Market Watch: Was GiG’s B2C sale to Betsson born out of desperation?

In the otherwise unremarkable movie Arbitrage, there’s one standout scene that will justify repeated viewings for many investors. Richard Gere’s character, intent on selling his hedge fund before an imminent margin call, hastily negotiates a nine-figure valuation with the buyer over a (relatively inexpensive, in comparison) lunch at Le Caprice and scribbles a makeshift one-liner contract on a napkin, countersigned by the buyer.

As he walks away from the table, with his (now legally-binding) sale offer, he looks back and says: “I would actually have settled for half that amount”. It’s tempting to think that similar intensified discussions must have happened recently in Malta as GiG’s owners scrambled to offload its B2C business to Betsson ahead of the impending bond repayment in a few weeks.

The question that needs asking is which of the two sides needs this deal more than the other. Betsson’s performance in 2019 was ‘challenging’, with Q4 revenues dropping more than 10% year-on-year, despite a 1% increase on the previous quarter. It’s reasonable for their shareholders to expect better diversified revenue streams, and GiG’s B2C assets could indeed deliver a complementary and sustainable solution over the next few years.

That said, GiG is seriously in need of positive news. Even after having divested its B2C assets, the B2B and software divisions don’t seem to be going anywhere north anytime soon. Perhaps this is a gradually unfolding saga that will eventually culminate in a larger GiG asset sale, but as things stand, it’s hard to see who would be tempted to take up anything else on offer now.

The demise of offshore licensing

However, this particular transaction is not an anomalous event. It is part of a more gradual, and symptomatic underlying trend affecting not just both companies but the majority of Nordic B2C operators and will slowly but surely become more prevalent over this decade. The Betsson-GiG acquisition is one facet of an unravelling narrative that is developing as a result of localised gaming regulation (in this case Sweden’s) and – on a macro view – the death of the all-encompassing offshore gaming licence.

While this in itself is not really news anymore – we’ve known offshore was going to implode over two years ago now – this steady demise of the once-unassailable remote gaming jurisdiction is starting to affect a wider number of regulated operators, and not just those that are (over?-) exposed to now self-excluded territories. Witness how, in less than 18 months, most publicly traded gaming and affiliate marketing stocks have successively blamed Sweden, then the UK, and soon Germany for their inability to push their line charts up into positive territories.

The truth is, over-regulation aside, the European gaming market has been saturated for more than half a decade, and territorial legislation is just an inevitable nail in the coffin of an overlooked loophole that island nations such as Malta and Cyprus use to supplant their own domestic produce. This entire tax arrangement was never intended to be permanent – not with how the grand European project is slowly converging towards full homogeneity. Let’s face it – if upon checking into the club you’re happy to leave your sovereign currency and monetary policy at the door, it’s only a matter of time before someone comes around to have a word about your fiscal policy as well.

Aside from the inevitable stock crunch from gaming stocks due to regulation, there is another, majorly overlooked, causal effect. Over the last couple of decades following the birth of the offshore jurisdiction, a substantial part of the gaming world has embraced, and indeed adopted, this status quo as the norm, setting up semi-permanent roots in these territories. Just under a generation ago, to capitalise on the then-burgeoning offshore gaming honeymoon, young professionals and families crossed borders, made roots, and naturalised these offshore locations as their homes away from home. What will happen to an offshore jurisdiction as the currency of its licence starts to devalue? A peripheral part of this black swan event is already being felt in places such as Malta, which (ongoing morality-reckoning notwithstanding) has until recently been sagging under the rapid growth in demand for decent and affordable housing, transport, shopping and restaurants, but now is increasingly faced with a surplus of vacant office space, some of which may soon include GiG’s recently finished headquarters.

The compound effect will be a net brain drain from the gaming sector as selected jurisdictions start to reduce their demand for specific talent. Faced with the prospect of say, moving to Manila or Kiev to remain in gaming, or pivoting to a newer high-demand industry that can capitalise on niche talent, what will well-integrated families choose as a next chapter? Witness how rising hedge funds in the nineties were almost entirely replete with rocket scientists as a result of the demise of the cold war. So, today’s European gaming CTOs, CMOs and math prodigies may very well become tomorrow’s DeFi and esports rising stars. Indeed, this transition has already begun across several companies and will become even more prevalent over the coming decade.

Time for plan B?

When the great gaming reckoning comes, a voluminous chapter will be devoted to the rise and decline of the offshore territory and the resulting hedonism that emerged during that period. And then parallels will be drawn with the construction boom in Spain in the noughties and the banking and hedge fund bubbles in Ireland and Iceland respectively shortly thereafter. And the inevitable consequence that occurs when there are simply no more blocks to add to the pyramid. The increased M&A action we are witnessing at the moment is just a portent of what’s to come in Europe over the coming years as the respective jurisdictions dictate their own legislation on their own terms, and by extension render most of the remote licences (and their operatives) redundant as a consequence.

In the short term, the rest of the non-European gaming world will continue to wallow in mostly greyish markets. But for all those hard workers caught up in offshore territories, even if the end is not yet nigh, it wouldn’t hurt to have a plan B in the back pocket, just in case the employer has an upcoming bond repayment to call. That way, in a worst-case scenario, income is secured, and family’s future is well-hedged without the need to change countries, schools and traditional weekend dinners in the local village carvery.

The same goes for the regulators of offshore territories, who after all this glorious sunshine should have had more than ample time to harvest the monies gained from these licences, diversifying them into new revenue streams in vastly different sectors. If this has not yet happened, then it’s probably wise to start explaining the near-term implications of a rapidly consolidating industry to letting agents.

But the real warning here needs to be imparted to rule-makers in existing European territories, who live under the pre-1990s illusion that industries will blindly subvert to whatever rules are imposed. Online commerce is quite unlike lesser-fluid, lower-tech markets, and players can easily bypass whatever controls are applied (just like MP3 repositories before iTunes, and video downloading before Netflix). If history serves as a baseline, unduly harsh legislation will expedite the rise of an unnecessary bootlegging industry not unlike that witnessed a century ago.

Australia is a prime example of what happens to gambling when heavy restrictions are adopted. Gamblers will find whatever source of gambling comes their way – be it white, grey or dark. Especially if the content is easily accessible, engaging and rewarding. ISP blocking (Australia), IP filtering (Germany) and name-calling (UK) won’t detract black-market operators, especially in a market increasingly dominated by VIP action.

So, act sensibly and make a level playing field where all the kids can happily play together. Otherwise in a few years gambling media coverage will be less about industry progress than about which magnates control which cartels. It arguably might make for more intriguing reporting, but it won’t be for the honest working masses, and it surely won’t be a growth market for the taxpayers and tax collectors…