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Churchill Downs is buying Big Fish. GeekWire Illustration; Photo by Jeff Kubina, via Flickr.
Churchill Downs is buying Big Fish. GeekWire Illustration; Photo by Jeff Kubina, via Flickr.

Churchill Downs is an iconic part of American culture, best known for the running of the Kentucky Derby.

So, why in the heck is the operator of America’s best known horse race buying a Seattle company that sells hundreds of gaming titles with names such as Gardenscapes 2, Gummy Drop and Midnight Castle?

The legendary Churchill Downs. Photo via Shutterstock.
The legendary Churchill Downs. Photo via Shutterstock.

Executives at Churchill Downs Inc. — a publicly-traded company with interests in online horse wagering and slot machines — attempted to address that question in a conference call and presentation this morning with analysts following yesterday’s surprise deal to buy Big Fish Games for as much as $885 million.

Perhaps it’s only proper that we turn to a horse racing analogy to help make sense of the deal.

For Churchill Downs, the Big Fish acquisition is all about betting on a fast galloping filly that shows a lot of promise.

Churchill Downs, which saw net revenues drop six percent to $173.7 million during the third quarter, is looking to move beyond horse racing as part of a third wave of diversification that started nearly a decade ago.

Click on chart for full presentation

“We recognized then that we had to change because our only growth asset at that time was our Kentucky Open Derby event,” said Chairman Bob Evans in today’s call. The company built its online horse wagering business,, largely through acquisitions between 2007 and 2010 and then shifted to casino operations with acquisitions of facilities in New York, Mississippi and Illinois. Evans said those moves have paid off, with the stock up 229 percent in the past five years.

Now, with Big Fish, Churchill Downs is hoping to complete the triple crown.

“The mobile-online gaming space gives us new products, new customers, new geographies,” said Churchill Downs CEO William Carstanjen. “With the trends we see in mobile, smartphones, tablets, and other hand-held devices — the growth we see in mobile and online games, particularly in the social casino games —  the segment is a logical adjacency.”

Carstanjen said they were particularly impressed with Big Fish’s “seasoned” management team, including founder Paul Thelen who he said has consistently built the business over the past 12 years. In fact, Thelen and crew have grown a decent-sized business, with annual gross bookings last year of $278 million. That was up from $238 million in 2012.

“Mobile and online games is a large, competitive and sophisticated segment,” said Carstanjen. “Scale matters. Game development expertise matters. Distribution scope matters. Marketing analytics and experience matter. We don’t think we could expect to be successful dipping a toe into the water, and we felt we needed to go big and start with scale, team and with more expertise and experience.”

Paul Thelen
Paul Thelen

Interestingly, Big Fish has grown its business without producing a single hit game like rivals such as Zynga with Farmville or Rovio with Angry Birds or PopCap with Plants vs. Zombies. That was something that Churchill Downs executives addressed throughout today’s call, with Carstanjen noting at one point: “They have never had the mega-hit game, and we actually like that.”

Carstanjen added that having a mega-hit is a problem that “everyone would like to have.” But because it has not occurred to date, Big Fish has steadily grown a more diverse, disciplined and stable business that’s not as susceptible to the winds of change in the fickle games business.

“Diversity of content is the key attribute we are most impressed with,” said Carstanjen.

But he also added that Big Fish focused on mobile gaming titles early on, a decision that Carstanjen said was the right move when many others strayed into the dangerous territory of social gaming. “Generally, that has proven to be the right focus,” he said. Big Fish Casino was the top revenue producing casino game on iOS in 2013 and so far this year.

“Big Fish is a significant player in the mobile games space,” he said. “You don’t necessarily see this sort of consistent booking growth over 12 years at other public social or mobile games companies, and this speaks to the diversified business that Big Fish is.”

Specifically, Churchill Downs noted an interest in Big Fish’s casino games, where the company ranks fourth with an 8.3 percent market share. But it is not just about casino-style games. Carstanjen said that they liked the diversity of games available via Big Fish, beyond the casino titles.

Click for larger image.

“This is different in that respect from the acquisitions that some of the gambling companies have made,” said Carstanjen, indirectly referring to IGT’s purchase of Seattle-based DoubleDown for as much as $500 million. “The broader range of mobile and online games was important to us, and we highly value the ability and optionality to play in the bigger space.”

Carstanjen said that Big Fish was not sold as part of some “auction” or “fire sale,” and that the team of more than 600 employees will remain in Oakland, Seattle and Luxembourg. It plans to operate as standalone entity, with Carstanjen saying the business will receive “our best attention and effort.”

Churchill Downs has big expectations for Big Fish, and that was evidenced by the incentive plan put in place for Thelen. If the Big Fish unit achieves $1 billion in gross bookings in 2016 — about triple 2013 totals — Thelen will earn a founder bonus payment of $50 million. That’s on top of $15 million in Churchill Downs’ stock that Thelen will receive.

“This would represent quite an explosion in the growth rate, given that bookings were $312 million over the last four quarters,” said Churchill Downs CFO William Mudd. “We, of course, believe that the $50 million payment is well worth it if Big Fish can grow a business of this scale by the end of 2016.”

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