With the recent increase in the Remote Gambling Duty (RGD) in the UK, both online and land-based gambling operators are reassessing their business strategies and cost structures. At the iGB Live M&A Summit held in July, Ollie Woodward, a corporate finance director at BDO, noted that many operators are focusing on the sustainability of their player bases as they adapt to the new tax climate.
In a significant operational overhaul, Entain announced last week it would be restructuring, which may lead to the elimination of up to 500 global positions. The company clarified that these changes were not directly prompted by the UK's tax increase.
Conversely, Bally’s Intralot viewed the tax hike as a potential opportunity. They recently acquired Evoke, a move that came after Evoke struggled with the market changes brought about by the RGD increase. Robeson Reeves, CEO of Bally's Intralot, indicated in April that this acquisition would bolster their plans for European expansion.
Woodward explained that restructuring and mergers and acquisitions (M&A) are becoming vital as operators respond to the current UK market conditions. He emphasized that discussions about cost management are becoming a major focus for BDO’s gaming M&A team.
Operators are reconsidering their workforce and technology. Woodward remarked, "Client conversations have evolved to ‘how do we look at our cost base and right-size that?’ It’s a balancing act where clients believe that if they can remain strong during this period, they may find opportunities with smaller players struggling to adapt to these tax changes."
He highlighted that the tax rise coincides with many businesses already evaluating their cost bases through the lens of artificial intelligence. Larger, established operators are particularly focused on examining their personnel and technology to identify efficiency opportunities.
Currently, Woodward's team is involved with approximately five or six UK gambling businesses that are navigating significant transactional processes across both online and land-based sectors, as well as among online suppliers. Some are looking toward markets outside the UK, such as Alberta in Canada, for potential growth.
Understanding how player demographics are shifting is also a key consideration for operators in the wake of the RGD increase. This involves examining factors like return-to-player (RTP) rates and marketing expenditures. Woodward stated, "Ultimately, it comes down to the sustainability of your earnings and your player base."
Despite the pressures exerted by the RGD hike, operators generally display a sense of resilience and optimism as they seek strategies to mitigate its effects.
During the BDO panel at the iGB Live M&A Summit, Woodward underscored the significance of comprehensively reporting regulated versus unregulated revenues in today’s M&A context. Accurate reporting is crucial, particularly since buyers now prioritize opportunities in highly regulated environments.
Noteworthy industry players such as Bet365 and Yolo Group have made moves to exit or downsize their unregulated operations over the past year, highlighting a market shift.
When asked about the challenges of reporting unregulated revenue during due diligence, Woodward noted that companies must determine if they can legally segregate these operations if seeking to sell or carve out parts of their business. He mentioned that while recognizing the value of distinct business segments can be manageable, many businesses lack detailed reporting on crucial metrics to facilitate this process.
In the current M&A climate, regulated revenues are increasingly seen as more appealing. Woodward stated, "They're easier to exit. They’re attracting higher multiples. A lot of the big groups are moving towards either 90 plus percent regulated or at least soon to be regulated, showing a distinct trend in the operator base."
From a reputational standpoint, companies with a history of unregulated revenues are not outright rejected in potential deals. Woodward indicated that the perception largely hinges on how these operations were managed, particularly concerning their transition to regulation. The distinction between grey markets, which may have been operated under the assumption of future legalization, and true black markets where online gambling is illegal, plays a significant role in these assessments.
Addressing what management decisions informed their past actions is essential, according to Woodward, as firms strive to negotiate the complexities of potential deals in this evolving market.
