Following the recent increase in the Remote Gambling Duty (RGD) in the UK, both online and land-based gambling operators are reassessing their operational strategies. During the iGB Live M&A Summit held in July, BDO corporate finance director Ollie Woodward noted that many operators are particularly focused on the sustainability of their player bases after this tax rise.
Entain recently revealed plans for a significant restructuring that could lead to the elimination of up to 500 jobs across its global workforce, although the company stressed that these changes are not a direct response to the RGD increase.
In contrast, other companies such as Bally's Intralot are viewing the tax hike as an opportunity for growth. They moved to acquire Evoke, which had faced challenges amid the changing market dynamics, including the tax adjustment. Bally's Intralot CEO Robeson Reeves indicated that this acquisition aligns with the company's European expansion goals.
As operators adapt to the current landscape, Woodward highlighted that restructuring efforts and mergers and acquisitions (M&A) have taken center stage. Conversations among BDO's gaming M&A team reflect this shift.
"Client discussions have shifted towards how to reassess and right-size our cost base. Many operators believe that maintaining strength during this period could lead to market opportunities, especially as some smaller companies may struggle to cope with the new tax changes," Woodward explained.
He mentioned the growing trend among established players to evaluate their workforce and technology, questioning how to evolve and potentially achieve margin improvements.
Currently, BDO's M&A team is engaged with about five or six UK gambling businesses involved in major transactions across both the B2C online sector and the land-based industry.
"Some are exploring expansion into new markets abroad, with Canada’s Alberta province going online, hoping to find growth opportunities outside the UK," Woodward stated.
Understanding shifts in player demographics has become critical for operators in the wake of the RGD hike. This analysis involves examining return-to-player (RTP) rates and strategies around marketing expenditures. Woodward emphasized, "The core concern is the sustainability of earnings and player bases."
Despite the pressure that the RGD hike has placed on profit margins, Woodward noted a prevailing sentiment of resilience and optimism among clients as they seek methods to counteract these challenges.
Another key topic discussed during the BDO panel at the iGB Live M&A Summit was the emphasis on reporting regulated versus unregulated revenues, a significant factor in today’s M&A environment. Woodward pointed out that from a seller's standpoint, clarity in reporting unregulated revenue is increasingly important as buyers seek highly regulated opportunities.
Prominent industry players, including Bet365 and Yolo Group, have been actively reducing their activities in the unregulated markets, reflecting this growing trend towards regulation.
When queried about the nuances of reporting unregulated revenue during due diligence, Woodward noted that many companies must first consider legal and structural aspects to isolate those operations if planning to participate in a sale or carve-out.
However, he pointed out that many businesses are not yet effectively tracking their key performance indicators to allow for the easy separation of these operations. Determining the value of different business segments is manageable, but achieving proper operational reporting remains a challenge.
Currently, M&A activity in the gaming sector favors regulated revenues, which are seen as more appealing due to their higher exit potentials and multiples. Woodward explained, "Many large groups are striving for over 90 percent regulated revenue or are moving toward that goal. This trend has created a noticeable division among operators."
While companies with past unregulated revenue streams may not be instantly dismissed in potential deals, Woodward stated that the perception largely rests on the specifics of their operations. For example, operators that engaged in grey markets previously but formally applied for licenses once regulations were established may be viewed differently than those operating in outright illegal markets.
"Investors and partners are increasingly interested in the decisions made by management during those times and how they responded when regulation was introduced," Woodward concluded.
