FDJ has a government-granted monopoly in France on the lottery and POS sports betting. As well, it owns the Irish lottery. This is a consistent, high-quality business with 3-5% organic growth. At the pre-acquisition TEV, FDJ trades at 15x 2023 FCF. 

 

--

 

Monopoly Status

 

Several points to make about the French monopoly status.

1) It was signed as a 25 year monopoly, and 20 years remain. It expires in 2044.

2) The EU opened an investigation three years ago regarding the price FDJ paid the French government for the monopoly contract. This has weighed on the share price. However, management discussed the matter on the latest quarterly call. The investigation is going nowhere and they believe it will be closed in Q4. The gist is that the European Commission is not making this a priority, and if the EC were going to pursue the matter, there would have been far more back-and-forth with FDJ.

 

From latest call:

 

"I don't know if I can translate like that. It's not a big deal for the European Commission. It doesn't need to have the new people business set. We know also that the European Commission wants to come to an end to this in that inquiry. We know that the French state is doing also the job to come to an end. So we are reasonably positive on the fact that we will come to a conclusion in the coming months. Clearly, we cannot comment on that. You know that we have no real weight on this decision directly us. This is what we have understood, and this is also what we would like to happen. I think you will maybe say that we have said that several times. But this time, it maybe more probable. But still, it's not totally certain. So we will see, but we have a reasonable hope that we will come to an end with this case -- end of Q3, beginning of Q4."

 

"We are confident that there's no commitment from the European Commission. So it remained our good feeling. So let's see. But the only thing which is sure that as Pascal said, there will be the end of the current mandature. So the team will -- there will be some shift within or amongst the team. We assume that the current team maybe want to get rid of this. It might not be the most important investigation for them. But we know in the backlog, there are something like 40 different investigations. So that's our best, I will say, a lecture of the current situation. But it remains our view. We don't have any commitment, nor on the outcome, nor on the calendar from the European Commission."

 

3) The French government has no incentive to switch the lottery provider in two decades for several reasons: (a) FDJ has done a fine job running it. No corruption. No mis-management. FDJ is viewed as a top-flight operator (b) The French government receives over 90% of Gross Winning Revenue (GWR) less operating expenses via taxes and their ownership stake in FDJ. So why risk a new operator to try to claw away a fraction of FDJ's profits? In two decades, the French government has a strong incentive to re-sign FDJ at a reasonable price. The risk of a new operator is not worth the small potential reward.

4) FDJ has a deep moat in its relationships with lottery retailers. These relationships would not pass to a new operator, and a new operator would need to re-form a relationship with these 29k POS locations. As well, the POS signage and some POS equipment belongs to FDJ. As a counter, if the lottery were to move fully online, FDJ's position would be severely weakened.

5) Related to #4, FDJ made two small POS terminal acquisitions. So many individual retailers are using POS software and hardware from FDJ. This is not irreplace-able, but it makes it more difficult for a new lottery company.

6) Pro-forma the acquisition, the French Monopoly will produce two-thirds of the profits. However, the rest of the business is growing about 5% per year faster.

 

--

 

Current Valuation of FDJ (Pre Kindred Acquisition)

 

One recent positive is that 3% of shares outstanding were wiped out in a legal dispute. 

MktCap: 185.27mm * E37.80 --> E7.0bn

Net Cash = E600mm

TEV = E6.4bn

 

The Net Cash position in FDJ is a little complicated. First, I do not count lease debt as I will subtract out lease expenses from EBITDA. Second, there is an off-balance sheet liability (Euromillions jackpot) that needs to be paid as players win the large jackpots. 

 

EBITDA '24 = E695mm (9.2x)

 - I have subtracted the excess sportsbook winnings in H1

Capex = E125mm

Lease = E10mm

Taxes = E140mm (25% tax rate; D&A and capex about equal) 

FCF = E420mm (15.2x)

 

--

 

Kindred Acquisition

- Announced January 2024; to close at end of 2024;

- mgmt refuted rumors of problems or a forced divestiture of French unit. From latest call: "And to make it even, we say, even clearer, there are a lot of [indiscernible], a lot of things which are being said regarding the fact that maybe among the remedies there could be the disposal of the Unibet brand in France. To put it bluntly, this is totally false, either nonsense or a lie, whatever you want."

- They are going to close all non-regulated countries except Finland (because there is a process in place in Finland for regulation). Norway, Hungary, and Poland are the most important. If they offer a process for a regulated market, FDJ will remain or seek to re-enter. I do not include any upside from these possible re-entries.

- Paying E2.3bn; Note: this is different from the E2.6bn in deal announcement due to (a) cash produced in H1 and (b) I am not counting lease liabilities.

- Funding via cash-on-hand plus a bridge loan to be converted into more permanent capital. Net debt will initially exceed 2.0x, but mgmt stated it will quickly drop below. Including leases, I expect FDJ to exit acquisition with E2.0bn net debt.

- From mgmt: "we've been working closely with credit rating agencies and expect a solid investment-grade rating profile of the combined group to refinance further this operation." With the French 5-yr at 2.63%, I expect FDJ to raise the financing at 4-4.5%.

- I'd encourage you to read the prior two VIC write-ups on Kindred. They detail the turmoil and the opportunity.

- Kindred had control turmoil in 2022/2023, and the CEO and CFO left in 2023. As well, their financials suffered as they were forced to leave the Netherlands and then re-enter. However, H1 2024 results were strong and stable. 84% of gross winnings were from locally regulated markets, and this does not include Finland. 

- Kindred has scale both in online casino and sports betting in Netherlands, France, Belgium, UK (online gaming only), and Sweden. It does not have the North American growth opportunities as the other large competitors. It is an established player in well-developed markets in Europe. 

 

--

 

Standalone Valuation of Kindred (E2.3bn)

 

EBITDA '24: GBP 255mm --> GBP 220mm (after closing non-regulated) --> E260mm

Capex: GBP 55mm --> E65mm

Lease: GBP 15mm --> E18mm 

Taxes: E30mm

FCF = E147mm (15.6x) 

 

Kindred stuck to their GBP250mm guidance despite a very strong H1. However, this includes a few million in losses from the North America business they shuttered in H1.

 

--

 

Synergies

 

From M&A announcement call:

 

"we estimate that GGR growth will be accelerated by more than 50 basis points. EBITDA margin will be enhanced by more than 50 basis points."

 

"So we, of course, believe that they are revenue synergies in the way that we will work together to grow the activity in different markets. And on cost synergy, the main question, of course is on France, but we have not included any in our price, even though we think that there probably will be synergies in France, including in terms of brands because, of course, if we were to complete this transaction in France, we would have the possibility to have a better probably brand with Unibet. That's, of course, part of the synergy that you might imagine. But we've been very cautious on that at this point in the price."

 

"We have not integrated any synergies in the figures that we have communicated and the 50 basis point accretion EBITDA margin is without synergies. The magnitude of synergies are some dozens of millions of euros, it's quite small regarding the old operation, but it's still -- it's interesting."

 

[I believe what they are describing as these "non-synergy" synergies are corporate headquarters duplication.]

 

"So we will work as soon as possible with Kindred to see what will be the timing of the transition between our technology in France and KSP [Kindred Sportsbook Platform]. And this is really part of the synergies, and it will be integrated in the rollout plan of KSP that has been already set. And Nils said that it will take place between 2024 and end of 2025, beginning with 2026. So it will be in this time frame, then we will turn the technology in France from the one we have now to KSP to have a complete technology stack, cutting-edge and financially efficient."

 

Based on management's comments, FDJ will see at least E50mm in additional EBITDA after fully integrated. This is via headquarters costs; software development consolidation; Advertising and Promotion in France; operations in France.

 

--

 

Valuation after the Acquisition

 

Pro-forma for the acquisition (without synergies and the 50bps from "non-synergy synergies"),

 

TEV = E8.7bn

EBITDA '24 = E955mm

Lease = E28mm

Capex = E190mm

Interest = E80mm

Taxes = E145mm

FCF = E512mm (14.1x) with a combined organic growth rate of 5-6%.

 

With cost synergies (including announced 50bps margin improvement), FDJ is trading at under 13x. Comps are difficult here because the other large online gaming companies are seeking growth in the U.S. FDJ has lower risk (and also less upside). FDJ is a steady cash-flow producer (consumer staple) with a runway of MSD growth that should trade 20-25x, depending on how one projects the French monopoly concession process in two decades.

 

--

 

Catalysts

 

Deal completion and new guidance (with synergy details) in Q1'25

EU Commission formally closing the investigation

 

--

 

Risks

 

Kindred deal blocked -- although FDJ is cheap-to-fair as a standalone

EU takes action on investigation

 

Regulators -- This is always the main risk. However, in their core markets, the regulatory environment has been in place and stable.