M&As On the UK and the International Gambling Market

Posted by Harry Kane on Monday, June 24, 2019

What Does the Future Hold For M&As In the UK iGaming Market?

There are numerous trends that have defined the UK iGaming market in recent times, including an incredible rise in the number of lucrative mergers and acquisitions completed during the last seven years. This number includes several international deals, such as GVC Holdings’ procurement of Australia’s Sportingbet for £560 million back in 2017.

There are several factors that have underpinned this trend, including a desire amongst major operators to reduce their operational costs and improve their economies of scale in a competitive marketplace.

M&As have also provided operators with an opportunity to diversify their interests whilst claiming a larger market share, which is something that should appeal to every online casino and sports betting brand.

However, there is evidence to suggest that M&A type deals may soon become a thing of the past in the UK, with a host of more appealing investments and less hostile environments now available overseas. We’ll explore this further below, whilst asking what the future holds for the iGaming marketplace in the UK.

M&As And Their Impact On the UK Gambling Industry

During the last seven years or so, there’s little doubt that mergers and acquisitions have played a pivotal role in shaping the iGaming market in the UK.

This has also contributed heavily to what’s currently considered to be the most mature iGaming market anywhere in the world, and one that continues to blaze a trail for other regions to follow.

However, the sheer rate and scope of recent M&As in the UK have driven a considerable level of consolidation since 2012, particularly amongst the most established and well-resourced iGaming brands.

Not only this, but we must also consider the changing nature of the UK market and the key regulatory challenges that it continues to face.

The UK Gambling Commission (UKGC) has certainly introduced a number of increasingly stringent guidelines for operators as part of its core strategic objectives through 2021, which seek to safeguard vulnerable players, improve the reputation of the iGaming industry and empower operators to become ambassadors for responsible gambling in the UK.

Many of these regulations have revolved around the verification of customer ID and the way in which operators deal with problem gamblers, from recognising irregular behaviour to offering viable access to self-exclusion and time-out initiatives.

Economic Factors and Measures That Affect the British iGaming Industry

Additionally, there are several economic factors and government-backed legislative measures that have combined to increase the pressure on operators in the UK. Take the recently unveiled FOBT cap, for example, which was finally rolled out in April and slashed the maximum betting threshold for these machines from £100 to a paltry £2.

Given that FOBTs account for an incredible 56% of all betting shop profits in the UK, this new legislation is likely to cause considerable uncertainty and have a detrimental impact on the profitability of major high street players like William Hill and Paddy Power (who have both been involved in high-profile M&As of late).

Even brands that operate exclusively online are set to be impacted indirectly by the new legislation, with the Treasury having increased the Remote Gaming Duty (RGD) by 6% to offset potential revenue losses.

This change will increase the total rate of RGD to 21%, with the new duty set to be unveiled as part of the Chancellor’s autumn budget in October. The impact will be particularly pronounced by multi-channel operators, who will see both their turnover and their profitability diminish significantly within a relatively short period of time.

What Would The Legal Changes Lead To?

As a result of these changes and the recent drive to introduce a mandatory tax for the funding of gambling addiction treatment facilities in the UK, brands such as William Hill and GVC Holdings have also seen their share values slashed of late.

These factors, along with the tremendous uncertainty that has been created by the UK’s proposed departure from the EU, have combined to create a perfect storm in the industry and place the long-term future of the domestic iGaming market in considerable doubt.

The question that remains, of course, is what exactly does this mean for M&As in the UK? Well, despite the recent consolidation in the marketplace and a slight decline in the rate of mergers and acquisitions, it could actually trigger a spike in activity in the near-term.

More specifically, the market leaders may well look to capitalise on the current level of market growth before it declines, by completing any lucrative deals before the recent legislative changes begin to take their toll.

In the medium to longer-term, however, we’re likely to see M&As become less commonplace and the leading operators reconsider their overarching strategy. At the same time, operators may also turn their attentions away from opportunities in the UK and mainland Europe, as they look to target lighter regulatory markets with higher growth potential.

This rule may not apply to smaller and mid-tier operators, however, who may find their very existence threatened by increased taxes, diminishing profits and a more heavily regulated advertising environment. In this instance, such firms may well decide to consider mergers and small-scale acquisitions as a way of consolidating their market position and remaining profitable in an increasingly challenging climate.

What Are Investors Looking for In the Current iGaming Market?

The potential for M&As involving mid-tier brands is certainly interesting, in so much that it highlights the mature nature of the UK marketplace and how it’s established culture is appealing to investors.

However, if the interest in the UK market does cool over the course of the coming months, the question that remains is what exactly will pique the interests of investors during the same period of time?

Given the factors that are squeezing the UK marketplace and the profitability of iGaming brands, it’s no wonder that growth and potential market share are among the key drivers for investors. This is why so many top-tier British and European operators are casting their eagle eyes across the Atlantic, as the North American market finally shows signs of maturing.

Is the US iGaming Market Profitable?

Last year saw the omnipotent Supreme Court finally strike down the Professional and Amateur Sports Protection Act form 1992, which was a law that prohibited state-authorised sports betting nationwide (save for the exception of Nevada).

As a result, individual state authorities are now permitted to legalise sports betting in their own jurisdictions, with the justices agreeing 7-2 that the longstanding federal ban was inherently unconstitutional.

Of course, this announcement has been slightly undermined by a recent decision by the Department of Justice in the U.S., which reconsidered its 2011 opinion that the Wire Act should only be applied to sports betting.

The Wire Act is another longstanding federal law which historically banned bettors from transmitting gambling data across state lines, and by revising its interpretation in 2011 the Department of Justice opened the door for states to license online gambling and potentially enter into lucrative interstate pacts.

However, by reversing this decision under pressure from Sheldon Adelson and his so-called ‘Coalition to Stop Internet Gambling’ organisation, the DoJ has restricted the iGaming market’s potential in the States and restricted the growth of individual operators.

Still, the effective legalisation of sports betting in the States has created a significant opportunity for growth in the U.S., particularly in regions that have already allowed and regulated online casino gaming.

So, with states including Nevada, New Jersey, Delaware, Pennsylvania and West Virginia now able to offer sports betting alongside casino verticals to a vast and increasingly motivated audience, the market in North America should grow exponentially in the months ahead.

It’s also important to note that other U.S. states are now mulling over the prospect of legalising online gambling and sports betting, including Michigan and California. This is creating the type of fast-growing and increasingly diverse sector that appeals to investors of all shapes and sizes, so long as they can partner with brands that are able to deliver a sizeable market share.

Foreign Operators’ Interest In the US Gambling Industry

William Hill is one brand that has invested heavily in the U.S. market, although it has maintained an interest stateside since 2012 when it partnered with the major casino group Eldorado. Recently, it has evolved this relationship to create a nationwide partnership for both digital and land-based sports betting, in a bid to capitalise on the Supreme Court’s ground-breaking decision last year.

This will enable William Hill, who’s already established as the leading sports betting operator in the U.S., to access a staggering 21 large-scale premises in 11 separate North American states. This equates to a customer base of up to 23 million, while Eldorado’s pending acquisition of Tropicana Entertainment Inc. will open up two more states to the William Hill brand.

Given this, there’s little doubt that William Hill will continue to seek out acquisition and merger opportunities throughout the U.S. market, particularly as a growing number of states legalise various online gambling verticals and select few domestic operators look to claim a competitive market share.

Investors Interested in the Swedish iGaming Market

Another new and exciting market that may be appealing to investors has recently opened in Sweden, as iGaming finally took centre stage in the Scandinavian country at the beginning of 2019. Even before this date, a plethora of license applications had been placed in the pending regulated market, with a number of UK-based operators looking to claim their own piece of the pie.

However, it was interesting to note that overseas brands and investors also flocked to the Swedish market, including the Danish operator Better Collective.

This company finalised the €30 million acquisition of the Swedish iGaming affiliate Ribacka Group on January 1st, enabling Better Collective to assume control of the underlying business and a number of prominent online gambling portals including the Speltips site. Founded in 2012, this firm generated revenue in excess of €6 million in 2018, whilst it’s one of several sports betting and casino platforms that has a competitive edge in the burgeoning Swedish marketplace.

Better Collective paid an initial cash consideration of €15 million for the business, with a further €6 million having been invested in cash last month. Final payment of €9 million may also be due in 2020, depending on Ribacka’s revenue and profitability performance.

Despite the enthusiasm of first movers like Better Collective, however, Sweden lacks the maturity or size of the U.S. market and is unlikely to see sustained M&A activity for a little while.

The market certainly lacks regulatory certainty, and this has certainly had an impact on the first quarter results among Swedish-centric firms. With this in mind, several of the market-leading operators (particularly in the UK) are likely to hold fire in the interim, as they allow others to blaze a trail and cope with the legislative hardship that’s likely to come their way.

Of course, this doesn’t mean that the industry’s biggest iGaming firms won’t look to complete large-scale acquisitions and consolidate their position as the market grows, but for now, there’s little doubt that the U.S. remains the most lucrative opportunity for investors.

Why the U.S. Вill Represent the Long-Term Play for Operators

As we’ve already seen, UK operators are clamouring to invest heavily in the U.S. marketplace, as they look to restructure their business model and offset the myriad of challenges that they face at home.

Whilst the U.S. represents the so-called “Gold Rush” in the current iGaming market, exalted levels of demand are causing issues in terms of valuations and the cost of acquisitions.

At the same time, it’s important to recognise that mature brands like William Hill boast a huge competitive advantage in the States, thanks to their status as early movers and proactive investors.

With these points in mind, we may see varying levels of success in the U.S. market in the near-term, as some M&As fail whilst others struggle to cope in the wake of the DoJ’s recent revision of its 2011 on The Wire Act.

Acquisition and consolidation in the U.S. definitely represent a sensible long-term play for UK operators, however, particularly as a growing number of states legalise and regulate online casino gaming and sports betting. Make no mistake; the market is set to dominate the thoughts of operators and investors throughout Europe, whilst many have been waiting for this niche to open up for nearly a decade now.

In fact, the main challenge for operators will be deciding precisely when to make their move, as they look to strike the balance between adding tangible value to the market and avoiding any regulatory uncertainty.