A recent analysis from Deutsche Bank indicates that the UK government's proposed increase in Machine Gaming Duty (MGD) may have a disproportionate impact on various operators in the sector. The potential adjustment to MGD was initially highlighted by The Financial Times, revealing that Chancellor John Healey is considering raising the tax based on recommendations from the Social Market Foundation in a recent report.
Deutsche Bank's evaluation used data from the Gambling Commission, revealing the gaming machine industry generated a gross gaming yield (GGY) of approximately £2.7 billion ($3.5 billion), with Category B machines making up the bulk of this amount.
The Rank Group appears particularly vulnerable to the proposed changes. According to Deutsche Bank, the company, which has the most extensive retail presence among operators, could face an increased duty cost of roughly £35 million annually. This amount represents about 44% of the company's expected EBIT for 2028 and around 17% of its EBITDA in the near term, even after accounting for some mitigation. Without mitigation measures, Deutsche Bank predicts that a doubling of MGD to 40% could lead to costs rising to approximately 24% of EBITDA.
Rank's strategy to boost earnings through deploying more machines in venues, with a target of £100 million in EBIT, could be undermined by this tax increase. The company has indicated that numerous venues may become "unviable," which could lead to job losses.
In light of these potential challenges, Deutsche Bank has maintained a 'hold' rating on Rank, having previously downgraded the company from 'buy' in January.
In response to the analysis, a Rank spokesperson shared their ongoing discussions with the Treasury and other government departments to communicate the impacts that tax hikes would have on both the industry and their business.
Entain, another major player, is projected to face an additional £100 million in costs annually before any mitigation efforts. This was detailed in a letter sent to Prime Minister Andy Burnham earlier this month, where Entain expressed concern that a significant MGD increase could lead customers to leave the regulated market for illicit alternatives, potentially shifting up to £1 billion in gambling stakes to the black market.
The additional costs represent around 10% of Entain's anticipated EBITDA for FY27 and 20% of their free cash flow target for FY28. With Entain's shares currently trading near multi-year lows, Deutsche Bank noted that the market seems to be factoring in these risks, although it remains positive about the company's long-term investment potential, citing strong online growth in the UK, exposure to the US iGaming market via BetMGM, and anticipated free cash flow generation improvements by 2028.
Flutter Entertainment, which primarily derives its market valuation from the US business FanDuel, is expected to be the least affected by MGD changes among the three operators. The bank estimates that the increased duty would impose costs of less than $20 million on Flutter’s UK retail shops, accounting for less than 1% of the group’s EBITDA, thus having minimal impact on its overall financial profile.
Deutsche Bank assessed that mitigating the tax hike will be far more challenging for physical retail operators compared to online firms. Recent strategies by online gambling operators to offset tax increases have included reducing marketing expenditures and workforce numbers while still striving to increase market share. However, retail operations are burdened with higher fixed costs related to rent and staffing, making economic adaptations more complex since their revenue is closely tied to physical locations.
In its projections, Deutsche Bank estimated that a baseline mitigation rate of about 30% of the gross cost increase might be feasible, mainly through the closure of underperforming retail outlets. Nevertheless, the net profit impact will still be significant for operators with extensive machine operations.
The reported potential for an MGD increase comes amid a trend of retail operators exiting the UK market. This year, Betfred closed 132 shops following last year's increase in Remote Gambling Duty while its CEO, Fred Done, warned that further tax hikes could lead to vast betting shop closures and harm related sectors like horse racing, exacerbating the decline of traditional high streets. Additionally, in April, Evoke shut down 200 of its William Hill stores for similar reasons.
The article includes an updated comment from a Rank spokesperson as part of the coverage.
