The UK government's proposed increase to the Machine Gaming Duty (MGD) could significantly impact various operators, as highlighted in a recent analysis by Deutsche Bank. This rise was first cited by The Financial Times, indicating that Chancellor John Healey is considering the hike based on recommendations from the Social Market Foundation.
Using data from the Gambling Commission, Deutsche Bank assessed that the gross gaming yield (GGY) for the gaming machines sector is around £2.7 billion ($3.5 billion), with Category B machines making up a substantial part of this total.
Among the key operators affected, the Rank Group stands out as the one facing the greatest financial challenge. Deutsche Bank estimates that an increase in duty could burden Rank with additional costs of approximately £35 million per year. This amount translates to about 44% of the company's projected EBIT for 2028, or roughly 17% of its EBITDA in the near term, even after some mitigation efforts are considered. Without any mitigation, the doubling of the MGD to 40% could push costs to 24% of EBITDA, jeopardizing Rank's plans to ramp up earnings through machine expansion in venues, where it targets an EBIT of £100 million. The company has voiced concerns that many of its locations may become “unviable,” raising the possibility of job losses.
In light of these findings, Deutsche Bank has maintained its ‘hold’ rating on Rank, having previously downgraded the company from a ‘buy’ earlier this year.
Entain is also highlighted in the report, as it anticipates an extra £100 million in annual costs before any mitigation. A letter to Prime Minister Andy Burnham confirmed this projection, with Entain cautioning that a steep rise in MGD could lead customers to shift to the black market, potentially costing the regulated market as much as £1 billion in stakes. These additional costs would represent around 10% of Entain’s anticipated EBITDA for FY27 and about 20% of its FY28 free cash flow goal. Despite facing these hurdles, Deutsche Bank continues to rate Entain as a ‘buy’ due to its strong growth in the UK online market and its involvement in the US iGaming space through BetMGM, among other factors. However, the company has cautioned of operational challenges, already confirming approximately 400 job reductions within its UK workforce of 2,000.
Flutter has emerged as the least affected operator among the three analyzed, with Deutsche Bank estimating that the MGD increase would add less than $20 million to its costs for UK retail shops, representing less than 1% of the group’s EBITDA.
Deutsche Bank emphasizes that physical retail operations will struggle more significantly to mitigate the tax increase compared to online industries. Online operators have typically managed to counterbalance around half of recent tax hikes through reduced promotional offers, trimmed marketing budgets, and workforce adjustments. In contrast, retail shops have higher fixed costs related to rent and staffing, and their revenues are tightly linked to physical locations, making it difficult to pivot customers online.
In light of the anticipated cost increases, Deutsche Bank forecasts that a baseline mitigation rate of around 30% of the gross cost increase could be achieved primarily through the closure of low-performing shops. However, even with such closures, the profit impact is expected to remain considerable for operators with extensive retail machine networks.
Recent months have seen a number of operators retreat from the UK retail landscape. Betfred has already closed 132 shops this year, leaning on last year's increase in MGD as a contributing factor. CEO Fred Done warned that more tax increases could result in widespread betting shop closures, negatively affecting related industries like horse racing and exacerbating challenges for high street retailers. Similarly, Evoke shuttered 200 William Hill locations in April due to the same pressures.
This updated analysis includes a response from Rank's representative, reflecting the ongoing discussions with the Treasury and other governmental bodies regarding the implications of the proposed tax hikes.
