ZEAL Network SE (TIMA) Earnings Call Transcript

Ladies and gentlemen, welcome to the corporate update call of ZEAL Network SE. The company's CEO, Dr. Stefan Tweraser, and CFO, Andrea Behrendt, will guide you through the transaction of the acquisition of SevenCanyon in a moment, followed by a Q&A session via audio line. Please make sure we can see your full name. And with that, I am handing over to you, Stefan Tweraser.

Thank you very much. Everybody on the call, welcome, and thank you for joining on such short notice. We are excited and have an important strategic transaction to share with you today, and we are great that you found the time to jump on the call with us. ZEAL Network has signed a share purchase agreement to acquire the remaining 96.5% of SevenCanyon Limited. We have already held 3.5% stake since 2018 through ZEAL Ventures. And with this acquisition, we are entering Europe's largest and one of the most attractive prize draw markets, the United Kingdom. This transaction is an important step in executing our growth strategy by combining 7Days' established market position with ZEAL's expertise in digital customer acquisition, data analytics, CRM and platform operations, we are creating a new opportunity to scale our business beyond our core markets, Germany and Spain. We will walk you through the strategic rationale, the target, the transaction structure and the financial market impact. And obviously, are happy to take your questions after that. In terms of the agenda, what we want to cover today, we'll give you an overview of deal highlights. We dive into the U.K. market, why it is so attractive for us and why it's really a fundamental strategic rationale for us to enter that market. We'll give you an introduction to SevenCanyon and the brands that we are acquiring with this business. We will go through the transaction structure and the financial impact of that acquisition and detail the value creation that will happen as a result and then obviously recap and are happy to answer your questions. So let's jump into the deal headlines. With the acquisition of SevenCanyon, we pretty much hit the ground running and use the fast-track entry to access the very attractive U.K. market. This is consistent with our strategy. It's not an opportunistic deal. It is the logical next step in the strategy we have communicated to you and the financial markets to selectively diversify through new products and new markets. SevenCanyon is our first concrete step outside Germany. We gained immediate access to Europe's largest prize draw market. The U.K. market is worth around GBP 1.3 billion. It's growing at a fast pace. It's highly fragmented with more than 400 operators so a prime market for us to enter as a professional player. SevenCanyon is already a scaled, profitable and cash-generating business with an EBITDA of more than GBP 10 million in the most recent financial year, which ended in March of this year. We don't carry a build risk. We are acquiring a proven and profitable business. The purchase price is mainly financed through a new EUR 40 million loan that we have arranged with Deutsche Bank. It has a 7-year duration, and this preserves us our flexibility to have other shareholder-friendly capital allocation strategies implemented. Last but not least, for the first fully consolidated financial year, we expect a positive EBITDA impact in the high single-digit million euro range of this transaction. To dive a little bit into the U.K. market, why it is so attractive for us? As a background, please remember that we've been with SevenCanyon as investor for the last 8 years or so. We've invested in them in 2018 and through ZEAL Ventures held a 3.5% stake. So we are pretty familiar with what they are doing and thus pretty familiar with the dynamics of the U.K. market, and that's why we are so excited about this opportunity. The U.K. prize draw market generates annual billings of around GBP 1.3 billion within the much larger U.K. lottery and gaming landscape. The segment of prize draws is growing and the category continues to professionalize and digitalize. There are, as I briefly mentioned, more than 400 operators, many of them very small and very young, pretty opportunistic to a certain extent. It's a fragmented market. This is an ideal environment for us as a well-capitalized consolidator with the right infrastructure. SevenCanyon as a player -- as a platform for players, sorry, has a very active returning customer base. The recurring revenue base is something that we can deepen with our abilities around CRM retention management, customer lifetime value management. We also expect that the U.K. market will move towards a more formalized rule-based setup. Rising standards favor operators with a strong compliance capability and have and related -- market-related expertise, exactly what ZEAL has been doing in Germany for years. We have a very strong track record to create professionally designed successful lottery products in a tightly regulated market. And so now we have our own meaningful U.K. platform from day 1 with this acquisition and thus have the ability to further reduce our concentration in a single market in Germany. When you look at SevenCanyon as a low-risk investment opportunity. I think we are one slide too far. When we look at SevenCanyon as a low-risk investment opportunity, then there are a couple of things that we wanted to point out to give you some background why exactly we chose to acquire the remaining shares of SevenCanyon. First, SevenCanyon gives us immediate scale in a very attractive adjacent market. Rather than building from scratch, we chose to acquire an established profitable player so that we can hit the ground running from day 1. SevenCanyon enjoys strong unit economics, efficient customer acquisition, a committed team and a meaningful EBITDA generation. We have known them for 8 years. We've been invested in them since 2018. It's not a bet on an unfamiliar target. It's an acquisition of an asset we know closely, the founders, the team, the financials. There is a high strategic adjacency as SevenCanyon runs prize draws with cars and houses as the headline prizes directly adjacent to our own Dream House and Dream Car draws in Germany. The capability overlap thus is significant and obvious and positive for us. Last but not least, our know-how in CRM, retention management, subscription management, performance and brand marketing data and highly regulated marketing offerings offer a high upside for additional value creation and are complementary capabilities that can further strengthen SevenCanyon's commercial performance. Let's have a look at SevenCanyon in detail and how they operate. SevenCanyon at a glance is a holding company of 3 companies: 7Days, which does car and house competition; UKCC, which is very much focused on fishing gear and leisure cars; and Redline, which is focused on classic car competition. SevenCanyon thus gives us immediate scale with these brands. The foundation of all platforms are the pay to enter competitions with a fully compliant free entry route and with hundreds of thousands of active players. The 3 platforms enjoy broad engagement within the U.K. customer base of the prize draw industry. The platform offers a broad range of prizes like cars, houses, cash, tech and lifestyle products across live, instant win and subscription format. The competitions are run end-to-end in-house with live stream draws that build transparency and customer trust. As you can see, SevenCanyon and ZEAL fit together very well. We are running adjacent well-positioned businesses and host -- and both sides will benefit from each other. I'm now handing over to Andrea, who will walk you through the transaction structure of our acquisition.

Thank you, Stefan, and good morning also from my side. Yes, I have the privilege to push the transaction from ZEAL side, and we are really happy to share now some details with you. After the Lotto24 transaction, this is the largest transaction in ZEAL's history. And -- but even more important, it really is the strategic investment in our future. We are building on a big success of charity lottery brands in Germany, and this transaction really creates an excellent foundation for diversification of ZEAL, and that's the strategy that we are pushing for a lot, and you heard us talking about it already a lot. It diversifies our business. It expands into a scalable product portfolio and supports our ambition to become increasingly independent from jackpots. Now let's have a look on the transaction structure, the financing and the short-term impact on our guidance. So first of all, we established a new U.K. holding company, which now acquired the remaining 96.5% of SevenCanyon. As Stefan already said, we own already the 3.5% stake since 2018, and this sits directly under ZEAL Network SE, and this will not change for the time being. The purchase price is GBP 33.9 million and in cash by closing. And we have agreed an additional earn-out of up to GBP 4.8 million. That's payable within the next 6 months after closing, and it is conditional to the achievement of agreed targets in that period. In addition to that, we will pay for some inventory, like meaning prizes, especially cars and the cash that was available in the companies at the transaction. To fund that transaction, we entered into an additional loan agreement arranged by Deutsche Bank, and we are very happy about that. We were able to close a loan agreement over EUR 40 million with a 7-year duration as well as a little intercompany loan that was used to finalize the transaction. This increased our external debt to approximately EUR 100 million. And our cash at bank is still very meaningful. You know that we are a strong cash-generating business post transaction of around EUR 70 million. And even if we take the lower part of our EBITDA guidance, it still puts us in a very healthy net debt-to-EBITDA ratio. Of course, the first-time consolidation impact of SevenCanyon will lead to higher revenues and EBITDA in the second half of this year. At the same time, we will also record the incurred transaction-related one-off expenses in a mid-single-digit million euro range. We expect SevenCanyon to make a meaningful contribution to ZEAL's revenues and EBITDA following the consolidation. However, I want to call out the exact revenue contribution under ZEAL's IFRS reporting framework is to be finalized, particularly regarding the technicality of the transaction current revenues translating into ZEAL's reporting. We will, therefore, review the potential update on our revenue guidance over the course of time, and we'll update that as soon as possible. On the EBITDA, we are very clear. We confirm the corridor for this year of our guidance from EUR 70 million to EUR 75 million, given a single-digit million euro range of onetime expenses included in that guidance and under the assumption of a normal jackpot environment for the following 6 months in Germany. The deal and the financing structure that we set in place will not negatively impact our regular dividend policy and our shareholder-friendly capital return policy that you know and you all love. Special dividends and share buybacks will remain options that we will consider on a regular basis, and we'll communicate that to you whenever we decide it. Great. And with that, let me talk you through the clear value creation that we see post transaction and the key acquisition levers that we're seeing that strengthen our market position, both for ZEAL and for SevenCanyon. So first of all, I want to call out the obvious. The obvious is, of course, we have a growth potential, a huge growth potential still in the German market, and that's still there for the next years to come, and you know that we are repeating that, and we are really happy about that. At the same time, now with this meaningful transaction, we are diversifying our business and allowing us to establish in the U.K. a significant additional market with additional growth potential. We also strongly believe in ZEAL's strong-standing expertise of the 25 years e-commerce experience that we have especially in customer acquisition, retention, brand and performance marketing. And that added with the data analytic expertise that we built up. And we think this will enhance SevenCanyon's performance over the future. In addition, we can contribute to SevenCanyon with the deep know-how of how to build a successful Dream House raffle as we did in Germany, and we are really proud of what we built here. The expertise that we have will accelerate SevenCanyon's house draw business in the U.K., which we see -- where we see a significant growth potential. At the same time, the other way around 7Days Performance, Redline and UKCC bring deep experience and expertise in car draws. This is an insight that we can apply in Germany. As you know, we launched in April our own car raffle product in Germany. And therefore, we see that the knowledge transfer will go both ways. ZEAL, we also have built a highly scalable platform asset in the past year that allows us for running multiple brands and which we could use also in the future for the SevenCanyon businesses. But last but not least, we expect the U.K. price draw to continue moving towards more formalized rules and higher regulated standards. This should really favor us as an operator with strong capabilities in compliance and strong experience over the last 20 years in a highly regulated market like Germany. ZEAL's operating model is well suited for such an environment, and this could also become a strong competitive advantage for us in the U.K. market compared to many smaller operators. And with that, handing over to Stefan for summing it up.

Great, Andrea. Thank you very much for walking us through the financial details. Let me now briefly recap why this transaction is strategically and financially compelling for ZEAL and its investors. First, the acquisition gives us immediate access to the large, highly attractive and growing U.K. price market. Rather than building this position from scratch, we are acquiring an established platform with proven brands, strong customer acquisition capabilities and a profitable operating model that can scale. Second, the transaction further diversifies ZEAL geographical footprint. Germany remains our core market, continues to offer significant growth opportunities that we will invest in. At the same time, the U.K. gives us a meaningful second home market and reduces our dependency on jackpot-driven developments in the German lottery market alone. Third, the acquisition is financially attractive. We expect the transition to be EBITDA accretive in the first fully consolidated financial year, supported by SevenCanyon's existing profitability and by the additional value creation levers that we have just outlined. Fourth, we believe the expected professionalization of the U.K. prize draw market plays directly to ZEAL's strength. As a scaled compliance-driven operator with long-standing expertise in regulated markets, we are well positioned to benefit from a market environment that has increasing -- an increasing focus on professionalization, trust and well-governed players. Fifth, the transaction reflects disciplined capital allocation. We have structured the deal in a way that balances strategic ambition with financial prudence, including a derisked transaction structure with an earn-out component linked to future performance. And finally, the acquisition does not change our commitment to a shareholder-friendly capital return policy. ZEAL remains cash generative, financially disciplined and focused on maintaining a strong balance sheet while continuing to return capital to shareholders through regular dividends and where appropriate, additional capital return measures such as special dividends or buybacks. Taken together, this transaction is an important step in ZEAL's evolution. It strengthens our growth profile, diversifies our business, creates a meaningful second home market in the U.K. and supports our ambition to become a more diversified player. We are now happy to take your questions.

Thank you so much, Dr. Stefan Tweraser and Andrea Behrendt for the presentation. Now ladies and gentlemen, it is your turn. We are opening up the Q&A's questions via audio line [Operator Instructions].

Everyone. Can you hear me?

We can hear you.

Perfect. So I've got 2 questions, please. So first, on the purchase price. You paid around 4x EBITDA, which looks super attractive. So could you just talk a little bit about how you've been able to achieve such an attractive price point for this acquisition? Secondly, 2 points here. First of all, on the U.K. prize draw market, what is the online share in the market at the moment? And then you spoke about the total billings in the market and also the number of players. Could you talk a little bit about SevenCanyon's market position? So could you provide a rough indication on the number of billings? And maybe also, I heard your comments on the revenue line, but still to model it for the analysts, it would be extremely helpful if you could maybe just give us a ballpark number in terms of annual revenue for SevenCanyon.

Thank you so much for your question. With this, I hand over to the CEO and CFO to answer.

Maybe let me pick up the 3 rationale question one more time and talk about the U.K. market. When you look at those 400 players in that GBP 1.3 billion market, then we think that SevenCanyon as a group of 3 brands is definitely among the top 5 players in this market. There is obviously Omaze as one of -- or maybe the dominant player. But setting aside that, we have with SevenCanyon a very strong bunch of brands that are particularly focused on different segments of the market and thus have been able to capture quite substantial share.

Yes.

The 4x scheme...

No, please, let's take you that, and I'll take the revenue.

Yes. So the 4x EBITDA, every acquisition is obviously always a negotiation. And I think what gave us an upside in that negotiation were 3 things. A, we have been invested in them since 2018. So we know the management team. We know the founders. We know the dynamics and they've come to appreciate us as a very supportive shareholder in all their endeavors. B, when you look at what we bring to the party in terms of our platform, our marketing capabilities, our abilities to design products in regulated markets, then that is also a very strategic fit that helped us to focus more on future growth in our evaluation and thus have that kind of stronger position in the price negotiation. And then finally, as with every founder, kind of the emotional factor is always what happens with the company. If I leave, what happens after my earnout. And there, I think the founders who will exit the business after the earn-out have found a very trusting partner in ZEAL that they could rely on to continue their business going forward even after they left.

And on the revenue side, so the SevenCanyon Group recorded per U.K. GAAP EUR 99 million -- no, GBP 99 million sorry, in revenues last year, although this is not directly comparable with ZEALS's revenue -- IFRS revenue. So we would rather call that probably billings in our setup. Economically, it's closer to billings, like I said, or the transaction volume that we are sharing with you guys on the ZEAL business. The IFRS revenue contribution, like I said, it's still under review the final accounting treatment for SevenCanyon, and we will communicate that as soon as we have it possible. If you want a number that is more comparable to our German revenue number, that would be like a gross gaming revenue number, and that's GBP 30 million.

Now, there's another raised hand by Mr. Tim Kruse.

A lot of important questions already asked by Christian. But just one follow-up on the acquisition price, those regulatory possible changes. As I understand, currently, there's no licensing under the lottery licensing in the U.K. for these PDC suppliers. Is that something which also was a factor in your negotiations? And then Andrea, maybe as a follow-up, very helpful that comment on the gross gaming revenue. Can you maybe comment on the growth trajectory of the company in the past? -- sort of is that within your midterm guidance of low to mid-teens in growth? Or is that a higher number just as a maybe a follow-up on that.

So maybe I'll pick up the first question. We expect, and that's also why the transaction makes so much sense for us is that the U.K. market will be moving into a more professional and more -- a bit more regulated environment. Not that we foresee anything close to a German regulation, but the voluntary code of conduct that has been established by the U.K. prize draw players and by the way, SevenCanyon was one of the big proponents and big drivers of that voluntary code of conduct points to the direction that player protection and professional conduct by prize draw companies will be much more important. And that plays well, well into our strength. So when it comes to being able to rely on ZEAL's regulatory expertise to design and operate lottery products and prize draw products in the future, that obviously also gave us a leg up in the price negotiation.

And we are not communicating any explicit midterm guidance for SevenCanyon. But of course, like we said before, our ambition is to grow that business and that it matches our overall growth ambition for the ZEAL.

There is another raised hand by as Abed Jarad.

Can you hear me?

Yes.

We can hear you.

I have 2 questions. First, are billing margin comparable to -- broadly comparable to ZEAL Dream House or Dream Car products? And second, can you disclose the earn-out targets or conditions for the payment? And maybe one last question. Do you see the U.K. as a potential platform to expand beyond prize draws in lottery brokerage like your core business? Or is it out of question?

Maybe I start with the billings margin or the product margins. So like I said, as the accounting treatment is not yet clear between transactional volume and revenue treatment, we cannot answer that question finalized because that needs to be done within the next months, and we will communicate that to you guys. But on the definition that I just said, if you want to compare it, they are quite similar to ZEAL's structure.