On the right SPAC: Why Matt Davey's blank check company is shying away from complex deals

After raising $250m to support its investment efforts, gaming industry-facing SPAC Tekkorp Digital Acquisition Corp is eyeing innovative companies that are already in or seeking to enter the US market. Where Tekkorp differs from other investment vehicles is its management and board’s deep-rooted and longstanding experience in gaming, with industry veterans Robin Chhabra and Tony Rodeo offering up their expertise. Here Tekkorp founder and CEO Matt Davey reflects on how his time at the helm of NYX Gaming Group and its sale to Scientific Games helped forge a deep understanding on carrying out highly complex deals (and why that experience has put him off making any more).   EGR North America (NA): Tekkorp is not just a faceless investment vehicle, what can you bring to the industry that other SPACs can’t? Matt Davey (MD): Contextually you’re right, what we’ve observed is that there is a significant amount of capital out there looking for a home. There are a large number of blank check companies, but also there’s a huge number of private equity shops, etc. So there’s a whole range of financing options if you’re a private business. When we put the company together, we were mindful about two things, one was the management structure, and then two was the board. On management we’ve put together a team whose members each have more than 20 years’ experience in the industry. And the key there was not just being good at financing but also understanding operations. When it comes to doing a deal as a SPAC, a better way to think of it is as an IPO. In that case, you want to know that your partners understand your business and can help drive a narrative around your competitive strengths and what the vision for the company is. Having operational skillsets and actually really understanding what it feels like to be in the shoes of an operator and a vendor we think makes a difference. We think it’s a lot more engaging and a better result than just someone who’s an ex-investment banker who’s done a bunch of deals but never actually run a business, never had to deal with expanding a company with 4,000 people around the world, for instance, and scale it. Second to that is corporate governance and reputation, and that’s where our board comes into play. We’ve handpicked our board and they all have stellar reputations. We have Tony Rodeo, the ex-CEO of Caesars, on the board and he brings the big public gaming company experience for US-listed companies. We have Tom Roach, who’s the ex-head of audit services for EY, right across the gaming industry in the US. He’s seen what has happened and worked well and what hasn’t worked well within gambling companies. We have Sean Ryan from Facebook and he brings the whole social gaming aspect to the party. And then Marlon Goldstein, who brings a very strong legal benchmark coming in from Amaya to The Stars Group, and then across to Flutter.

EGR NA: How has your experience impacted your search for acquisitions and are you looking to maintain some influence in the companies once the sale and IPOs are completed? MD: DraftKings and Golden Nugget were very simple stories, both fabulous businesses, but it’s a simple investor growth story. You’re a smart, fast growing domestic igaming and sports betting business and you’re looking to get access to capital and go public rapidly. And so that ticked the box. In both cases, it was more of an outreach from those companies to SPACs that deliver that result. For us, one of the things we love about SPACs is they’re incredibly flexible. Should someone be in that situation and want to work with us happy days, we’re certainly not going to say no. But our broader skillset and experience means that we are much more familiar with international opportunities as well. And there are some very diverse, fabulous businesses that may not have already made an outreach to the US public markets that we can have inbound calls with about how the US system could help accelerate the business plan. We’re familiar with a broader range of businesses and we have a reputation within the industry that we think would appeal to those that are overseas. EGR NA: How did you establish such a top-tier team and how do you all agree on what you want to pursue? MD: In my desire for moving forward and doing something fun, I wanted to do it with people I know and trust and have a ton of respect for. And so, I was fortunate to be able to do that. I brought onboard Robin Chhabra, who I worked very closely with back in 2016 on the OpenBet transactions when he represented William Hill. That is probably one of the most difficult transactions our bankers have ever been involved in and you get to really know somebody through that process which took six months to complete. Eric Matejevich, who was on my board, and then as my CFO at NYX Gaming Group I’ve also known for a long time and have a ton of respect for. In terms of deciding on what to look at, one of the most attractive things about the SPAC product is it’s just incredibly flexible. We can look at everything, provided it fits within the broader guidelines of being digital and focused on sports. We are looking at everything and we were having a very strong and robust debate internally about where our energies should be focused. EGR NA: What types of companies are you looking at specifically? MD: We broke it down into four categories. We’re focused on digital sports, gaming, and social casino. But within that there are four segments that we articulate; the first is marketing affiliate media, as we think that segment stands to be a net beneficiary certainly over the first five or 10 years of this emerging market. That would be assets like Barstool Sports which we think is growing rapidly. When you think about the billions of dollars being spent on the US market today, the affiliate media marketing businesses pick up a fair piece of that. Segment two is the operator space and that includes social casinos. That’s a well-known and well-trodden path. The third category we were looking at is the supplier category. We think that market looks interesting as well. And then the fourth category is the data analytics AI category. That’s where you have these ancillary businesses that are doing some really interesting value-added type activity that supports the overall ecosystem. EGR NA: What enticed you to start a SPAC over joining another industry firm or starting your own company? MD: I made the decision to focus on the investment side of the industry back in 2019 after successfully selling NYX Gaming Group to Scientific Games in 2018, and then completing the integration of the 1,500 or so staff we had within the eight and a half thousand in Sci Games. It felt to me that there was an enormous amount of opportunity on the investment side as we have this ongoing migration of consumer behavior from land-based retail analog to online and digital. At the same time, we have this incredible expansion of sports betting and gaming here in the US. The confluence of those two factors I thought gave us a very interesting investment environment, and one that we could take advantage of given that we’ve seen the playbook for how this has been rolled out in other markets, particularly Europe and Australasia. We set about making a number of investments and one of the constraints that we ran into is when you’re looking to buy an entire company is typically you need to have other financial partners come on alongside such as other private equity shops. So, you end up having two negotiations, one with the vendor, and then one with the private equity, and it didn’t really deliver the most optimal results. We’d looked at the SPAC model before and it’s now attracting high-quality sponsors and investors, and high-quality deals are coming through, so that became much more attractive. We saw that it was a very flexible approach to be able to put up the right capital for a single or multi-step deal in a much more efficient way. Back in the early 2000s there were about 8,000 public-listed companies on US stock exchanges. Today, there are about 4,000, so you’ve seen almost 50% attrition, the drive behind that is consolidation, and private companies have been able to stay private for longer because the venture capital private equity markets have been so strong you just didn’t need to go public. There is a lack of companies to invest in now. And if you really like the online gaming space, you’ve got three choices today to invest in. We think the whole SPAC model is really helping the investor group by giving them more optionality, more ways to express their interest. And at the same time, it really helps the industry grow because we’re putting a lot more capital to work in these businesses. EGR NA: Did you anticipate that the SPAC model would take off in the gaming space when you considered it initially? MD: When I looked at it two or three years ago, we didn’t think it would. But we have a really interesting financial backdrop now with incredibly low interest rates, much lower today than they were two or three years ago. And what that is forcing public investors to do is to move out of bonds, which really don’t generate much return, and look for high-growth assets particularly in equities. You’ve got public institutional investors looking for growth options and then at the same time, we’ve got the US market opening. It’s probably the fastest-growing market of size worldwide for igaming and sports betting and it’s got the potential to become the largest when it’s fully formed. If you’re an international gaming operator or supplier with ambitions to be a global player, you have to be in the US. But then it’s expensive because it’s highly competitive. There’s a dramatic need for capital, and then you have a desire from public investors to invest in growth assets. And we think that combination makes for a very interesting model. There seems to be a misconception around the amount of money raised in SPACs versus the target size, and people say, ‘you’ve only raised $50m or $200m or $300m and that’s all you can buy.’ But that’s not the way SPACs work, they can work on a multiple of cash raised. And we do that because we’re looking for a significant number of shares to be rolled forward by the vendor into the public entity. We often tie PIPE investment in public equities along with the transaction and that gives other investors the same opportunity alongside those that put up the original amount of capital. In our case, the $250m. In our disclosure to the market we suggested we’re looking at targets between one to two billion dollars in enterprise value, and that’s the reason we’re looking for multiples on that capital we’ve raised. EGR NA: What’s the roadmap for deals? Will there be multiple acquisitions at once? MD: It’s broad by design because you have two years to execute a transaction, you need to be certain your funnel is as broad as possible. Then it’s a matter of looking at how you provide what the vendors are looking for, in terms of the right amount of capital, the public facing aspect of the business, the corporate governance, and structure and the board, etc. Then we need to make certain that pricing and structure makes sense to our public investors. When it comes to whether it’s one or multiple assets, again this is the power of the SPAC product, it’s very flexible. The limit really comes down to complexity, and our team have the benefit of having done some very complex deals historically, but we wanted to shy away from that. What we do think is important is that we have a very simple message to the public investor, even if the back-office structuring can be complex. If we are to make one or multiple deals, you do them at the same time. You package it all into the one transaction, and then the process is called de-SPACing. You merge with those businesses and then if the vote is yes, you’re off to the races. The key comes down to, what does the business need to be fully formed once it’s public? Some businesses tick the boxes right across all of that and don’t need any help. There are no egos on our team, we are more than happy to step to the left and let the new business go forward, but if there is a desire, both on the part of the vendors and the public investors, for us to have some form of deeper involvement going forward, we’re absolutely happy to do that as well. We bring the benefit of a lot of experience and work within public capital markets, navigating regulatory requirements, and putting together the right internal controls and reporting protocols for businesses going from private to public. EGR NA: What’s the competition looking like across the investor landscape? MD: Money has been freely available for some time now for the right opportunities. I think the differentiator is what we talked about before and really understanding the companies. We think that there’s definitely a lack of deep knowledge about what sports betting and igaming is, particularly here in the US. And so if you don’t understand the value chain, it’s easy to make mistakes when you’re putting capital to work in the industry. Say, for instance, there’s a view that the current market leaders in sports betting in the US will be the market leaders in 10 years’ time, we think history shows that’s not the case. We think that there are some very strong examples that demonstrate market leadership can change significantly, especially in a rapidly emerging marketplace. We have that knowledge and experience and we think that’s quite the differentiator when it comes to articulating a value proposition. And we’re certainly experiencing that from the inbound inquiries we’ve had on our business. EGR NA: What are you seeing from companies in terms of innovation? What would you like to see? And has anything really caught your eye yet? MD: People talk a lot about innovation. Some come into the gaming industry and say ‘hey there’s a lack of innovation. It’s the same games and the same sports betting offers,’ but in part that reflects what the consumer wants. What they’re looking for is innovation in terms of frictionless access to entertainment. The promise of going digital makes things easier and reduces friction. We’re seeing improvements in payment processing in AML and onboarding of players, geolocation, and detection. We’re not really seeing it in terms of product sets. Innovation in sports betting in the UK in the last 20 years has been in-play betting and cashout, everything else is pretty much the same. We’ve been happy to see the innovation around the underlying plumbing and the removal of friction from the industry, but the core product itself is fantastic and we’re not looking for that to be innovated on.