Deutsche Bank’s recent analysis suggests that a planned increase in the Machine Gaming Duty (MGD) by the UK government could have disproportionate impacts on various operators in the gaming industry. According to reports from The Financial Times, Chancellor John Healey is considering raising the MGD following a recommendation from the Social Market Foundation, which outlined this proposal in a recent report.
Using data from the Gambling Commission, Deutsche Bank revealed that the gross gaming yield (GGY) for the gaming machines sector stands at approximately £2.7 billion ($3.5 billion), with Category B machines comprising the bulk of this revenue.
The analysis highlighted that Rank Group, recognized for its extensive retail footprint, would be particularly vulnerable to the MGD increase. Deutsche Bank projected that an uptick in the tax could cost the operator around £35 million annually, representing roughly 44% of the company’s expected earnings before interest and taxes (EBIT) for 2028, and about 17% of operational earnings (EBITDA) in the short term. Prior to any mitigation measures, if the MGD were to double to 40%, costs could escalate to approximately 24% of EBITDA.
Rank's strategy of boosting earnings via machine deployment across venues, with a target of achieving £100 million in EBIT, faces jeopardy due to these potential tax increases. The company has warned that numerous venues might become nonviable, potentially leading to job losses. Deutsche Bank has maintained a ‘hold’ rating for Rank, having previously downgraded it from ‘buy’ in January.
In response to the study, a Rank spokesperson noted, “We are continuing to engage directly with Treasury and with other government departments to set out the impacts that tax increases would have on the industry and on our business.”
Entain, another major player in the gaming sector, is expected to incur about £100 million in additional costs from the MGD rise before mitigation is taken into consideration. This estimate was echoed in a recent letter to Prime Minister Andy Burnham. Entain cautioned that significant increases in MGD could lead to a customer shift towards the black market, predicting that up to £1 billion in gambling stakes could be drawn away from regulated environments. This cost represents about 10% of Entain’s projected EBITDA for FY27 and 20% of its free cash flow target for FY28.
Deutsche Bank observed that Entain's stock is currently trading at multi-year lows, indicating that investors may have already factored in these risks. The company also highlighted that operational impacts could necessitate staff reductions in its UK operations, confirming that around 400 roles from its 2,000-strong UK workforce would be eliminated following recent consultations. Nonetheless, Deutsche maintained a ‘buy’ rating for Entain, citing a favorable long-term outlook driven by strong online growth in the UK and exposure to the US iGaming market via the BetMGM joint venture.
Flutter, whose market success is heavily tied to its US business, FanDuel, is anticipated to be the least impacted by the MGD increase among the three major operators. Deutsche Bank estimates the extra duty could add less than $20 million to Flutter’s costs for UK retail operations, which amounts to less than 1% of its overall EBITDA, suggesting minimal impact on the company’s earnings.
Deutsche Bank noted that offsetting the tax rise will be significantly harder for physical retail locations compared to online operators. While online businesses have adapted to past tax increases by trimming promotional offers and marketing expenses and streamlining staffing, retail operations contend with a heavier fixed cost structure related to rent and staffing. Reducing marketing or shifting customers to online platforms is not straightforward, as gaming machine revenue is directly linked to physical venues.
Due to these challenges, Deutsche forecasts a mitigation capacity of about 30% of the gross cost increase, often achieved through closing loss-making shops. Even after such closures, large operators with extensive retail machine estates are still expected to face significant profit declines.
The ongoing trend has seen several operators retreat from the UK retail market. For instance, Betfred has shut down 132 outlets this year after last year's increase in remote gaming duty. Betfred CEO Fred Done warned that further tax hikes could lead to widespread closures of betting shops and negatively impact interconnected sectors like horse racing, deepening the decline of high street commerce. Similarly, Evoke has closed 200 William Hill stores this April due to comparable challenges.
