INTEGRATED INDEPENDENCE

Kindred Group CEO Henrik Tjärnström speaks to Tim Poole about the operator’s takeover of supplier Relax Gaming, discussing the rationale behind the merger and the growing trend of operator-supplier integration

As industry consolidation continues on an exponential scale, supplier acquisitions like Scientific Games’ takeover of Lightning Box Games and Evolution’s buyout of Big Time Gaming are becoming evermore common. So much so, in fact, it almost feels too obvious to point out... But a newer trend has developed in recent years which is somewhat bucking the wider consensus. Indeed, in the modern M&A climate, more and more operators are buying more and more suppliers – a concept that feels completely contrarian upon first thought.

Earlier this year, a prime example materialised as established operator Kindred Group purchased online gaming supplier Relax Gaming. Relax will continue supplying B2B slots and the like to competing operators, in some cases direct Kindred rivals. All the while, Kindred will keep operating in the same vein as it was before – with no change in approach off the back of this merger. They seem like conflicting approaches, and yet they will proceed side by side as part of one overarching strategy.

A few months into the partnership, Gambling

Insider is proud to have landed Kindred CEO Henrik Tjärnström to speak exclusively about the acquisition, its connotations and what this growing operator/supplier trend means for the wider industry. In the Q&A below, Tjärnström offers his thoughts on the deal’s benefits, structure, alternatives and overall meaning for Malta. Call this integrated independence, if you will.

Hi Henrik, thanks for taking the time to speak with us again. What are the biggest benefits of Kindred acquiring a supplier like Relax?

As we highlighted on 2 July, when we announced the transaction, it will accelerate our strategy towards our increased focus on product and customer experience; and basically strengthen our product control and differentiation through proprietary content. That was one of the main themes. But we have also been a long-term owner of Relax since 2013, and we owned a third of the company previously; this now enables us to add a rapidly growing and profitable B2B business with a world-class product offering – combining a B2B supplier with a B2C operator is creating a really strong group for us at Kindred.

In terms of the structure of the deal, how will the two sides operate? Is it pretty much both sides carrying on as before, or are there going to be any meaningful differences?

So Relax is a market-leading scarce asset in the B2B space. It’s a full-service supplier that offers for us both bingo and poker on a proprietary basis; additionally, it has both world-class aggregation and its own games delivery casino company. So in that sense, they are a top supplier and accumulating more and more operators to their portfolio. It started 10 years ago when Relax was formed; it was basically a spinoff of the technology arm of iGame, and by doing that it’s a tech company at its core. It focused initially on just being that layer in between the game studios and the operators, and accumulating integrations. Over time, they got to a critical mass on both integrations with studios and with operators; then they also decided to create their own games on top of that. So that, combined with the poker and bingo they’ve offered us, has enabled them to be a strong B2B supplier. For us then we, as a B2C operator, of course want to have a unique offering and content; and Relax has been a core vehicle for us to do that already. We’ve also done some more direct integration to our platform. This will enable us to have a B2C arm and a B2B arm, and they can be completely separate from an operational point of view; to secure the integrity of the B2B customers while at the same time providing us, our B2C arm, with unique content. So it’s really one plus one equals three in this sense.

I was going to ask if Relax will keep providing B2B games for other operators and you’ve answered that already. But will it be making any new specific games for Kindred on an exclusive basis? And, like you’ve said, the B2B and B2C arms will be separate, but isn’t it a little weird to have an operator buying a supplier that’s still working with rivals?

Yes, but it’s become more of the norm in the industry of today that B2C operators also have an arm that is more B2B, and to get scale on those investments as you’ve seen elsewhere, when you look at the supplier side of our sector. With the integrations towards the operators, by having that critical mass and then when Relax started to do their own development and launching that into that network, there’s very good scalability in that model. It flows through pretty much down to the bottom line, and as you can see the operating margins are phenomenal in the supply chain. So it is really a norm of today that operators want to have bespoke, unique content; and also get the benefit of having what we will now have: the highly profitable B2B arm of Relax. This will provide a strong financial cash flow coming in, and it enables us to then reinvest in the B2B side, to continue to grow and create even better profitability for Relax.

In the past, operators have already bought suppliers; you have DraftKings and SBTech, you have this deal and there have been a couple of others. Do you see this trend continuing? Will we get to a stage where every major operator will have bought a major supplier?

Margins in our sector are quite under pressure from the re-regulation trends and betting duties. The transformation we’re undergoing is to have as high profitability as possible: these supplier companies offer that as long as, of course, they can provide good-quality games and provide that to other operators on a larger scale – which Relax can do. So, from a financial point of view, it makes sense and also, from a strategic point of view as I mentioned, we would get exclusive content; then operationally, we would keep them separate so we get the benefit from the Relax positives and we don’t have to invest in Kindred developing our own bespoke studios, starting from scratch. By basically increasing our holding from a third to take control of the company, we get that double benefit.

A potential alternative is when operators launch their own bespoke studios. I’m not sure how similar it is but obviously LeoVegas did something like that recently and Penn National. Is it the choice of acquiring a supplier or launching your own studio, or is that something slightly different?

We could have done that and that was one alternative we were looking at. In this sense, we already had such a close cooperation and partnership with Relax, and Relax was already helping us with some of these things today. So we felt it made much more sense for us to actually create that opportunity on the Relax side in a sense, and then for Relax to provide that service to the B2C of Kindred rather than us doing it ourselves – as I said, starting from scratch. Now we can commission a studio ourselves if we want to, based on the Relax side of the business operating on their already-developed platform and functionalities. This will give us faster time to market and then that studio can develop bespoke content for Kindred if that’s what we choose to do.

At the same time, we can also make a call if we want to resell that into the wider network of Relax, to get better profitability on those investments. So for us it makes perfect sense to take this functionality in-house and get the best of both sides in that transaction, rather than us having to put focus on it as well. It creates clearer focus on the customer side of the business by outsourcing this to Relax, so we still get the benefit from the Relax cash flow in the overall group; again really strengthening both Relax and ourselves.

Do you see this as a route other operators will follow in the industry, creating their own studios? Do you think it’s something that may happen more in the next couple of years?

Yes, I think so. As you said, it’s already been happening in other places of the sector today. But I think Relax is a unique asset that’s already providing us with these services: not only casino, which is normally what you talk about with studios. But it’s also already providing us with our bespoke bingo and poker software, and then they’re having this aggregation capability and business stream. Then there’s the games production, so it’s a one-stop shop on the B2B side for games and that is a scarce asset really. There are truly no companies similar to Relax; that’s why we found it extremely interesting to conclude this deal.

I’ve got a final major topic I wanted to talk about and it’s a similar overall theme: M&A but looking more specifically at Malta. Are we basically going to see one great big consolidation in the next few years, progressing faster and occurring more often in Malta?

It’s not only Malta, it’s the whole sector, and the need for scale is very important because of the margin pressure we talked about with regards to local regulations. It’s also been a sector where consolidation has been happening now for the last 20 years or so. We ourselves have done one acquisition a year, more or less, for the last 15 years. So us being one of the large operators in the sector, we are of course quite active in looking at M&A. The organic growth is our rock bed and if we can add strategic acquisitions on top of that and then if that is in Malta, like Relax of course, it makes some extra sense from a structure point of view. There are

Henrik Tjärnström

familiarities with the set up and the corporate structure, but we have also done acquisitions, as you know, in Gibraltar; two of them with Stan James and with 32Red, and elsewhere. So you have so many different operators and suppliers in Malta and it’s a hub for the iGaming sector; that will remain. I think there’s also a vibrant start-up community here with a lot of ideas and everything being brought to the market, so I’m sure that will continue.

Like you say, it looks like it’s going to continue at the same rate or maybe even quicker. To finish off, is there any other message you’d like to get out there, specifically on the Relax deal? How has it progressed since the agreement was finalised?

If anything, I’d perhaps add that we see great potential with taking Relax from where it is today and into, for example, the America expansion; like the US and markets where there is a need for extra content. That is a double win for both Relax and for all of Kindred in the sense that we can get more content into the US market; and also for Relax to not only supply us there but for other customers in the US market. Again, just stressing the point that we want to keep Relax as an independent entity within the overall Kindred Group, and continue to invest in Relax to further its strength and B2B offering; and grow their customer base even further. We see great potential for that; it would be a really good thing for Relax and Kindred and we as an operator know the value of integrity, the value of B2B customers, and that’s why we’re stressing this really. It’s top of our agenda to keep the independence between the B2B and B2C sides.

Management for Relax is also committed to remain with meaningful ownership, and the Founder and previous Chairman are remaining in charge of Relax, as a group within the Kindred Group.