View from the City: An M&A-fuelled drive for scale set to continue through 2021
Simon Davies, head of online gaming research at Deutsche Bank, analyses the M&A and regulatory landscape
The online gambling sector continued its winning ways in January, with the UK-listed sector up by another 8%, after the strong run through 2020. The themes remained the same. The sector’s favourable run of sports results continued, with unusually high gross win margins in December and continuing into January, helping drive a raft of positive trading updates. This underpinned positive forecast momentum for the industry, with a number of upgrades coming. At some stage, luck will turn but fan-free football stadia seem to be doing wonders for the underdog.
After record M&A in 2020, the New Year got off to a busy start – MGM walked away from a bid for its US online partner Entain; meanwhile Entain confirmed it is in discussions to buy Tabcorp’s Australian wagering division. We see an M&A-fuelled drive for scale continuing through 2021, encouraged by ongoing regulatory tightening. The long-awaited UK Gambling Act 2005 review has kicked off and advertising/sponsorship restrictions are now a given (but largely implemented already by the listed operators). The risks remain that there will be additional tightening, such as stake limits on slots, or even deposit limits. Nonetheless, the government has committed to an “evidence-based” review. And last week’s PwC report on the black market (estimating a doubling of amounts staked by UK consumers at offshore illegal sites last year), points to the risk that excessive regulation will reduce both consumer protection, and the £3bn a year of industry taxes.
Given regulatory challenges at home, it is unsurprising to see a keen sector focus on the nascent US online betting/igaming market, particularly given the significant premium valuations enjoyed by the pure play US betting companies. Michigan went “live” in January, and more states are progressing legislation (Georgia and Arizona both made progress). A more surprising source of interest was the new CEO of Las Vegas Sands, the casino group, who admitted he is interested in building an online gambling business. Sands’ long-term chairman, Sheldon Adelson, passed away on 11 January after years of lobbying against US legalisation of online gambling. This suggests another potential source of M&A.