IG Acquisition Corp. (NASDAQ:IGAC) has entered into a definitive agreement to combine with mobile gaming platform PlayUp at an enterprise value of $399.7 million, or 10.9x its 2022E gross revenue.

Sydney, Australia-based PlayUp is a mobile and online betting and fantasy sports platform currently expanding into the US market.

The combined company is expected to trade on the Nasdaq once the deal is completed in the first quarter of 2023.

Transaction Overview

IG brings $300.4 million into the deal from its current trust and has not yet supplemented this with a PIPE. The parties have, however, entered into a standby purchase agreement with a Yorkville fund, that would allow the combined company to direct Yorkville to purchase up to $70 million in shares at 97% of the market price during the three years following close.

PlayUp expects to add $290.4 million to its balance sheet through the deal after footing $10 million in expenses. IG must maintain proceeds of at least $60 million, with $36 million drawable at completion as a condition of close.

Existing PlayUp shareholders are rolling 100% of their existing equity in the company and are expected to own 50.7% while public IG shareholders are to own 43.5% in a zero redemptions scenario. The SPAC’s sponsor is expected to hold a 5.8% stake at close.

This is a major concession on IG’s part as the parties have adjusted its compensation, presumably to match potential redemption levels. The sponsor is to see its 7,500,000 promote shares canceled and replaced by the greater of 2,500,000 shares or a 5.75% stake at close.

The sponsor has further agreed to a one-year lock-up, but may be released early if the combined company trades with a VWAP at or above $12 for 20 of 30 trading days. PlayUp shareholders have also agreed to a one-year lock-up.

IG Chairman Bradley Tusk is set to chair PlayUp’s post-transaction Board.

Quick Takes: PlayUp has been growing its online betting fast and joins a raft of gambling companies taking the SPAC route to the public markets.

That may not have been PlayUp’s Plan A, however. The company announced on July 11 that it had retained Innovation Capital as a financial advisor to help it explore strategic alternatives “including strategic partnerships, a sale of the company or other possible transactions.”

While a SPAC deal falls under the “other” category, this list of options is more often laid out by a company needing help to get through its next stage.  It will be interesting to see in the forthcoming filed proxy when deal talks between IG and PlayUp were initiated, and more importantly when due diligence began, since today’s announcement comes just 10 weeks after it announced the strategic review.

Nonetheless, on the growth bit, the company has had a strong first half of 2022, leaving it to believe that it will have more than doubled betting volume on its platform over two years from $197.3 million in 2020 to $402.7 million in 2022E. The house’s take on its business has been relatively thin thus far, however.

PlayUp expects just $14.6 million in net revenue after netting single digit millions in each of the past three years. The company has yet to turn positive EBITDA, and its EBITDA shortfalls have widened as time as gone on from -$5 million in 2021 to a projected -$25.9 million in 2022E. Most of its business is still based in Australia and New Zealand although it has entered the Indian market as well.

It expects its entry into the US market to provide the largest portion of its upside in the future, but this has been a loss leader thus far. It accounted for -$4.3 million EBITDA from $1.1 million in total turnover when PlayUp initially dipped its toe into the New Jersey market in 2021. In 2022E, the US market is expected to make up for most of its losses to the tune of -$18.6 million EBITDA from $61.8 million in overall turnover.

Cash burn is not unusual in the gaming space. Notable de-SPAC DraftKings (NASDAQ:DKNG) most recently updated its 2022E guidance to -$800 million EBITDA from -$860 million EBITDA out of $2.1 billion in total revenue.

But, the comparison is nonetheless instructive, because while the US market may be among the largest, it also hosts fervent competition with well-funded major players like DraftKings, FanDuel and various platforms connected to major casino operators. Each of these spend heavily on marketing.

By the end of this year, PlayUp expects to be live in New Jersey, Colorado and North Dakota with Indiana, Iowa and Ohio entries slated for 2023 and Pennsylvania and Arizona in 2024.  But, it will be playing catchup to players that already have a presence in every US state where it is legal.

In the meantime, this deal does value PlayUp at a significant discount at 10.9x gross revenue, while DraftKings trades at about 15.3x. Smaller cap gaming de-SPACs trade much more conservatively, however. Rush Street (NYSE:RSI) trades at just 0.73x gross revenue and Codere (NASDAQ:CDRO) trades at 0.27x.

Click here for the full investor presentation.

ADVISORS

• Paul, Weiss, Rifkind, Wharton & Garrison LLP is acting as legal counsel to IG Acquisition Corp.
• Richards, Layton & Finger, PA is acting as special Delaware counsel to IG Acquisition Corp.
• DLA Piper is acting as legal counsel to PlayUp.
• Innovation Capital, LLC is acting as financial advisor to PlayUp.