Clichés aside, the stakes may never have been higher for the UK's gambling companies. The businesses have been hit by the introduction of the 15 per cent point of consumption tax (PCT); a move by government to bag taxes from all bets made by UK customers irrespective of where the online operator is located. PricewaterhouseCoopers (PwC) says this has had a material impact on operators who moved their operations offshore to territories such as Gibraltar and Malta where they were previously "exempt from paying betting duties in the UK".
Not everyone has been losing their shirts to Westminster tax initiatives, though. Bingo business Rank Group (RNK) has actually been a beneficiary of government policy - notably via the reduction in bingo duty from 20 per cent to 10 per cent. At the group's results in August, management said part of the £11.3m tax windfall had been ploughed back into the business. Separately, former investment landowner and corporate counsel Paul Richardson was brought in as group director of strategy and corporate development - a position responsible for assessing acquisition opportunities.
Overall, however, industry change is accelerating in the face of an increasingly onerous tax regime. On top of the PCT, betting companies have to contend with machine gaming duties, which range from 5 per cent to 25 per cent depending on the size of winnings available. Companies have identified an increase in scale as a means of mitigating the mounting tax burden; a point borne out by a sharp step-up in merger and acquisition (M&A) activity. "Operators are under more pressure due to the increased cost of compliance and additional betting duties payable," PwC added. "This pressure is deemed to drive some of the M&A activity that we have been helping clients with and we expect activity to increase."
Upping the ante
A trio of major deals are piled on the Competition and Markets Authority's (CMA) in-tray - Paddy Power (PAP) and Betfair (BET); Ladbrokes (LAD) and Gala Coral; and GVC Holdings (GVC) and Bwin.Party Digital Entertainment (BWIN). Each of the deals would create businesses of significant scale. Indeed, it has been mooted that the last of the three tie-ups could conceivably create the highest yielding entity in the FTSE 250, although that's obviously a function of the share price.
The pairings also make sense on other levels. With Paddy Power and Betfair, the Irish group has a solid retail estate, whereas Betfair is known for its online prowess. Importantly, Betfair's chief executive, Breon Corcoran, who used to head up its prospective Irish bedfellow, is staying put in the top job while Paddy's chief, Andy McCue, will become chief operating officer. The quality of an operator's online platform is key these days, not least because mobile phones mean punters can place a wager any time, anywhere, but also 'apps' tend to create stickier customers. If someone downloads an app, they are more likely to keep using that company's services.
The GVC/Bwin deal has provided the most drama as the latter's board had recommended a deal from rival 888 Holdings (888), but GVC went all-in to become the preferred bidder. A meeting of Bwin shareholders takes place on 15 December in order to approve the deal. If it does move ahead, it's thought that GVC will temporarily suspend its dividend in 2016 - something it did while it integrated its previous acquisition, Sportingbet - but there is no reason to think that it won't reinstate payments, perhaps even earlier than expected.
A Gala affair
Ladbrokes' shares are down some 17 per cent (at the time of writing) from the price when it confirmed in June that it was in merger talks with Gala Coral. Disquiet over the deal was personified through high-profile shareholder Dermot Desmond, who sent a letter to shareholders and brokers outlining his reservations. A fund manager who owns the stock but did not want to be named, said he understood some of the concerns highlighted by Mr Desmond and had viewed the deal himself as merely "okay rather than a standout, brilliant transaction". But the manager added it was "hard to argue against the fact the market was consolidating and people who don't have scale will be at a disadvantage". He said if the deal did fall through both would be "at the dance looking for another partner".
In spite of the market's muted response to the deal, Peel Hunt's leisure and gaming analyst, Nick Batram, has retained his buy rating, suggesting that, even if the CMA puts too many obstacles in the way of a deal, the potential organic recovery under new chief executive Jim Mullen could push the shares higher.
Tightening odds
Another reason for the desire to pal-up may also be the sheer level of competition in the market, a factor highlighted by Mr Corcoran at Betfair's recent results presentation. The chief executive said the company would be maintaining its marketing spend at the same level as that reached during last year's World Cup, partly because two rivals in particular were "making it tougher for the rest of the market". Mr Corcoran said the return on its marketing investment was strong, but this is something investors need to monitor. Ramping up marketing spend is all well and good, but it needs to yield results. Mr Corcoran also said he had noticed smaller rivals, such as unlisted SkyBet, significantly increasing levels of hiring in a clear bid to challenge the larger businesses.
IC VIEW: Mobile and online gambling remains a growing trend. But the size of the initial boost given to these stocks by digital technologies is unlikely to be repeated. Ultimately this means the businesses are likely to have to maintain high levels of investment in technology to stay ahead of the game. Marketing costs may also remain elevated, although more direct campaigns via mobile devices provide a relatively low-cost means of generating traffic and returns.
Another factor investors need to consider is the split between regulated and non-regulated markets. Many companies cite how they are moving more towards regulated markets in expectation of greater certainty over revenues. However, it's worth remembering that gambling remains an expedient target for politicians wanting to raise taxes, while claiming they're acting out of a sense of social responsibility. Be careful where you place your bets.
