One of online gaming’s hottest rivalries is at an end. Yesterday, Optimal Payments – parent company of the Neteller digital wallet – announced its $1.2 billion dollar acquisition of Skrill – parent of the eponymously named mobile product.
The deal will combine Neteller digital payments with Skrill’s e-wallet. The two firms are best known for serving the online gambling and gaming community.
“I think it’s a combination of two very compatible businesses. We’ve had our eye on the Skrill business since 2011,” Joel Leonoff, CEO and President of Optimal, told MPD CEO Karen Webster during a conversation on the day the deal was announced. “We both are serving the online gambling community – primarily in Europe for now – and are very similar in our product orientations. Where the services really differ is in strengths and geographies. The combination of the two brings us both more relevance in the gaming space and allow us to develop a more balanced strategy geographically.”
The opportunity for the now combined firms is bigger than just gaming, however, according to Leonoff. Skrill is one of the largest online payments and Internet money transfer companies in Europe. In fact, it is one of the few payments services eBay allows sellers to accept for marketplace transactions. Skrill launched its own payments service for digital marketplaces last September that put it into direct competition with PayPal. Meanwhile, Optimal moved into the U.S. market last summer when it acquired California-based Meritus Payment Solutions.
“E-gaming represents only 50 percent of our business today. We are focused on more than just payments in gaming and gambling,” Leonoff told Webster. “The reality is our business is about processing payments and helping companies accept various modalities of currency online. We’re certainly a catalyst and a partner in various industries both because we can help companies accept Visa [and] MasterCard and alternatively because we offer about 150 local payment types through our stored value system the ability to expose product and services to a worldwide audience.”
As they work through the acquisition process, how to suss out that expanded vision will come more sharply into focus. Leonoff noted, for example, that the Skrill wallet – due to its strengths today – might make a better vehicle for wider e-ambitions.
“We will evaluate which product is also suited for general eCommerce so we can be sure to build a strong offering in that regard,” he clarified.
The now merged firms will also be looking for opportunities to bring new users into the digital payments ecosystem – particularly by leveraging Skrill’s Ukash platform. Ukash allows users to convert cash into digital currency for use within the Skrill wallet. To put the platform’s importance into context, Leonoff noted that it was worth $180 million in revenue to Skrill – as opposed to the $140 million its digital wallet brought in.
“There’s popularity with this product in communities where cash is more prevalent,” Leonoff told Webster, explaining why perhaps they had a more natural entry point with certain consumers. “There is a whole world of unbanked customers and societies where consumers don’t carry cards where there are opportunities to perpetuate this kind of product.”
And those are the types of opportunities that Optimal says they are ready to capitalize on. When asked by Webster why now, if they have had their eye on Skrill since 2011, Leonoff said it was a lot about corporate maturity as the company was scaling up.
“Our profit is ratcheting up fairly quickly and we are on track to reporting $112 million in profit with the Optimal business alone this year [up from $52.2 million last year]. We have become a little bit more capable of shaping the market and, at the same time, that market has gotten bigger and more buoyant. We felt that in our minds we were mature enough to really pursue a deal of this size.”
So what’s next?
The Optimal/Skrill hybrid firm is still deeply involved in online gambling, and is looking to expand its efforts into the United States.
“Already, Nevada, New Jersey and Delaware have legalized and regulated online gambling, and we are looking for opportunities in California and Pennsylvania, where it is looking like it might be legalized. We are already processing for the entire industry.”
Optimal, like Skrill, does the majority of its online gaming business in Europe and has since 2006 when the U.S. Congress passed Unlawful Internet Gambling Enforcement Act. Prior to the passage of the UIGEA, online gaming existed in a space that was poorly defined legally, but lucrative. Leonoff reports that prior to the passage of the law, Optimal was processing $10 million a day in transactions via its mobile wallets.
After UIGEA, which prohibits “gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.” The law also banned banks and similar online institutions from transacting with gambling sites in violation of the law.
However, because UIGEA does allow for states, where certain types of “real world” gambling are legal to expand into online gaming – with the state acting as intermediary. Some states – like New Jersey and Nevada have embraced this, as Leonoff noted, with others considering similar moves.
“From the gaming perspective, we are very well-positioned.”
Optimal will also be focusing closely on maximizing the efficiencies that combining the two business can bring – according to Leonoff those efficiencies are estimated at the low end to be worth around $40 million. Most of those low-hanging fruit synergies will involve consolidating office and data center space. It will also save a good deal in marketing costs, since, as Leonoff noted, both companies currently spend the majority of their budgets marketing against the other.
And the deal is not quite complete just yet. Optimal’s shareholders and regulators must approve the acquisition plan.
Under the deal as currently formulated, Optimal will buy Skrill from a holding company owned by private equity firm CVC Capital, Investcorp Technology Partners and other shareholders for €720 million ($790 million) in cash and 37.5 million new shares (worth $148 million). Optimal will additionally take on $280 million in Skrill net debt. Skrill investors will have a 7.9 percent stake in the combined company.
Investment Tracker Weekly Wrap
The second week of March didn’t quite clear a billion again – but with $921 million in financial activity observed across a variety of investment types, it got close.
The biggest play was the acquisition of General Electric Co. Australia and New Zealand financial services unit for $6.2 billion. On the commercial payments side, the biggest deals were the private equity investment in Moda Midstream by EnCap Flatrock Midstream for $750 million, followed by acquisition of BNN Solutions by Madison Logic for $125 million.
Most of the venture- and strategic-backed investments in retail payments were in the Alternative Finance and Banking areas, which collectively captured 85 percent of the total. Sequoia was the most active investor this week, participating in three deals. From a geographic perspective, the U.S. was the most active region followed by Europe (minus Russia). The median investment amount was $6.7 million; in 18 out of 85 deals, amounts weren’t disclosed.
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