avoid the local spotlight on any wrongdoings.
There had also been headlines that Playtech was backing out of lease commitments for Tel Aviv’s Sarona Tower, where the plan had been to occupy four and one half floors by 2017. The plan now is to take down only two floors. Original estimates had assumed a different reorganization plan when and if Ava Trade and Plus500 were added to the mix. Without these entities contributing staff, a different approach to sales, retention and customer service operations could be pursued in lower cost markets. Once again, press comments that spoke to the demise of Playtech were incorrect at best.
Regardless of these minor restructuring efforts, Sagi and crew have not given up on finding new business partners through the acquisition route. Many analysts, ourselves included, suggested that Playtech look beyond the UK for targets, if only to avoid the scrutiny and need for approval from the FCA. Playtech followed suit. In May, it acquired Swedish online slot machine games provider Quickspin AB for roughly €50 million, and in July, it bought a 90% stake in Austrian rival Best Gaming Technology (BGT) for €138 million.
As for the latter acquisition, Playtech CEO Mor Weizer said, “BGT is the leading provider of sports betting software and solutions for gaming and sports betting operators in what is one of the fastest growing verticals of our industry. BGT offers the market’s most sophisticated retail sports solution which is also both modularized and flexible, allowing Playtech to quickly integrate with its own platform.”
The purchase of Quickspin, however, created much more discussion, as to what it could mean in the future. One reporter noted that, “The deal immediately put Playtech in the position of being a slot games supplier to Amaya. Playtech and Amaya have now agreed to expand the deal, and the three most recent releases from QuickSpin will soon make their appearance in the PokerStars casino client.” Do these actions imply that Amaya is in play once more and that Playtech could be the possible suitor? Neither company is acknowledging any merger discussions, but speculation will undoubtedly continue until someone speaks up publicly on the matter.
What other tidbits about Teddy Sagi are surfacing in press backrooms?
It is almost a given that billionaires do not get that way without having moved about in the shadows, conducted a few business dealing of a highly questionable nature, or tried every trick in the book to avoid the tax man. No one could have foreseen the fallout to come before the International Consortium of Investigative Journalists began releasing the “Panama Papers”. Nearly 11 million documents revealed a level of bribery and corruption on a global basis that had never been heard of before. From numerous government officials to the wealthy and influential, even Vladimir Putin’s cronies have been accused of laundering $2 billion through the Panamian Mossack Fonseca corruption racket.
What does this have to do with Teddy Sagi? Haaretz, an Israeli news source, reported that, “Teddy Sagi is the first person associated with the gambling industry to be found in the Panama Papers and has 16 different shell corporations through Mossack Fonseca.” In a related story, Amaya CEO and Chairman, David Baazov, may also have assets in Mossack Fonseca. As a result of these ongoing revelations and that he may have been involved in an insider trading scandal, Mr. Baazov, has stepped down indefinitely as CEO. I doubt if merger talks between Playtech and Amaya will ever get off the ground anytime soon. The regulators and the Press would have a field day.
Despite attempts by reporters to create financial strife where there is none, Playtech continues on making money hand over fist, gobbling up more gambling-related companies right and left, and all the while attending to the normal business process of internal restructuring for more efficiency and higher profits.
Teddy Sagi may be keeping his smiles to himself these days and maintaining a lower profile, but his burgeoning gaming empire is busy making money the old fashioned way by increasing revenues and cutting costs. In the meantime, the press will continue to look for a new angle of attack, but Teddy is thick skinned, another attribute of the rich.