After announcing your engagement come the challenges of matrimony, and after a particularly fervent flow of dealmaking for the gamblers in 2015 there is a lot of settling in to do.
The most significant of the tie-ups last year was arguably that of Paddy Power (PAP) and Betfair (BET), with the Irish group attracted to the online prowess of its target. The company had joked in a summertime tweet that the companies could merge under the name Betty Power. Just one month later, this tongue-in-cheek response to news of Ladbrokes' (LAD) approach for Gala Coral came true. The first of these deals looks like it will be completed fairly quickly, but Ladbrokes is likely to need to sell off some of its estate to satisfy competition authorities.
There was also the high-stakes tussle for Bwin.Party Digital Entertainment (BPTY) between 888 Holdings (888) and currently Aim-traded GVC Holdings (GVC). In the end, the latter rolled the dice one last time after Bwin's board had notionally accepted 888's offer and it came up trumps. The enlarged GVC/Bwin entity is set to list on the main market on 2 February and, all things being equal, is expected to be the highest yielding stock in the FTSE 250 - a key plank of our recent GVC tip.
All this points to further M&A activity. The bulk of it is likely to be at the smaller end of the market, unless William Hill (WMH) and 888 executives are holed up in a room right now trying to bash out some kind of deal in a bid not to be left behind.
Sophie Blandford, equity analyst at Daniel Stewart, says she would not rule out the pair agreeing terms, but argues that there "would be arguments about price" given that it is nearing a year since 888 rebuffed a £700m advance from WMH.
The enlarged groups will also be focusing heavily on technology. One likely driver for these deals is the desire to gain extra online know-how. Winning a greater share of the available mobile audience is key. Not only can such customers be slightly more sticky - apps are a good way of encouraging repeat visits - but companies can also learn about their customers' betting habits quickly and accurately. This helps them target their marketing more effectively, which is cheaper than mass-market campaigning.
Another major trend - which is inextricably linked to all the dealmaking - is regulation. The UK's point-of-consumption tax and machine gaming duty both served to erode margins at all the gambling companies, meaning scale has become increasingly important.
"The reasons why companies looked towards M&A last year are the same this year," says Nick Batram, analyst at Peel Hunt. "The cost of operating in regulated markets is rising and technology costs keep going up, too. It's about being a broader, deeper business for companies in the space. You can also take fixed costs out, depending on the deal."
Investors need to be aware of the split gambling companies have between regulated and unregulated markets. While regulated markets arguably provide a more visible earnings stream, they are usually more expensive to operate in.
Overall, market-watchers are expecting 2016 will be a better year for many operators, given companies with UK customers have worked through the impact of the country's new taxes and, importantly, there is a major football tournament, in the form of UEFA's Euro 2016.
"The European championships will be the biggest ever as there are more teams and so more matches," says Mr Batram. "Last year we saw the hit from not having a [football] world cup so the tone of results should be better."
| Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: | |
|---|---|---|---|---|---|---|
| BETFAIR GROUP | 3,911 | 3,626 | 43.0 | 1.0 | 156.1 | Hold, 3,532p, 25 November 2015 |
| BWIN PARTY DIGITAL ENTM. | 127 | 1,054 | 42.5 | 3.0 | 17.3 | Hold, 455p, 02 September 2015 |
| LADBROKES | 117 | 1,188 | 13.0 | 4.8 | 4.2 | Hold, 110p, 26 November 2015 |
| PLAYTECH | 777 | 2,505 | 16.7 | 2.6 | 16.9 | Buy, 778p, 24 November 2015 |
| RANK GROUP | 282 | 1,102 | 19.3 | 2.0 | 76.3 | Buy, 280p, 31 December 2015 |
| WILLIAM HILL | 377 | 3,332 | 13.3 | 3.3 | 0.1 | Hold, 387p, 10 August 2015 |
Favourites
We viewed the bearishness about GVC taking a dividend holiday in 2016 as overdone and therefore a good buying opportunity. The company took the same action when it was digesting Sportingbet. The company is perfectly able to return to the payout roster. We're also bullish on Aim-traded 32Red (TTR), which is making smart use of technology in its marketing efforts, and Rank Group (RNK), for its online growth prospects.
Outsiders
The obvious candidate is William Hill. Without a deal obviously on the horizon and a tough set of figures at the half-year, chief executive James Henderson has his work cut out.
