The recent UK budget has brought a sigh of relief to gambling companies, who faced a feared increase in machine games duty. However, while investors may feel reassured, analysts caution that this relief comes with potential drawbacks, including shop closures and reduced investments as companies seek ways to cope with the heightened tax obligations.
From 1 April 2027, the machine games duty will rise from 20% to 25%, much lower than the 40% suggested by the Social Market Foundation. Preliminary evaluations indicate this increase will have a relatively modest effect on the earnings of diversified operators. Yet for businesses heavily reliant on physical venues, even a slight downgrade in earnings can prompt difficult choices regarding which locations to shut down.
"While a tax increase is never welcome, a 5% rise is manageable and should lead to a clearing event for the sector," said David Brohan from Goodbody. He noted that the increase of 25% refers to the tax rate itself.
However, Regulus Partners warned that this tax change translates to a significant cash flow reduction for many marginal venues.
The new duty will apply to machines with a maximum stake exceeding £1 or maximum prize over £100. The government's estimates project an additional yield of £135 million in the fiscal year 2027-28 and £130 million annually for the following four years, reaching a total of £655 million over five years, according to the Office for Budget Responsibility. Approximately 5,100 operators and 12,400 premises are expected to be affected.
Regulus Partners argues that assessing revenue alone does not accurately reflect affordability. Considering more than £5 billion in land-based industry revenue, the additional tax burden of roughly £130 million is significant, especially when measured against an estimated £392 million in free cash flow after capital expenditures but before interest. In their view, the annual costs vary significantly: £11,000 per betting shop, £20,000 per adult gaming center, £50,000 per traditional bingo hall, and £100,000 per casino, creating pressure on already thin margins.
Entain provides insight into navigating these financial changes. The company, known for its Ladbrokes and Coral brands, anticipates an additional annualized cost of £25 million from the tax before any mitigation strategies are applied. However, Entain aims to fully offset this increased expense by the end of 2028 through measures like estate rationalization and potential market share recovery, especially as some competitors reassess their position within the UK market. Despite this optimism, CEO Stella David cautioned that the tax changes could exacerbate the impact of previous increases and push more players toward illegal gambling avenues.
Assessments from Goldman Sachs have placed a conservative estimate on Entain's 2028 EBITDA, expecting around a 1.5% decrease under the assumption that 30% of the tax cost can be mitigated. The analysts attribute this potential adjustment to shop rationalizations and market share increases, particularly if smaller competitors are disproportionately affected by the new tax obligations. Furthermore, they noted a decline in Entain’s share price of about 11% since early September, partly due to concerns over this budget.
JP Morgan also forecasts an approximate 3% EBITDA impact for Entain and Evoke in FY2027, suggesting that operators will likely mitigate these losses primarily by closing unprofitable betting shops and enhancing the use of sports self-service betting terminals. For Evoke, retail comprises around 26% of its sales and 18% of its EBITDA, with gaming machines making up about 45% of this mix.
Morgan Stanley estimates that Entain's unmitigated tax expense could equate to around 12% of its UK retail EBITDA. Their analysis posits that roughly 10% of shops could become unviable due to the tax increase, but Entain's larger scale and greater investment in shops might position it better to handle this transition compared to its competitors.
Rank appears more vulnerable, with estimates suggesting a potential 5% hit to its FY2027 adjusted EBITDA if it can only achieve a 30% mitigation. Peel Hunt projects a £9 million yearly operating profit cost for Rank before any potential adjustments, leading to a forecast reduction of approximately £9 million in operating profit for FY2028. They maintain a Buy rating for Rank while adjusting the target price downward.
Additionally, closures could benefit competitors. "Every estate of casinos and bingo venues has weaker locations, and when these sites shut down, it benefits nearby operators," wrote Ivor Jones from Peel Hunt.
Looking ahead, Regulus questions whether the anticipated earnings effects sufficiently account for the policy’s overall sustainability. They suggest the real impact of increased costs will unfold gradually as operators’ leases expire and chronic expenses mount, leading to the likelihood of about 2,750 betting shop closures and an estimated 19,000 jobs cut.
The Betting and Gaming Council echoed these concerns, citing EY projections of nearly 9,000 job losses and significant risks to around 1,000 betting shops and casinos. BGC chief executive Grainne Hurst criticized the decision as "deeply damaging."
In sum, while some sectors of the gambling industry may find pathways to mitigate the effects of the increased tax, the looming threat of closures and significant reductions in spending could alter the landscape for the industry considerably. The essential question remains: how much of this new revenue will withstand the adjustments that follow?
