US financial daily "The Wall Street Journal" last week reported that US gambling giant Caesars was considering selling the business of Israeli company Playtika, and had hired the Raine Group investment bank to handle the offers it has received, which the Wall Street Journal said were not solicited, reflecting a $4 billion value for the company. Caesars Interactive Entertainment CEO Mitch Garber told the daily that no formal sale process was taking place, and a deal might not be agreed. He added that Caesars definitely wanted to hear what people had to say about Playtika, leaving little room for doubt that Caesars would be more than happy to make a 4000% return on its investment in the Israeli company.
Caesars acquired Playtika for $100 million in 2011 from Israeli founders Robert Antokol, who is still CEO of the company, and Uri Shahak, son of late IDF chief of staff Amnon Lipkin-Shahak. Playtika, a completely independent unit within Caesars, has become the world's leading player in the social games niche, as its results prove: $725 million in revenue last year, compared with $549 million in 2014 and $54 million in the year the company was acquired. The company's revenue reached $218.2 million in the first quarter of 2016, 10% quarterly growth and 30% annualized growth, reflecting $900 million annualized revenue.
Playtika's profit margins are stunning, even for an Internet business. Caesars reports its earnings before interest, taxes, depreciation, and amortization (EBITDA) for all its online business, which includes Playtika, global poker tournaments, and games played with real money (Playtika games are for virtual game coins, not real money. Payments are made only in order to advance to higher stages of the game). Caesars's EBITDA for its online business totaled $89.3 million profit in the first quarter of 2016. Since Playtika accounts for 96% of Caesars's online revenue, it can be concluded that most of this is attributable to Playtika, giving the latter a 40% profit margin, an amazing figure, and $350 million in annualized EBITDA.
The winning formula
A social game is one played on social networks like Facebook. Playtika currently has six games: four casino, one poker, and one bingo. The company's main game, Slotomania, is a casino game that has become the leading brand name in its field. In contrast to social games companies like Zynga and King, Playtika has found the winning formula combining the social element with the gambling element.
Playtika has over 1,300 employees. The company's senior management is located in Israel, and its development center in Israel has a staff of over 250. In recent months, the company has recruited dozens more employees, many for its business in Israel located in Herzliya Pituah. The company also has 12 more centers worldwide - not only research and development - and its foreign development activity is concentrated in Eastern European countries like Romania and Ukraine.
"The Wall Street Journal" says that potential buyers for Playtika could be financial companies, although it does not explain why, unless private equity funds are involved, or games, media, and entertainment companies, according to one source close to the company. "Globes" recently estimated the company's value at $3 billion, and this valuation has now received strong confirmation.
Why is Caesars considering putting Playtika up for sale instead of making the company public? Beside the weak state of the primary market, another reason might be that the convoluted corporate structure of Caesars as a whole and the liquidity problems in its conventional business of operating casinos and hotels. Caesars spun off its online activity in 2013, and incorporated it in a company named Caesars Acquisition - the public company that reports Playtika's results. The conventional activity is in a public company named Caesars Entertainment, which ran into liquidity problems last year. Caesars Acquisitions' market cap and Caesars Entertainment have market caps of $1.2 billion and $1 billion, respectively, and the discount on the value of Playtika is a result of the liquidity problems facing the rest of the group.
Published by Globes [online], Israel business news - www.globes-online.com - on May 15, 2016
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