It could be said without the slightest note of exaggeration that 2015 has been quite eventful for the UK gambling industry mainly because of the unprecedented number of mergers between companies operating in the United Kingdom that took place over the period. In addition to this, experts, operators, customers, and other interested parties had the chance to witness the effects the introduction of the so-called Point of Consumption tax as well as the increased Machine Games Duty rate, which now stands at up to 25%, had on the country’s both online and land-based gambling operations.
Over the past several months, some of the major gambling operators with product offering in the UK have complained of weaker financial results due to the newly imposed changes in taxation. And many considered those as an opportunity for consolidation with rival companies for the establishment of a stronger and more coherent whole.
In addition, operators have repeatedly pointed out that technology and compliance costs have been going up in the past several years and they have been looking for ways to offset those. And the gambling market has been growing at an impossible pace, particularly its online and mobile segments.
It could be said that the constantly changing environment has driven some of the gambling operators that are highly dependent on the UK gambling market, that is – a greater portion of their revenue and profits comes from that particular market, merge with companies in similar position in a bid to strengthen their operations. As a result, three pairs of the world’s biggest betting and gaming operators announced multi-billion merger proposals within the span of less than two months.
In July, Ladbrokes and Gala Coral notified media that they were discussing a £2.3-billion tie-up to create what would be the biggest chain of betting shops across the United Kingdom. A month later, Paddy Power and Betfair announced plans for a £6-billion merger. In September, bwin.party and GVC Holdings revealed a takeover deal, under which GVC is to buy its rival gambling operator for the amount of £1.1 billion.
The motives that have driven three pairs of UK’s largest providers of gambling services to merge together their operations are probably countless. However, analysts have pointed to two reasons that are likely to have contributed the most to the six companies embarking on such an insecure voyage through the tumultuous sea a merger or a takeover could be.
Proposed Mergers and Acquisitions
Ladbrokes – Coral Group
The two gambling companies first announced talks about a possible merger towards the end of July. It soon became clear that they have agreed upon all key points and a consolidation would indeed take place, provided the operators receive all the necessary regulatory and shareholders approvals.
Once the merger is completed, the new business – Ladbrokes Coral plc – would create the largest chain of High Street betting shops across the United Kingdom. The combined entity is expected to generate annual net revenue of £2.1 billion, EBITDA of £392 million, and cost synergies of no less than £65 million.
The two companies pointed out that their consolidation would create potential for faster online growth and would secure the combined gambling company with “an extensive international portfolio” of services for regulated markets, such as those of Italy, Spain, Belgium. The combined operator would be headquartered in London. Ladbrokes shareholders would hold a 51.75% stake in it and Gala Coral ones would own 48.25%. The estimated market value of Ladbrokes Coral totals £2.3 billion.
Paddy Power – Betfair
In August, Paddy Power and Betfair announced an agreement for a merger, in order to create Paddy Power Betfair plc – one of the world’s biggest public online gambling companies. The combined entity, valued at around £6 billion, would be headquartered in Dublin.
Existing Paddy Power shareholders would own a 52% stake in the new company. Prior to the merger’s completion, they would be paid a special dividend of €80 million. Betfair investors would hold 48% in Paddy Power Betfair. The combined entity is expected to generate annual revenue of more than £1.1 billion and pre-tax cost savings of up to £50 million.
GVC Holdings – bwin.party
bwin.party had looked for a buyer for quite some time until it announced that it would be purchased by rival gambling operator GVC Holdings for the amount of £1.12 billion. It took months for negotiations to enter their final phase, months during which bwin.party considered an offer by 888 Holdings as well.
Eventually, it was GVC that won the prolonged bid for the gaming company. Under the terms of the deal between the two involved parties, bwin.party shareholders will hold a 66.6% stake in the combined business, which is expected to generate cost savings of at least €125 million by 2018.
All three deals still need to receive the necessary regulatory and shareholders approvals and are expected to be completed in 2016.
What Brought the Wave of Mergers and Acquisitions
A number of significant changes have been introduced to the gambling operators providing their services in the United Kingdom since December 2014, most of which were related to the way companies were to be taxed. In addition to this, the online gambling market has been growing constantly and at an extremely quick pace. This resulted in higher technology costs, which, in turn, led to gambling companies looking for ways to offset those.
In other words, people with broader knowledge of the matter consider the recently introduced taxation regulations and the online gambling surge as the two main reasons for the mergers and takeovers that are expected to be completed in the months to come, if approved.
Gambling Taxes in the UK and Their Effects on the Gaming Industry
Point of Consumption Tax
The Point of Consumption tax for operators providing their operations within the United Kingdom’s borders turned out to be one of the most broadly discussed subjects among industry peers. The tax was introduced last year and came into effect on December 1, 2014 as part of the United Kingdom Gambling (Licensing and Advertising) Act 2014. The aforementioned bill itself was primarily concerned with the way overseas operators offering gambling products in the UK would be regulated as well as the Point of Consumption tax, of course.
But what exactly has changed for gaming companies with UK operations as of December 2014? Generally speaking, they are now supposed to pay a 15% Point of Consumption tax on their overall revenues. The new gambling law imminently resulted in a new cost structure that most of the operators did not seem fond of. In fact, a number of those simply opted for closing their doors for UK-based gambling customers.
Mansion Poker was the first gaming company to leave the UK gambling market. It was followed by Pinnacle Sports and PokerStars. Following the announcement about the Point of Consumption tax, the Remote Gambling Association said in a statement that the newly introduced regulation marked “a huge increase in the cost of doing business” in the UK and the fact that many companies might opt for leaving that particular market should not be a surprise to anyone. The RGA is known to be a trade association representing gambling operators licensed to provide online services across Europe.
Machine Games Duty
Earlier this year, an increase was introduced in the Machine Games Duty rate. Generally speaking, it is a tax that operators pay on the machine games they offer in case at least one of the prizes is cash and amounts to more than the lowest cost to play a given machine. When the offered machine games award non-monetary prizes or monetary prizes lower than the cost to play, gaming providers are only imposed VAT. As of 2015, gambling operators that provide their services within the United Kingdom’s borders are to pay Machine Games Duty of up to 25% on what they earn.
As a result from the Point of Consumption tax and the Machine Games Duty rate increase, major companies complained that they have seen considerable drops in revenue and profits in the first months after the introduction of the tax changes. Here it is important to note that such companies depend heavily on what they earn from their UK-based gambling customers.
For instance, Ladbrokes reported a 36% decrease in group operating profit to £24.6 million in the second quarter of 2015 as compared to what was posted for the same period a year ago. During the third quarter of the year, the company saw its group EBIT reduced to £14.3 million, citing the Point of Consumption tax and the increased Machine Games Duty as the main reasons for the drop.
Commenting on the effects of the taxation changes, particularly the ones of the Point of Consumption tax, John Hagan, a lawyer for London-based gaming law firm Harris Hagan, told media that those are the likely reason for the unusual mergers and acquisitions activity that has been witnessed over the past 11 months. Mr. Hagan called the new tax “painful” for gambling companies but he admitted that it is to stay for as long as officials feel necessary.
According to the gaming expert, more companies will make the difficult decision to consolidate their operations in a bid to mitigate the constantly increasing costs.
The Rise of Online Gambling
The online gaming surge has been another probable reason cited by people with knowledge of the matter. According to figures posted by the UK Gambling Commission, overall gaming revenue of £7.1 billion was generated in 2014. In comparison, the amount of £5.6 billion was reported in 2010. The major increase was mainly attributed to the constantly growing online market. In addition to this, it seems that gambling on mobile devices has become increasingly popular over the past year.
In the first place, the growing popularity and demand for more innovative and attractive online gambling products and services has resulted in operators investing more and more money on technology so that they keep up with customers’ expectations. As a result, some gaming companies started looking for ways to offset the increasing costs. And as it seems, they considered merging their operations with fellow providers of gambling product offering as one such way.
Another important thing that needs to be taken into account is the fact that the increased interest in online gambling has created quite challenging trading conditions for High Street gaming companies, with Ladbrokes and Gala Coral being among those. These particular operators as well as many others are still heavily dependent on their brick-and-mortar operations.
Ladbrokes, in particular, still seems to be experiencing difficulty in transitioning its land-based customers online. This is why the announcement that it is to merge its operations with fellow High Street company Gala Coral did not come as such a big surprise. Gala Coral is practically offering the same services and products as Ladbrokes. Yet, it could be said that it has already managed to establish itself as an online provider of gambling product offering as well.
Online gambling has grown significantly and at an extremely rapid pace, driving companies to search for the best possible means to cope with the quick changes and to adapt to their customers’ demands. And as it seems, six of the largest operators on the European and the global industry scene have decided that merging with fellow market leaders would help them diversify their product offering, attract more customers, retain their leading positions, and eventually create additional value for shareholders.
It is still quite early to say whether all three pairs of gambling companies will benefit from the upcoming mergers. Yet, one thing is for sure, the UK gambling industry is to undergo significant changes that will most certainly transform the way gaming services are provided across the United Kingdom.
