Photo Illustration: Tom Hall/Bloomberg

Here's a Sure Bet: Merger Mania Won't Abate in Gaming Industry

  • Deal volume of $12.9bn this year was the highest since 2005
  • Increased taxation and shift to online betting driving M&A

It’s been the busiest year for gaming-industry consolidation in a decade, and the wave of mergers and acquisitions isn’t over yet.

As governments ratchet up the tax burden at a time when companies are competing harder than ever for new customers, oddsmakers are finding the best way to combat the squeeze on profitability is to join forces. At $12.9 billion, the volume of deals announced in 2015 was about double that of 2014 and the highest since 2005, according to data compiled by Bloomberg.

“Consolidation will continue, because a trend is in place where globally governments are increasing taxes on gambling,” said Warwick Bartlett, chief executive officer of researcher Global Betting and Gaming Consultancy. “There’s a lack of profitability and a need to gain scale.”

August’s announcement of Paddy Power Plc’s 2.9 billion-pound ($4.4 billion) takeover of Betfair Group Plc showed how companies are merging to cope with a clampdown by governments, while seeking to boost their standing in the booming $40 billion online gaming market. There have been 72 deals across the industry this year, the most since 2006. In the U.S., Lakes Entertainment combined with Golden Gaming, while the downturn in the Asian gambling hub of Macau has prompted Crown Resorts Ltd. to explore taking some assets private.

More deals will happen in 2016, though maybe not on the scale of this year, according to Paula Murphy, an analyst at Fitch Ratings in London. Europe, the Middle East and Africa is the region most likely to see deals, she said.

“There are too many players in the EMEA gaming market, particularly with new online operators,” Murphy said. “Further consolidation should leave the remaining players better placed to cope with increasing regulation and capital expenditure requirements.”

Citigroup Inc. analyst James Wheatcroft also says more deals are likely, as companies try to scale up in order to have the firepower to invest in marketing, new products and technologies. That’s what prompted the merger of U.K. betting-shop leaders Ladbrokes Plc and Coral Group.

Potential Deals

According to Bartlett, the consultant, one possible deal would be a takeover of 888 Holdings Plc by William Hill Plc, a transaction that the companies have discussed as recently as this year. Those talks ended in February because of differences over valuation and 888 shares have risen 22 percent since, even after the company was beaten by GVC Holdings Plc in an auction for Bwin.party Digital Entertainment Plc. The share gain has propelled 888’s market value to about 658 million pounds.

Another possibility could see a combination of Unibet Group Plc and Stockholm-based Betsson AB, Bartlett said. The companies rank seventh and 10th, respectively, in his online-gaming rankings. Unibet, which has a market value of 23.8 billion kronor ($2.8 billion), is based in Malta and its stock is listed in Stockholm. Betsson has a 21.1-billion-kronor market value. Both companies declined to comment.

Cost savings from combining businesses are a key driver for consolidation as companies struggle to meet an increasing burden of tax and regulation. At the end of last year, the U.K. made all wagers placed by bettors in the country subject to a 15 percent consumption tax, preventing companies from escaping the duty by locating themselves offshore. Such is the intensity of competition, that companies have funded the additional burden themselves, rather than risk losing customers.

“The very competitive EMEA gaming markets will keep operating margins under pressure over the next three years,” Fitch’s Murphy said.

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