Quick Pitch: Kindred Group (KIND-DB.ST)

Potential Company Sale – 20%+ Upside

 

This idea was shared by SSI subscriber Tom.

Kindred Group is one of the largest publicly-traded B2C online sports betting and igaming operators in Europe, with a number of market-leading brands, most notably Unibet. The company generates most of its revenues from online casino (57% of sales) and sports betting (39%), with primary geographic focus on Western Europe (60% of sales) and Scandinavia (24%). The company has been steadily growing its sales and EBITDA till 2021 (see historical financials in this investor presentation).

A combination of multiple recent events strongly suggests the company is about to get sold at a significant premium to the current share price. Here’s a brief timeline explaining the whole setup:

• May’22 – Activist investor Corvex Management acquired a 10% stake and started pushing for the company sale.
• Jul’22 – rumors appeared that KIND’s management had unsuccessfully tried marketing the company to potential bidders. The potential reasons for the failed attempt included unfavorable market conditions and an incompetent management team. It’s entirely possible this ‘strategic review’ was carried out quickly just to fend off the activist.
• Aug’22 to Sep’22 – Corvex raised its ownership stake to 15%. Bowing to shareholder pressure, Kindred formed a five-member nominations committee, most of which were representatives of Kindred’s largest shareholders. Corvex’s founder became the chairman of this nomination committee.
• Dec’22 – The nomination committee, led by Corvex, proposed five new directors to Kindred’s eight-member board.
• Apr’23 – All five nominees were elected and the board was effectively overhauled. The new board immediately hired Morgan Stanley and launched a strategic review with a focus on the sale of the company.
• May’23 – Two of Kindred’s key executives, the long-tenured CEO and the CFO, resigned. This was followed by the departures of chief marketing and commercial officers.
• May’23 – Shortly after these departures, Bloomberg reported that Kindred has already held talks with potential suitors.
• May’23 – Kindred’s founder (3% stake) publicly supported the sale of the company.
• Jul’23 – Media rumors suggested that Kindred has been approached by the entertainment/hospitality giant MGM and an unnamed UK-listed company. The latter suitor is rumored to be either Flutter Entertainment or Entain. Notably, the activist Corvex is a large shareholder in MGM and has held a seat on the boards of MGM and BetMGM (a joint-venture between MGM and Entain) since 2019.

All of this was happening while the industry itself was/is rapidly consolidating (see here and here). The rumored Kindred’s bidders have also been actively participating in this consolidation wave. Entain has been on a buying spree with 3 acquisitions announced this year. Meanwhile, Flutter has acquired 2 companies over the last 3 years. It is not surprising that these players, including MGM, could be interested in Kindred. An acquisition would allow Flutter or Entain to complement their European portfolios as Kindred owns gaming licenses and operates primarily in Western Europe and Scandinavia. As for MGM, the company’s management has recently noted that it intends to continue growing its footprint in online gaming internationally.

The whole setup seems to be unambiguously leaning towards the sale of Kindred Group. Assessing a likely sale price is a bit tricky as there are not many comparable peers for the Stockholm-listed company. Relative to the recent industry transactions, Kindred could easily fetch 20%-30% above the current prices. The most recent transactions, including MGM’s acquisition of LeoVegas and Entain’s purchase of Enlabs, were done at 12.6x-15.5x EBITDA multiples. Meanwhile Kindred is trading at c. 10x EBITDA guidance for 2023 (potentially sandbagged as admitted by management during the recent earnings call). On one hand, Kindred might warrant a discount due to its lower growth rate and exposure to unregulated markets (this part of revenues is quickly shrinking and now accounts for only 20% of the total). On the other hand, Kindred boasts a strong balance sheet with only a tiny net debt position, which is highly unusual in this pretty levered industry.

Despite these high transaction multiples, UK peers seem to trade at lower valuations. A much larger player ENT.L trades at 11.7x TTM EBITDA, whereas a smaller peer 888.L – at 6.3x E2023 underlying EBITDA. A Sweden-listed online gambling operator Betsson trades at 7.6x TTM EBITDA. However, Betsson is also a slightly smaller company and is exposed to much riskier markets with 43% of revenues coming from Central/Eastern Europe and 22% from Latin America.

Kindred’s earnings are very likely to inflect upwards over the coming couple of years. TTM adjusted EBITDA stands at £185m vs around £300m seen during 2021-2022 (the company reports in GBP). Lower profitability has been mainly driven by issues in the Netherlands business and is likely not representative of normalized earnings. Kindred’s revenues and EBITDA plummeted 15% and 61% respectively in 2022 on the back of operational issues in the Netherlands. Kindred used to have a dominant market share in Netherland’s unregulated market. However, with the advent of online gambling legalization in the country at the end of 2021, local regulators have temporarily prevented Kindred from running the business. The company managed to get the license only in Jul’22. Since then Kindred’s business in the Netherlands has been recovering and as of Q2’23 has recaptured the #1 market position. Kindred’s EBITDA has now picked up from £129m in 2022 to £185m on TTM basis. Management expects the company to generate over £200m during 2023, with £105m already delivered in a supposedly seasonally slower first half of the year. This compares to Kindred’s EV of £2.0bn with a minimal £3m net debt position.

In the case of a no-sale outcome, the downside should be fairly limited. Assuming Kindred’s share price would revert to levels seen back in Dec’22 (before Corvex made it clear they want to overhaul the board and proposed new directors), the downside would be c. 10%. Since then Kindred’s financial performance has improved and the company is now run by an entirely different management team, spearheaded by Corvex.

Corvex Management is a special situation and value-focused hedge fund with c. $3bn in AUM. It was founded and is run by Carl Icahn’s right-hand man, Keith Meister. Aside from Kindred, Corvex also has several other successful activist campaigns under its belt:

• Corvex acquired a stake in At Yum! Brands in 2015, pushing for operational changes and disposals of several segments. While Yum’s management was initially unwilling to fulfill Corvex’s requests, the company ended up selling Super Chix business and closing KFC’s Eleven segment. Subsequently, Keith Meister joined Yum’s board and successfully pushed for the spin-off of its Chinese business.
• In 2017, Corvex accumulated a stake in Energen and alongside another activist, Elliott Management, pushed for the company sale. Energen was eventually acquired by Diamondback Energy in 2018 at $84.95/share vs c. $57/share where Corvex acquired its stake.
• In Aug’22, Corvex unveiled a 5% stake in MDU Resources, pushing to discuss strategic options with the board as it considered the company undervalued. Both sides entered into a cooperation agreement in Jan’23, handing over Corvex one board seat.

More details on Kindred can be found in these VIC pitches – here and here.