UK gambling companies have avoided the machine games duty hike that investors feared the most. However, analysts who welcomed this week's budget as a positive turning point also noted that shop closures, limited investment, and gains from struggling rivals could help offset the new costs.
The increase from 20% to 25%, set to take effect on April 1, 2027, is significantly lower than the 40% rate suggested by the Social Market Foundation. Early evaluations indicate that while the impact on diversified operators' earnings may be minimal, businesses that rely heavily on physical locations face tough decisions on which venues to keep open.
"Although a tax increase is unwelcome, a 5% rise is at least manageable and could serve as a clearing event for the sector," wrote David Brohan from Goodbody. This statement refers to the rate increase, which amounts to a 25% hike in the duty itself.
Regulus Partners cautioned that this adjustment might lead to a reduction in cash flow that could prove detrimental for many marginal venues.
The increase applies to machines with a maximum stake above £1 or a maximum prize exceeding £100. According to HMRC's policy document, the change is projected to yield an additional £135 million in 2027-28, with £130 million expected in each of the subsequent four years, totaling £655 million over five years based on estimates from the Office for Budget Responsibility. About 5,100 operators and 12,400 premises are anticipated to be affected by the new duty.
Regulus emphasized that using revenue as a measure of affordability is misguided. With land-based industry revenues exceeding £5 billion, the extra tax bill of £130 million seems absorbable at first glance. However, when compared to an estimated £392 million in free cash flow after capital expenses but prior to interest, it represents around one-third of that cash flow.
Annual costs are projected at about £11,000 per betting shop, £20,000 for adult gaming centres or bingo arcades, £50,000 for traditional bingo halls, and £100,000 for casinos, though there is a wide range of variation. Regulus highlighted that these costs are considerable for land-based entities already operating on thin margins with high fixed expenses.
Entain has outlined a strategy to fully mitigate the increased tax burden. The owner of Ladbrokes and Coral predicts an additional annual cost of £25 million for its UK and Ireland retail operations before mitigation, with expectations of fully offsetting this by the end of 2028. The company's approach will involve consolidating operations, optimizing group strategies, and potentially capturing market share as competitors reassess their positions in the UK market. Entain maintained its guidance for fiscal year 2026 and expects to generate £500 million in annual adjusted cash flow by 2028.
Despite this optimism, Entain's chief executive, Stella David, acknowledged the difficult path ahead. She affirmed the commitment to safeguarding jobs while ensuring a sustainable retail presence on UK high streets but cautioned that these tax changes could lead more customers to seek illegal operators.
Initial scenarios from banks are generally more cautious than Entain’s projections for mitigating the impact. Goldman Sachs anticipates a roughly 1.5% effect on Entain's group EBITDA for 2028 if about 30% of the direct cost is mitigated, resulting in an estimated 2% decline in equity value. They noted that shop rationalization and potential market share growth could counterbalance losses, particularly if smaller competitors struggle more than larger entities. Yet, retail operators have less flexibility than online counterparts to trim promotional expenditures, as those costs are already relatively low.
Goldman also reported an approximate 11% drop in Entain's shares since early September, citing budget-related risks as one of the factors for this decline.
In terms of closures as a means to offset earnings, JP Morgan projected an average annualized EBITDA impact before mitigation of about 3% for both Entain and Evoke in fiscal year 2027, approximately 2% for that fiscal year alone. The firm expected many operators to counteract the impact primarily through shutting unprofitable betting shops and utilizing sports self-service betting terminals more extensively, particularly in response to reduced machine economics.
For Entain, retail operations are estimated to represent roughly 22% of their FY2027 sales and EBITDA, with gaming machines contributing around half of that. For Evoke, these figures are about 26% of sales and 18% of EBITDA, with around 45% stemming from machines. Flutter, in contrast, has minimal exposure.
Morgan Stanley evaluated the unmitigated cost of Entain at about 12% of its UK retail EBITDA and 2% of overall group EBITDA. They suggested that mitigation efforts could cut losses by up to around 50%, primarily through shop closures, estimating that around 10% of the stores would become unprofitable. This outcome largely hinges on competitors' responses, as Morgan Stanley opined that the scale of Entain's operations and its higher investments in shops positioned the company favorably to adapt to changes.
Deutsche Bank similarly assessed the potential to offset approximately 30% of the increase through retail closures and market share gains, projecting pre-mitigation EBITDA reductions of around 3% for Entain and 6% for Rank, leaving initial forecasts unchanged until further responses become clear.
Rank's situation highlights a more pronounced earnings adjustment. Brohan at Goodbody estimated that the duty increase, assuming a 30% mitigation, could reduce Rank's FY2027 adjusted EBITDA by around 5%, in contrast to about 2% for Entain and less than 1% for Flutter. Following this, Peel Hunt reported that Rank's estimated annual operating profit cost pre-mitigation would be £9 million, prompting a reduction of its FY2028 profit forecast by the same amount and adjusting earnings per share down by about 13%, although FY2027 predictions remained stable.
Ivor Jones, an analyst at Peel Hunt, believed Rank could sustain solid operating profit growth despite the tax rise. He maintained a Buy recommendation but lowered the target price from 175p to 155p, indicating he would reassess after the interim results are announced in January.
Rank could also benefit from competitor closures, as Jones noted that every estate of casinos and bingo venues includes weaker locations, meaning closures can benefit their local rivals. The broker pointed to the returns on recent investments and the optimization opportunity presented by additional casino machines allowed since mid-2025. Nonetheless, Deutsche Bank cautioned that the tax increase might hinder Rank's medium-term investment strategies.
The underlying risk of closures looms larger. Regulus argued that while the immediate earnings effects may seem manageable, persistent pressure may build as leases expire and operational costs increase, forcing operators to evaluate potential returns on refurbishments. Their five-year analysis indicates that the duty increase could directly lead to approximately 2,750 betting shop closures, with about 1,000 already facing closure due to existing cost challenges. They also warned that this scenario could result in 19,000 job losses and a £57 million decrease in annual income for racing from media rights and levies.
Regulus cautioned that while the initial impact of the machine games duty increase might seem less severe, the effects would take considerable time to manifest. They estimated that a 20% decline in revenue from affected Category B machines would negate the direct tax benefits. Additionally, for adult gaming centres reliant on machine income, smaller independent businesses may face a greater risk compared to larger establishments. Goldman Sachs also highlighted that the withdrawal of business rates relief for adult gaming centres starting in April 2027 would further complicate their financial outlook.
The Betting and Gaming Council referenced EY projections predicting job losses nearing 9,000 and about 1,000 betting shops and casinos potentially closing or facing severe risks. BGC chief executive Grainne Hurst condemned the increase as a “deeply damaging decision.”
Ultimately, analysts' relief is primarily tied to the scale of the increase and the alleviation of uncertainty. While Entain aims for full mitigation and Rank can still pursue growth, the resulting closures and spending constraints could significantly diminish the industry's footprint. The ongoing question remains about how much of the additional revenue generated for the Treasury will withstand the adjustments prompted by these changes.
