Bet the house: Apollo pitches Lottomatica IPO at 15% discount but bruised ECM investors may want more

Data Insight ECM Pulse 17 April

Bet the house: Apollo pitches Lottomatica IPO at 15% discount but bruised ECM investors may want more

By , Cristiano Dalla Bona, and Raj Saiya

Market cap could hover at EUR 2.6bn post-money
Fair value at 8x EV/EBITDA below Entain’s 10x EV/EBITDA multiple

Italian gaming company Lottomatica has reopened Europe’s IPO market, with its sponsor Apollo offering what looks like a reasonable discount to fair value estimates for the asset. But an investor base that remains out of love with IPOs may demand more.

A previous report noted a potential enterprise value (EV) of EUR 5bn, based on expected revenues of EUR 1.57bn-EUR 1.67bn and EBITDA of EUR 550m-EUR 570m in 2023, implying an 8.9x EV/EBITDA multiple, although this was deemed by sources close to the deal as a little ambitious.

Analysts’ projections have valued the company at between 8x and just over 10x 2023 EV/EBITDA at fair value, said one source close to the deal, while the two other sources close said that a reasonable IPO discount would be around 15% to fair value.

Taking the bottom of that range, an 8x 2023 EV/EBITDA multiple would put Lottomatica’s fair enterprise value (EV) at around EUR 4.6bn based off the higher end of projected EBITDA of EUR 570m. This would imply an EV of around EUR 3.9bn when factoring in a 15% discount.

The company will raise EUR 425m at IPO, as reported, which will be used to reduce leverage to EUR 1.3bn, taking its potential market cap to, give or take, EUR 2.6bn, factoring in the debt on balance sheet after the listing.

The deal size would come to around EUR 650m, including EUR 425m in primary, should the company choose to do a 25% float on this basis, which two sources confirmed was the aim.

A fair value multiple of 8x 2023 EV/EBITDA is a discount to London-listed gaming giant Entain [LON:ENT] which trades at around 10x 2023 EV/EBITDA, according to data from Fidessa compiled by Factset. It is also a huge fair-value discount to Flutter [LON:FLTR] which trades at around 19x 2023 EV/EBITDA; the fair value multiple is a significant premium to peer 888 [LON:888] which trades at around 5.8x.

Two sources said that Lottomatica was larger than 888, and not as indebted, warranting a higher multiple, but they conceded that Flutter was also in a different league. The company was hoping to use Entain as its closest listed peer in marketing, they said.

An EV of EUR 3.9bn would imply a valuation multiple at the IPO of around 6.8x EV/EBITDA, based on 2023 projected EBITDA of EUR 570m.

Good but good enough?

The numbers may add up on paper, but IPOs are an emotional game. ECM investors remain deeply sceptical of the product following large losses on Europe’s two largest deals of the year IONOS [ETR:IOS] and Eurogroup Laminations [BIT:EGLA].

Both deals came at a significant discount to the sellers’ original ambitions, but have still suffered in trading with many saying they were too expensive.

For investors, vendors and advisors have not adjusted to one of the most difficult IPO markets seen in Europe in many years.

“We shouldn’t be talking 10% to 15% discount to FV, we should talk about a 30% discount,” said one ECM investor on Lottomatica and the state of the IPO market. He also questioned whether it deserved an 8x EV/EBITDA multiple given the asset’s smaller online offering compared to peers valued at similar multiples.

Of Lottomatica’s EUR 1.4bn 2022 revenue, around EUR 329m was from its online segment, just 23.5%, although it was the company’s fastest growing business at 111% YoY growth, according to 2022 results.

A 30% discount to a fair EV of EUR 4.6bn would give Lottomatica an EV of EUR 3.2bn and a market cap of just EUR 1.9bn, assuming post-listing debt. At a 5.6x 2023 EV/EBITDA multiple, the company would be cheaper than 888, likely a bitter pill for the vendor.

Lottomatica’s equity story is weakened by its sole country focus, rather than having a large international presence like some of its peers, said the ECM investor and a second ECM investor speaking to the Pulse.

But despite IPO reservations investors speaking to ECM Pulse agreed that Lottomatica was a good business. It is cash generative, with operating cash flow of EUR 391m and cash conversion of 85%, according to its 2022 results.

It also had a 33% EBITDA margin and strong year-on-year growth; a far cry from the pre-revenue tech businesses that burnt European IPO investors in 2021. “It’s the sort of business you want to own in this sort of market,” said one deal source commenting on the company’s financials.

The second investor said he would like to see big Italian-focused institutional investors in the book to support the stock and most of the deal allocated to investors with a five or ten-year focus. Both IONOS and Eurogroup were multiple times covered, but both investors said they would want to see even stronger coverage levels for Lottomatica.

“If they are shooting for a EUR 600m deal size, this will need at least EUR 2bn of real money in the book and then they do a proper scale back,” said the first investor, adding that might be difficult unless the discount was greater than 15%.

Early demand

One source close said that there was already enough demand to cover the book on the day of the IPO announcement based off early indications. Another added that “proper” demand was coming from “significant long-only” investors. The syndicate expects to have large anchors in the book but is unlikely to name cornerstones, the sources said.

The roadshow will include meetings across Italy as well as Continental Europe and the US, according to two sources. This early demand will lead to an accelerated pre-deal roadshow, with books likely to open at the end of the week of April 17, all three sources confirmed.

Most of the IPO proceeds will be primary, used to deleverage. It can’t be claimed that the deal is just “smash and grab” by Apollo which, two deal sources said, is happy to take an initial discount and angle for future follow-ons.

But the question for many on the fence is while Lottomatica is a good business, can they afford to miss it?

For all its cash generation qualities, Lottomatica isn’t Porsche [ETR:P911], noted the first investor, comparing it to the behemoth global car brand that came at a massive discount to Italian peer Ferrari [NASDAQ:RACE] to cheer a despondent IPO market in 2021. “This is a small mid-cap, 100% Italian story,” he added.

In a bear market any IPO is a gamble, but despite some griping, Lottomatica and Apollo hope this one pays off.

Barclays, JPMorgan, Deutsche Bank, Goldman Sachs and Unicredit, are acting as global coordinators. Mediobanca, BNP Paribas, Equita and Banca Akros are joint bookrunners.

Lottomatica declined to comment. Apollo did not respond to a request for comment.