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Brazil’s M&A boom could be fueled by high regulatory costs

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Adam Patterson, an economist at the University of California-Berkeley’s School of Economics believes that high costs for regulatory approval will lead to a “boom” in M&A activity on Brazil’s betting market.

Brazil adopted Bill 3,626/2023 on the 21st December to regulate sports gambling and online gaming. The bill was signed into law by President Luiz inacio Lula Da Silva later that same month.

In the country, regulations are currently being rolled out. Licence fees are expected to cost BRL30m (PS4.6m/EUR5.4m/$5.9m) for up to three brands.

The Normative Ordinance 722 set out the requirements for technology and security of gaming systems. Operators are required to obtain certification for their system from accredited entities recognized by the Ministry of Finance. To maintain compliance, operators must keep their systems updated.

Smaller companies may face difficulties in Brazil due to the high operational costs.

Patterson is a partner and economist at Redirection International. The company specializes in M&A, and it has a Brazilian team. Patterson’s comments were in reference to a study released on the Brazilian Sports Betting Market today (21 May).

Patterson thinks that high costs may be the key to increased M&A in Canada.

Patterson stated that “we see great potential in a boom of M&As in the Sports Betting sector. This is a world where Brazilian passions in sports and technology combine.”

The trend toward M&A is partly driven by substantial costs related to the licensing process. These include authorisation fees as high as BRL30m (6m), tax obligations, and technical certifications. These factors collectively pose an important challenge for the financial sustainability of smaller betting operators.”

M&A activities increasing

Operators are vying for positions on the Brazilian market in preparation for market regulation.

Better Collective, for example, acquired the Brazilian sports media platform Torcedores.com last September. Esportes da Sorte acquired Loyalty Group to expand its digital offerings.

M&A is predicted to continue growing. Patterson believes local operators are still able to compete despite the global influence.

Patterson added, “It’s expected that the requirement for companies to have Brazilian shareholders in order to get an operating licence will encourage mergers and purchases here in Brazil.”

It may happen that there will be fewer websites, and smaller companies, like in Colombia. But we should expect major changes. These include marketing, the use of new technologies, the deployment of large amounts of private equity, access to capital markets including future initial public offering, etc.

Brazil’s sports betting market is expected to grow by 50% per year

Redirection International predicted that Brazil’s market for online sports betting will increase by 50% annually on average until 2028. This was attributed by the M&A company to increasing popularity, technological innovation and large companies entering the Brazilian market.

Patterson is confident that Brazil will become one of the largest global markets for online sports betting. Patterson said that Brazil is the nation with the most users of sports betting websites. Brazil recorded 3.2 billion visits in 2022, despite the lack of a regulated market.

Aposta Legal Brasil data shows that 80 percent of Brazilians betting online in Brazil bet on football. Total 13% of Brazilians bet online on esports.

Datahub, an information and data platform, found that the number of companies offering sports betting increased from 51 in 2020 to 239 by 2022. This is a 368.6% increase. Datahub revealed that 80% of the betting revenues come from online casinos. The total sector turnover is expected to increase by approximately BRL120bn in 2023.

Brazil regulation incoming

Brazil has announced its regulations in four phases, and expects to complete them by July.

Earlier in the month, Normative Ordinance No. 2,191 imposed a tax of 15% on winnings over BRL2,824. Taxes will be collected at the source, at time of awarding winnings.

The Brazilian Institute of Responsible Gaming, IBJR, responded by describing the taxation system as both “harmful” (and “legally doubtful”) and that it might impact on the market’s success.

IBJR stated that “the rule would put in danger all of the good work done by the National Congress and MF Prizes and Betting Secretariat to regulate the market. It also fails to grasp the fact that regulation aims to promote positive behavior from operators and players, and contribute to the tax collection.”

Normative Ordinance No. 615 had previously prohibited operators from accepting payments by credit cards or cryptocurrencies. Normative Ordinance No 722, meanwhile outlined specific conditions for data centers to be situated outside Brazil.

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