In gambling, the house always wins, or so the saying goes. However, current conditions in Britain’s online gambling and bookmaking sectors is making it harder than ever for “the house” to succeed.
Changing consumer betting patterns, a tax on bingo halls, a further levy on fixed-odds betting terminals, and the difficulty of managing large, unwieldy estates is increasing the operational challenges of the gaming business. The result of this challenge is evident.
Since the start of the year, Ladbrokes and Gala Coral have announced plans for a £2.3bn merger and Bwin Party Digital Entertainment, one of the world’s largest online gaming companies and owner of the Party Poker site, is being hotly pursued by both GVC Holdings and rival 888 Holdings.
They are just the two most high-profile deals in what has been a bumper 12 months of merger and acquisition activity in the UK gaming sector.
Other large deals in the global gaming sector include the sale of Rationale Group, the parent company of PokerStars and Fulltilt Poker, to Toronto-listed Amaya Gaming and GTECH’s purchase of International Game Technology. These deals pushed the total M&A haul to more than $12bn (£7.6bn) in the 12 months to June.
The mergers are being caused by a number of factors, but the main driver is the need to increase scale and diversify product offering and location while cutting costs.
For many, particularly smaller independent businesses, consolidation has become a much needed means of survival, whereas other tie-ups may be more opportunistic and strategically-focused.
Some of the gambling mergers are also being driven by the shareholder activism that has swept Europe this year. After months of bankers warning that US activists were preparing to launch attacks on UK corporates, it has finally happened.
Some of the FTSE’s biggest companies, such as Rolls-Royce, are being targeted and the gaming sector is not immune.
US activist investor Jason Ader’s Owl Spring Fund has a stake in Bwin and has been agitating for change for some time. Market sources tell me that part of the reason why there is a bidding war for Bwin, despite the management recommending the offer from 888, is that investors such as Owl Spring have encouraged Sportingbet owner GVC to come back with a higher offer.
There is also a strong view that 888 is keen to bulk up and add Bwin to its stable in order to better fend off takeover attempts. The group itself was a takeover target last year when bookmaker William Hill made a £720m approach, which was firmly rejected.
However, the merger that could have the biggest impact, particularly for Britain’s high streets, is the proposed tie-up between Ladbrokes and Gala Coral. If it goes ahead, the enlarged group would become the fourth biggest gaming group in Britain after Bet365, William Hill and Betfair. Many in the market believe it could entirely redraw the landscape of British gambling.
The combined group would boast an estate of more than 4,000 shops, giving it 45% of the betting shop market, dwarfing its nearest competitor, William Hill, which has an estate of only about half that size.
It is almost certain that as a condition of any deal the Competition and Markets Authority would demand the disposal of some of the stores. Many in the market believe having such a large estate is also nearly obsolete at a time when gambling seems to be becoming an increasingly digital affair. Whatever the view, one thing is certain: any merger is going to result in sizeable store portfolio sales and/or lease assignments.
Property aside, the execution risks of this deal are high overall, and Ladbrokes is not coming to the negotiations from the most robust position. In the past month it has issued a profit warning, a dividend cut, a placing and warned investors that profitability may not return until 2017.
It has a go-it-alone strategy, which could work, but it believes a merger with Coral is an “absolutely compelling” proposal, even if some believe it is akin to two drunks propping up a bar.
More than a decade ago these two companies tried to merge but were blocked on competition grounds. Both argue that the gambling world is totally different today to back then, when online gambling didn’t even exist.
They feel this time, the roll of the regulatory dice could be in their favour.
It could well be, but will it be transformative or destroy value?
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Deirdre Hipwell is mergers & acquisitions correspondent at The Times
