Brazil is about to launch a legal online gambling market, and international operators are vying for market position. Kyle Goldsmith considered how mergers and media partnerships could shape the market in the short term.
Looking back at the launch of the gambling industry in the United States six years ago, a series of mergers and acquisitions helped some of today's leading companies gain a favorable position as they raced to seize the much-anticipated U.S. market.
Will the upcoming gambling industry in Brazil reflect some of the trends in the United States?
Flutter is one such operator, which invested $4.18 billion in 2018 for an initial 37.2% stake in daily fantasy provider FanDuel, later increasing its stake to 95% in December 2020.
To break into the equally enticing Brazilian gambling market, Flutter agreed in September to acquire an initial 56% stake in local operator Betnacional's parent company NSX Group for $350 million.
The group is very excited about the gambling opportunities in Brazil and has told shareholders that it will continue to acquire local brands in its main markets as part of its "local hero" brand portfolio.
Analysts are very optimistic about Flutter—Chad Beynon of Macquarie Bank predicted in December last year that the group's online market share in Brazil could grow by 150% to 25% by 2030. This could position Flutter at the peak of a highly competitive market.
Macquarie's analysis shows that, thanks to nine acquisitions since 2019, the company has created about $200 in incremental value per share for investors. Macquarie says that, along with its Flutter Edge technology stack, this NYSE-listed group and its acquisition business could achieve a global market share of about 20%.
The sudden increase in mergers and acquisitions in Brazil is not surprising, as local expertise and products are very valuable in foreign markets. In May, Adam Patterson, an economist at the British Consulate in Brazil, pointed out that high regulatory costs are a driving factor for mergers and acquisitions in Brazil, while gambling consulting firm Ficom Leisure emphasized that acquiring local expertise and technological advancements are the main benefits of entering the market through mergers and acquisitions.
Acquiring a local foothold through mergers and acquisitions is a key factor in Brazil, as according to the law, operators must have a local representative to support their license. While some companies have set up their own offices across the country, acquiring an established business may be cheaper and easier to operate.
A mergers and acquisitions consultant told PASA that Flutter was dissatisfied with the operation of its South American business from its office in Portugal. Acquiring the NSX Group allowed them to gain business and market experts in Brazil.
Three major categories of companies are eyeing the Brazilian market, including European giants such as Entain and Betsson, as well as Asian companies that want to reinvest in regulated markets and seek international development.
Proceed with caution in the Brazilian gambling industry
Then there is the third group; North American brands hope to expand their business to Brazil as part of their international growth strategy and establish a foothold in a market that may be similar to the United States in some respects.
However, mergers and acquisitions consultants believe that some established U.S. companies may be reluctant to enter the Brazilian market. DraftKings is one example, as the company does not seem to have an immediate intention to enter the Brazilian market.
During the second quarter earnings call, CEO Jason Robins stated that the company has no plans to enter the region through internal development or acquisitions, but if operators want to enter the region, they would also do so through acquisitions.
"I spent a lot of time talking to DraftKings and Fanatics, and they said, 'We want to enter Brazil, but do we need to be there at the opening? We want to know who will be successful, rather than assuming someone has already succeeded (in the gray market),'" a source told PASA.
After witnessing many operators withdraw from the U.S. this year, many may have learned from the U.S. market experience and chosen a cautious approach.
"I think there might be more mergers and acquisitions in the second and third quarters of next year. North Americans will take out their checkbooks and pay for certainty, rather than gambling on uncertainty," they added.
Is the media partnership model viable in Brazil?
An American giant that opportunistically established a foothold in Brazil is MGM Resorts International. In August, the group formed a joint venture with media giant Grupo Globo to launch its BetMGM brand in Brazil, benefiting from the media group's extensive influence.
Grupo Globo is the largest media group in Latin America, with a consumer network of about 70 million daily users covering television, digital, broadcasting, and print media.
This deal has reignited interesting discussions about media partnerships with Brazilian gambling operators, as this trend does not seem to have taken off in the United States.
Flutter's Fox Bet shut down in July 2023 after four years of operation, and Penn Entertainment sold its Barstool shares back to founder Dave Portnoy in August 2023, renaming its Barstool Sportsbook to ESPN Bet. There is also MaximBet, which barely got off the ground.
In both cases, the performance was lackluster. Since then, industry stakeholders have consistently believed that the media partnership model is not a fail-safe path to success, as sports media consumers may already have their preferred gambling brands.
However, Sky Bet is highly regarded in the UK, and many have tried to replicate its extremely successful model. "It's an interesting model," said Andreas Bardun, founder and CEO of Brazilian local gambling brand KTO.
"As always, it ultimately depends on execution. There could be many cases where such partnerships fail. If they can succeed, if they are agile enough, they will become truly strong competitors in Brazil," he said when discussing the cooperation between MGM and Grupo Globo.
But cooperation between two large companies is often hindered by bureaucracy and negotiations. This seems to be a factor in the closure of Fox Bet. Flutter and Fox launched a lengthy arbitration case over the media giant's choice to acquire more shares of the gambling company when acquiring Stars Group.
Public trust is crucial
It is expected that more deals will be reached in the early stages of the Brazilian market, but KTO is believed to become a "giant" in the market, as the company aims to capture 10% of the Brazilian market share.
"There will be many partnerships and major initiatives moving forward in Brazil, and we hope to be one of them."
Some believe that the Korean Tourism Organization may become a major target for its acquisitions in Brazil in the future, as it has already established a good foothold in Brazil through local and regional sponsorships.
"KTO is one of the few publicly traded gambling companies that can acquire local operators (considering KYC, AML, and all other interesting factors)," a source said.
Brazilian law firm Bichara e Motto Advogados' gambling and cryptocurrency business director Udo Seckelmann believes that media partnerships help increase brand awareness and provide a higher success rate.
Seckelmann said that Grupo Globo's long and rich history in Brazil can establish a solid connection between consumers and the BetMGM brand.
"If we learn that these media companies have been in Brazil for a long time, when people see this brand associated with a gambling partner, I think this will strengthen the brand, and consumers may feel more comfortable placing their bets on these brands rather than others they have never heard of," he pointed out.
For Seckelmann, it also depends on trust, which he believes is more important for Brazilian gamblers from a cultural perspective than for British and American gamblers.
Considering the recent pressures faced by the Brazilian online gambling industry, this is particularly important. In November, the Brazilian Supreme Federal Court (STF) held a two-day hearing to determine whether Brazil's gambling laws are unconstitutional, following weeks of strong opposition to the gambling industry by Brazilian politicians. The results of this hearing will be announced in the first quarter of 2025.
This concern stems from several reports this summer indicating that consumer spending on gambling may exceed their affordability.
This year, from the approval of legalization to the official release of regulations, there was a long wait, which further exacerbated the negative perception of gambling. Many believe that this period greatly contributed to the proliferation of illegal gambling websites.
Therefore, trust in the legal market is crucial for the industry to succeed and avoid further political resistance. "We can't trust everyone and every brand," Seckelmann admitted.
"I think if Globo and other media brands enter the industry and say, 'Well, we've been with you for the past 50 years, so you can trust us,' [this will be a differentiating factor for MGM]," he said.
