This report will cover the following topics:
Casinos: A Long History of Games and Gathering.
Investment Thesis.
Business Description.
The Online Gambling Market & Competition.
Purchase Price Analysis of Acquisitions.
Organic Growth Drivers & Cash Profitability.
Capital Allocation & Reinvestment Potential.
Valuation Model, Drivers & Risks.
Casinos: A Long History of Games and Gathering
Pinpointing the exact origin of casinos is a tricky task, but their legacy stretches far back. In civilizations like ancient Rome and China, people were already enjoying games that relied on luck and chance. For the Romans, gambling wasn't just entertainment; it also served as a source of revenue for the government.
The Ridotto in Venice, established in 1638, was a prime example. The Ridotto wasn't a standalone building however, but rather a hidden world within the Palazzo Dandolo, a palace near San Moisé church. Its name, "Il Ridotto," translates to "the private room," but in this case, it became a surprisingly public space for gambling.
The twist? It was government-run. This key detail made the Ridotto, established in 1638, the first legal commercial casino anywhere. Private gambling dens existed, but the Ridotto brought a layer of legitimacy and control.
This shift came after a surge of private gambling clubs sprouted throughout Venice. Unable to stamp them out, the city leaders adopted a "if you can't beat them, join them" mentality. By regulating gambling, they could profit from it.
The Ridotto itself wasn't a cramped den. This four-story wing boasted a grand entrance hall and lavishly decorated dining rooms. The real action, however, happened on the upper floors where the gambling tables resided.
While Il Ridotto lacked the variety of games we see in modern casinos, it did offer Biribi, also known as Cavagnole. This game resembled Roulette in its core mechanic. Imagine a board with numbered spaces, from 1 to 70.
Players would pick a lucky number and place their bets. Once everyone was in, a banker would draw a numbered token from a bag and announce it. If your chosen number matched the drawn one, you'd win a whopping 64 times your stake! Otherwise, your bet went to the house (the banker).
While Biribi catered to a wider range of players with its low stakes, Il Ridotto also offered Bassetta (sometimes called Barbacole or Hocca) – a card game known for its sophistication and high stakes. Considered a game for the wealthy, Bassetta was a potential path to significant losses or, for the daring, immense wins.
This early predecessor of Biribi involved players seated around a table with the banker. Each player had a "book" with thirteen cards, where they could place wagers. The banker would then flip the deck, revealing cards one by one. The outcome depended on the revealed card's rank and the player's bets. Wins and losses alternated between players and the banker throughout the reveal.
The thrill of Bassetta came with the "sept-et-la-va" (seven and the go) option. If a player had a winning card, they could choose to increase their stake. If the card won again, the payout would be a staggering seven times the original bet! This high-risk, high-reward element made Bassetta a favourite among Venice's elite.
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Despite opening in 1638, Il Ridotto's reign as a legal gambling haven lasted a surprisingly long time. Even though games of chance were outlawed across Italy, the Ridotto remained open for over a century.
However, by the 18th century, calls for reform grew louder. Venetian reformer Giorgio Pisani championed the closure of Il Ridotto, arguing it would "preserve the piety, sound discipline and moderate behaviour" of Venice's citizens. His message resonated – the vote to close the casino in 1774 passed with an overwhelming majority, marking the end of an era for public gambling in Venice.
The casino eventually found its current, and arguably most magnificent, home in the Ca' Vendramin Calergi. This stunning Renaissance palace, built in the 15th century by architect Mauro Codussi (known for his work on Venetian churches), became the unlikely host of a gambling haven. One can only wonder what Codussi would have thought!
Commissioned by Andrea Loredan, the palace boasted frescoes and paintings by Italian masters like Palma il Giovane and Gian Battista Crosato. Art wasn't the only luxury; the residence housed Italian royalty and even welcomed famed composer Richard Wagner for a time.
Over the centuries, the palace fell into disrepair, but the city of Venice saw its potential. They purchased it in 1946,restored it to its former glory, and in 1959, the Ca' Vendramin Calergi reopened – transformed into the Casinò di Venezia, Venice's official casino.
Today, the Casinò di Venezia sits majestically on the Grand Canal, offering a luxurious gambling experience within its historic walls. A free boat service whisks guests to the front door, and a restaurant and private garden complete the experience. Venice's love affair with gambling, it seems, has come full circle, with the Casinò di Venezia standing as a dazzling testament to this enduring tradition.
By the 18th century, the casino scene was booming across Europe. Card games remained popular, but new options like roulette and other table games started to diversify the offerings. Casinos even began to incorporate live music and shows, transforming themselves into full-fledged entertainment destinations.
The 19th century witnessed casinos crossing the Atlantic and finding a new home in the United States. The El Monte Casino in California, which opened in 1823, marked this shift. San Francisco followed suit in 1849 with its own casino. By the late 1800s, gambling had become a favourite pastime in many American cities, particularly in the Wild West. These early American casinos might not have had the glitz of their modern counterparts in Las Vegas, but they laid the foundation for the booming casino industry we see today.
Investment Thesis
Market Leader for Foreseeable Future
Migration of Casinos to Online Environments
M&A Opportunties
Future Share Cannibal
Market Leader for Foreseeable Future
Standing strong as the world's leading Live Casino provider, Evolution AB (Evolution) is relentless in its pursuit of staying ahead. Innovation and maintaining a competitive edge are ingrained in the company's core values. With a team of experienced operators and leadership at the helm, Evolution is well-positioned to dominate the Live Casino market for years to come.
Several factors solidify Evolution's dominance in the Live Casino market:
Economies of Scale: Launching a live casino operation requires significant investment and expertise. This “high barrier to success” makes it difficult for new competitors to challenge Evolution's established infrastructure.
Strong Brand Reputation: Evolution's brand is synonymous with quality Live Casino experiences. This recognition makes it easier to attract and retain both B2B customers (operators) and end-users (players).
High Switching Costs: As operators invest in custom-branded tables with Evolution, switching to another provider becomes more expensive and disruptive. This creates a strong incentive to stick with Evolution.
Limited Need for Multiple Suppliers: Operators typically find little value in partnering with multiple Live Casino providers. Evolution's comprehensive product suite often fulfills all their needs.
Unmatched Product Quality and Breadth: Evolution boasts a vast portfolio of high-quality games, making it difficult for competitors to offer a comparable selection that would entice B2B customers or players to switch.
Migration of Casinos to Online Environments
True to its name, Evolution is constantly innovating the way we gamble. They're not just pushing the boundaries of Live Casino with games like Lightning Roulette, but also introducing entirely new experiences like game shows. This commitment to fresh ideas is key to their success and, we believe, a major driver of future growth. Several factors will likely keep propelling Evolution's strong performance and will continue to change the dynamics between online and land based casinos: a growing market, new partnerships with B2B customers, expansion into new markets, and a rise in player engagement.
M&A Opportunties
Evolution's healthy finances and extensive reach position them perfectly to capitalize on promising acquisitions. Their substantial cash reserves, strong cash flow, and low-risk profile make it easy for them to secure favorable debt financing should they need it for future large acquisitions. Additionally, their expansive distribution network allows for potential synergies with other gambling content providers after a merger or acquisition. Based on review of company transcripts, management confirm their opportunistic approach to M&A, suggesting they're actively seeking strategic deals, which will discuss more in our ‘purchase price analysis of acquisitions.’
Future Share Cannibal
Evolution’s Board of Directors has more explicitly communicated there capital allocation framework in Q2 2024. Accordingly, they will now distribute 100 percent of the excess net cash flow remaining after investments, including M&A, to support ongoing operations. They will continue to pay a dividend of 50 percent of net profits annually, using the balance to repurchase shares unless an extraordinary dividend provides better shareholder value. The Board currently believes that investing in it’s own shares is highly value enhancing to shareholders and is initiating a buy-back program of up to EUR 400 million for the second time and we couldn’t agree more. Based on our estimate future cash flows, we think Evolution could become a share cannibal over time.