November 03, 2021 - 11:16am EST by
2021 2022
Price: 10.00 EPS 0 0
Shares Out. (in M): 50 P/E 0 0
Market Cap (in $M): 497 P/FCF 0 0
Net Debt (in $M): -144 EBIT 0 0
TEV (in $M): 353 TEV/EBIT 0 0

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DDMX / CDRO - Codere Online - Long $10.00, Market Cap $497mm

Compelling Entry Point into Fast Growth Latam Online Casino 


We are recommending an investment in DD3 Acquisition Corp II (Nasdaq: DDMX), soon to be (Nasdaq: CDRO). DDMX is merging with Codere, S.A., a leading gaming operator with a presence in Mexico, and other Latin American countries.  Post merger, the Company will become one of the largest online casinos in Latin America (with a significant presence in Spain and Italy as well). The transaction dynamics are quite interesting and increase our excitement. Unlike most SPAC transactions which seem to involve ever increasing multiples, DDMX is acquiring an asset from a forced seller. This is a SPAC transaction and spinoff/restructuring play all in one. Codere (parent) was forced to restructure itself following the Covid-19 pandemic. In April, the Company entered into a restructuring transaction, which was ratified by shareholders on May 11, 2021. Creditors received ~95% of the company.  (For full details, see Codere’s Q1 2021 earnings presentation).  


In an attempt to maximize value and increase liquidity, Codere announced the sale of its online business to DDMX in June 2021. We believe the valuation multiples are quite compelling at 2.3x 2022E sales. There have been numerous online gaming transactions recently and it wouldn’t surprise us for this asset to become a take-out target in the coming months. Note: The vote to approve the deal is on Nov. 18.


We believe the stock is worth ~$14 on a standalone basis (3.2x 2023E revenues) for +41% upside. At our price target, the stock would still be one of the cheapest online gaming companies. In a takeout, we believe the stock is worth $17-20 (4.5x 2023E revenues).

Note: Target prices takes target EV less cash at YE22

Source: Bloomberg

Why the Opportunity Exists: The Restructuring


Codere Online is currently a subsidiary of Codere Group (Parent), which operates 23k slots in 6.6k venues throughout Spain, Italy, and Latam. Codere Group entered the pandemic highly leveraged like most casinos and saw its revenues all but evaporate. Revenues declined 89% YoY to €39mm in 2Q20 from €347mm in 2Q19 but only bounced back to €140mm in 2Q21 (40% of pre-covid levels). The debt holders looked at ways to maximize their recovery and agreed that spinning off Codere Online with an appropriate amount of capital would maximize their proceeds. 


You can see the precipitous decline in revenue, profitability, and cash flow for the Parent. Post Covid recovery has been slow.



This led Codere to approach DD3’s second spac, DD3 Acquisition Corp (Ticker: DDMX), to merge Codere Online with DDMX. Down the line, these shareholders are not in the business of owning equities so it’s likely they’ll want the company sold in short order (more on this later).


From Codere Parent on H1 earnings call 9/1/21:
Before I hand it over to Angel, I want to briefly discuss the online transaction we

announced on June 21, which we -- I believe is a great deal for the company in these

challenging times, turned in a difficult situation and into a great opportunity for Codere



A few months after the COVID outburst last year, it became clear that the group could not

fund the needs from our online business unit, let alone its growth or expansion into new

markets, which could eventually translate into missing out on the great opportunities that lie ahead in Latin America. We immediately started working on different standalone funding alternatives and ended up choosing DD3 to disposing minority stake in our online business, in order to merge it with one of their SPAC. DD3's track record, the transaction restructure, in which we maintain a majority position and existing management team, the exposure to the U.S. through the NASDAQ listing where there is great opportunity for online gaming companies, and of course evaluation where all key elements that made us by far the best option.


So we are completely focused today on the restructuring and survival and in this protracted crisis that has drove crazy all the industry and all the world. And then we of course, we will focus on recovery in EBITDA levels through 2019 and beyond and focus on growth opportunities.  Fortunately many of the most important growth opportunities that will be online will be not subject to financial restrictions, provided the DD3 transaction, we have announced finalized as expected before year end.


Company Overview

Codere Online is an international online casino gaming and sports betting company operating primarily in Spain, Italy, Mexico, Colombia and Panama where it offers its users the ability to play online casino games and bet on sports events, and expects to start operating in the City of Buenos Aires (Argentina) in late 2021. Codere Online maintains a wide and updated catalogue of online casino games with over 900 titles from more than 20 third-party content providers.


Codere Online launched in Spain in 2014.  In their core markets, they count over 3m registered players.  The company is focused on leveraging the Codere brand, which has been around since the 1980s. Codere Online leverages a 3rd party tech stack (e.g., Playtech) but has its own player management system, cashier, and front end.


Spain: The online gaming market in Spain has grown at a 22% CAGR over the last 5 years,  reaching ~€851mm in 2020. The market is conservatively forecast to grow at a 6% CAGR over the next 6 years. Spain is currently the largest market for CDRO at 61% of projected 2021 revenues. Codere entered the market in 2014 and has grown its revenues consistently. The Spanish government implemented new laws in November 2020 to limit advertising which is creating headwinds for all the casinos in the market. However, once the industry lap these 

headwinds, the market should resume its strong growth rates. 


Mexico: The online gaming market in Mexico has grown at a 28% CAGR over the last 5 years,  reaching ~$183mm in 2020. The market is conservatively forecast to grow at a 19% CAGR and should reach $625mm by 2027. Mexico is the largest gaming market in LatAm and is still in its infancy with such a small market. CDRO entered the market in 2016 but didn’t fully launch commercially until 2019. Mexico is currently the 2nd largest market for CDRO at 33% of projected 2021 revenues and should continue to be one of the company’s best opportunities for scale and higher margins. The largest players in Mexico are Caliente, Codere, and Playcity.


Colombia: The online gaming market in Colombia has grown at a 68% CAGR over the last 3 years, albeit off of a small base. CDRO entered the market in 2019 and expects ~$5mm of revenues in 2021. Players in the market include Bwin (ticker: ENT LN), Sportium (owned by Cirsa), Codere, Luckia, Rush Street (ticker: RSI) and Betfair (recently purchased by Paddy Power).  


Argentina (Buenos Aires):  Argentina is Latin America’s fourth-largest country and second-biggest economy. Gambling is regulated on a province-by-province basis, with operators only allowed to offer their services to residents of their province. In those that choose to regulate, operators are allowed to offer virtually all forms of gambling. The potential online TAM is around $260mm. Codere’s brand has been in the country for over 30 years and the company expects to begin its online operations in Buenos Aires at the end of this year. 


Italy: Italy is the 2nd largest online gaming market in Europe after the UK. The online gaming market in Italy has grown at a 26% CAGR over the last 5 years and ended 2020 at €2.5bn. Codere entered Italy earlier this year through a partnership with Microgaming. It remains to be seen how successful the company will be in Italy but if the company is able to win a small share of the market, the upside is large.


Brazil: Brazil may be one of the most exciting markets given its the largest market by both GDP and population. The online gaming market is forecast to grow to $1.3bn by 2027. Right now the market is unregulated but Congress continues to discuss regulating the market. Once the market eventually becomes regulated (potentially in 2022), Codere would be almost certain to receive a license. 

Transaction Overview

In June 2021, DD3 Acquisition Corp II announced its plans to merge with Codere Online. PIPE investors committed $67mm including investments from Baron Funds, MG Partners, and DD3 Capital Partners plus an additional $10mm in DD3 shares Barons pledged not to redeem.


The $77mm in guaranteed capital fully covers the required cash minimum. The pro-forma EV assuming no redemptions is $353mm vs 2022E revenues of $152mm, putting the stock at a very reasonably priced 2.3x revenues.

We were particularly encouraged by Baron’s involvement in the diligence process.  Baron will own ~3.5mm shares.  Baron received a nominal number of founder’s shares (37k) bringing its cost basis to $9.90. This is not a situation where an anchor was brought in under materially different terms. 


Sponsor Background

DD3 Capital Partners are Latam focused sponsors. Their first SPAC was Betterware (BWMX), which listed on the NASDAQ last year and is one of the best performing SPAC investments in history.  BWMX shares were up 5x from the SPAC price (a little over 3x today) and Management has delivered on all accounts. We believe DD3 has learned from the issues they had with BWMX initially including investor awareness and this won't be the same issue when it comes to Codere. They have already lined up a number of analysts for coverage when they despac and have management and the sponsors hitting the road regularly to get the word out.


Unlike many (recent) SPACs the DD3 is execution focused, and a value buyer - they are not promoters or SPAC peddlers that rely on celebrities and pie-in-the-sky ideas to drive absurd valuations.


Online Gaming has Been a Bright Spot for the SPAC market

There have been 5 SPAC announcements in the online gaming vertical.  The three transactions that have closed have generated strong shareholder returns. In August, DraftKings announced it would acquire GNOG in an all stock transaction representing 7.6x 2022 revenue.

Tenants of the Bull Case

1. Secular Growth & Large TAM 

The Latam online gaming market is currently $0.3bn and expected to increase 10x over the next 7 years as new markets legalize and market share shifts from unregulated players to regulated players. Codere believes its TAM could be up to $8bn including both core markets and expected expansion markets. Core markets include Spain, Italy, Mexico, Colombia, Panama, and the City of Buenos Aires. Expansion markets include Brazil, Chile, Peru, Puerto Rico, Uruguay, and Argentina (excluding BA).


Goldman Sachs forecasts iGaming could balloon to $14 billion in revenue in 2033 from $1.5 billion today. This equates to a (CAGR) of 27% for more than a decade.


Key markets have already opened in recent years through new regulation, including Panama in 2018, Colombia in 2019 and Buenos Aires in 2020.  Codere will use the proceeds from the transaction to gain market share through both increased marketing and tech investments and product build outs. 


While the company isn’t currently in the US, there’s a compelling case to be made for targeting the under-penetrated US Hispanic market.  This could be done directly or via strategic partnerships.


2. Consolidating Industry

The online gaming (and sports betting) industry has seen a recent flurry of M&A activity. It’s no surprise that 2 of the 9 names management used in their analysis are currently in the process of being acquired or were recently acquired. 


Some of the more recent and prominent deals include:


Caesars acquires William Hill for $3.7b - Sept 2020

GAN buys European iGaming /sportsbook operators Coolbet for $175mm - Nov 2020

Bally's acquires Gamesys for $2.7bn - Mar 2021

DraftKings buys Golden Nuggets Online Casino for $1.5b  - Aug 2021

Penn National Gaming buys Score Media and Gaming for $2bn - Aug 2021

SciPlay Forms Committee to Consider Scientific Games Takeover Offer - Aug 2021

Aristocrat launches bid to acquire online gaming platform Playtech for $2.9bn - Oct 2021


MGM Resorts CEO Bill Hornbuckle said online casinos are “the secret to this business,” and that it will eventually be two-thirds of the bottom line in the space.


The recent DraftKings (DKNG) acquisition of Golden Nuggets (GNOG) is interesting because on a base of ~$120mm revenues and $142mm in expenses (1H21 annualized), the acquirer expects to realize $300mm of of revenue uplift, COGS improvement, marketing efficiency, and corporate overhead scale. It all depends on who the ultimate buyer is for (CDRO) but it’s obvious the synergies would be high if strategic. The Golden Nugget acquisition price amounted to 7.6x 2022E revenues. If we did the same math for CDRO, the stock would be worth $26+. We think CDRO can command closer to 4.5-5x revenues from a strategic buyer given their strong positioning in high growth Latam markets.  


3. Cheap Valuation 

Codere’s valuation is too cheap in the context of the M&A boom in the industry. The stock is one of the cheapest names in the B2C casino space. US domiciled names tend to trade at a premium for a multitude of reasons.The next frontier for US companies to hunt for acquisitions with their strong currencies is the international space. Codere represents an attractively positioned online casino with nearly all the requisite licenses to be a takeout target. 


Codere trades at a 58% discount to peers on EV/2022 revenues and a 46% discount on EV/2023 revenues. Two things to note, the company will spend some of the cash at closing on growing their customer base, so the discount is slightly lower and the company isn’t focused on margins for the first few years given any potential acquirer is going to focus on revenue growth. 


Two interesting comps are Flutter and Entain. Flutter is expected to grow topline at just 12% in 2022 and trades at 3.7x revenues while Entain is expected to grow topline at 14% in 2022 and trades at 3.2x 2022 revenues. Codere trades at just 2.3x 2022 revenues (~30% discount to Flutter/Entain) and is expected to grow top-line at 40% (or nearly 3x the growth rate of these comps). 

Note:  Strikethrough font denotes the company was acquired or is currently being acquired.  

Source: Bloomberg 

Gaming/casino SPAC deals have universally been well received by the market as evidenced by the 5 announced/closed deals below. Every single deal is trading above $10 and in most cases significantly above $10. 

Source: Bloomberg 



Management has a reasonable strategy to execute their growth strategy. We also think management understands that it likely has a matter of quarters to execute before the sponsors, board, and investors become impatient. 


Moshe Edree, CEO: Edree’s most notable experience was as the COO of Playtech Turnkey Solutions. Edree joined Codere in 2018 to lead the online team

Alberto Telias, CMO: Telias was senior at Stars Group and helped work on PokerStars and Betstars

Aviv Sher, COO: Scher previously served as COO of NeoGames and CEO of Prime Gaming


There are several risks for this investment.




High redemptions could result in less cash to the SPAC and stock liquidity

The PIPE already assures the min cash closing condition. Unlike many SPACs, DDMX/Codere will not need to waive min cash.

Stock liquidity may be limited initially, but strong share price performance tends to drive increased interest and liquidity.  We are in a perverse environment where low float high redemption SPAC equities have been known to “meme”.  This is not the thesis here, but we will take it as an outside outcome. 

Currency fluctuations

Shares will trade in USD on the NASDAQ and operate in LatAm currencies and Euros.  Fluctuation will happen and should be monitored


Currently, most regulatory regimes favor online gaming, however, this could change and should be monitored

Management credibility and execution

The company has already guided down 4Q21 earnings after a light 3Q21. Codere expected to have more money over the summer to invest in the e business (They only had $7.8mm in cash as of June and had to conserve it). Once the company gets the $68-$144mm depending on the redemptions, we think we’ll see a significant acceleration in growth and that their out year guidance was conservative

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


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