By: Xavi Muñoz & Mònica Ferrer; Partner & Associate at ECIJA
Spanish online gambling regulation is built around a closed licensing system. Remote gambling licenses may only be acquired during so-called “licensing windows.” The last licensing window opened in 2017-2018; and it is unclear when (or whether) a new licensing window will be announced.
As the direct transfer of gambling licenses is prohibited under Spanish law (section 9 of Law 13/2011, of 27 May, on Gambling Regulation), the only way to receive a Spanish remote gaming license is to acquire the shares of a company already holding such a license through a M&A transaction.
We believe that – due to the large number of operators in the market – there will be some operators who will not be able to profitably operate their business, while other operators will still see opportunities to stand out in a crowded market; and thus wish to acquire a Spanish online gambling license.
At present, the only way to do so will be through an acquisition process.
The acquisition of a Spanish online gambling operator will entail all the normal steps of any corporate M&A process. Nonetheless, due to the specific regulations online gambling operators are subject to, several additional issues will have to be taken into account.
Overall, the process can be divided into the following steps:
STEP 1: Identifying a suitable target company
The target company will be among the ca. 80 firms holding a Spanish online gambling license. Only a few of those companies, however, would be interested in selling or accepting an investment. Consequently, research must be undertaken to draw up a suitable shortlist.
From among the feasible targets the buyer will have to select a company that holds the specific licenses (betting, casino, contests) he or she is interested in. Other considerations include price, technology, team, etc. Likewise, potential sellers will have to consider these elements in order to maximize their attractiveness to prospective buyers.
STEP 2: Valuation of the target company
Once the desired target company has been identified, the seller will have to execute a business valuation process which will have to take into consideration issues regarding the business operations, productive assets, historical performance, evolution of its Gross Gaming Revenue (GGR), number of active players accounts, etc.
In order to obtain some of this information, it might be necessary to directly contact the target company. In doing so, the parties shall sign a NDA and later, if talks progress, a Term Sheet, Letter of Intent, or Memorandum of Understanding.
STEP 3: Signing of a Term Sheet, Letter of Intent, or Memorandum of Understanding
Depending on the amount of information waiting to be confirmed and stipulations still to be agreed upon regarding the conditions for the transaction (e.g., total or partial acquisition; conditioned or fixed price; time schedule for the execution of the agreement; etc.), the parties shall sign and execute a Term Sheet, Letter of Intent, or Memorandum of Understanding broadly detailing the main aspects already agreed upon between the parties.
STEP 4: Due diligence process
The investigation and verification process to ensure that the transaction meets all desired goals and fulfills all agreed conditions, will have to take into account issues that are specific to the gambling sector. Such issues shall include, but not be limited to:
Date of issuance and renewal of the licenses, as well as any potential regulatory risk related to said licenses.
Software agreements with the suppliers of the gambling platform, the games, the CPD, and any other necessary element.
Corporate compliance level of the company. Online gambling operators are subject to a high level of corporate compliance obligations (i.e. specific AML obligations, need for DPO in personal data protection, etc.). Ensuring that all necessary obligations under Spanish law have been met, will thus be of utmost importance.
Gambling-specific regulatory compliance. The commission of two serious breaches within a period of two years entails what is considered a very serious breach under Spanish law. Such a “very serious” breach may lead to an economic sanction of between €1m and €50m, in addition to the potential loss of the gambling license. Therefore, the number and amount of any previous fines issued by the gambling regulator will have to be carefully checked.
STEP 5: Signing and closing of the Sale and Purchase Agreement (“SPA”)
The clauses of the SPA that will have to be most vigilantly negotiated are:
Representations and warranties of the seller. The findings of the due diligence process will have to be duly analyzed and included in the representations and warranties of the SPA.
Limitations of responsibility. Taking into account that the buyer will be assuming any contingency or liability that may arise in the future, the limitations of the liability for the R&W made by the seller will play a key issue in the negotiation of the SPA.
Price and payment structure. The operation may be structured in a wide variety of ways. The acquisition may be total (100% of the shares of the company) or partial (51% of the shares of the company). Additionally, the parties may be interested in deferring or conditioning the payment of the price to the obtainment of specific results (i.e. partially conditioning the payment of the agreed price to the maintaining or increasing of the company’s results or to the performance of key personnel). Likewise, the potential granting of stock options or vesting plans for key employees, the establishment of call options for the investor to buy the shares not acquired in the initial equity investment and any other mechanisms shall be duly established in the SPA.
STEP 6: Notification to the Directorate General for the Regulation of Gambling (“DGOJ”)
The transfer of shares will have to be notified to the Spanish gambling regulator (DGOJ) once executed, together with all the relevant information on the new owner of the gambling license (related parties; ultimate beneficial owner; etc.).
Finally, it shall be noticed that corporate restructuring operations such as mergers, splits or spin-offs of branches of activity are subject to the obtainment of prior authorization by the DGOJ, which will depend on the following factors:
that the company fulfills all necessary requirements to hold a gaming license under Spanish law (this is in accordance to article 13 of the Law 13/2011);
that the corporate restructuring operation is duly executed in accordance with applicable laws and regulations;
in which case, the DGOJ shall grant a “pre-approval” of such corporate operation, which will be valid for three months; and
that the new company acquiring the gaming license shall assume any responsibility for any issue regarding the gambling activities developed by the gaming operator.
At this point, the execution of the operation will become much more complicated as obtaining the regulator’s prior authorization is compulsory and its approval has to be received prior to the execution of the deal.
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