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PaddyPower & Betfair Merger Looms and a Changing UK Industry

A combination of high overheads and tighter industry regulation has led to a series of high-street shop closures and M&A activity across the gambling industry.

Last month online sportsbook Paddy Power (SBR rating B+) announced that it wants to merge with Betfair (SBR rating A-). The combined business could become one of the world’s biggest online betting and gaming companies, with annual revenues of more than £1 billion. Share prices in both companies soared after the deal was made public.

As Paddy Power and Betfair provide different but complementary services, there are unlikely to be any competition issues in Britain. It fuses Betfair’s betting exchange and presence in Europe and the United States with Paddy Power’s online business, UK and Irish high street outlets and Australian operation. Paddy Power’s and Betfair’s proposed deal has been driven as much by regulatory and tax issues as anything else.

Controversial UK Gambling Legislation
The British gambling industry has a tough time with Parliament and regulatory bodies, despite contributing over £2.3 billion towards GDP. The reason is ultimately why many bookmakers located themselves in Gibraltar as a means of significantly reducing their tax burden.

The introduction of the point of consumption tax, which requires a 15% levy on profits arising from British transactions regardless of the bookmakers’ domicile, has become yet another burden to the gambling sector and been the real tipping point for the industry to consolidate, no longer being able to domicile abroad and protect themselves from the regulation. Duties on fixed-odds machines and licensing fees are further examples of the mounting efforts by the UK parliament to heavily tax the industry. Just this week the introduction of the PoC tax in the UK and Europe's harsher new VAT regime were cited as the two main causes for a 17 percent fall in EBITDA reported by 888 Holdings in the first half of 2015.

Theoretically industry consolidation would enable the gambling sector to shield itself from the onerous taxation and regulation through economies of scale and significant cost savings. Margins are quite low for operators, and so moves to consolidate by the means of mergers and acquisitions should not be considered at all unusual. They are simply a natural development for the sector, which needs to be much more efficient.

Other Recent Mergers
The deal last week comes as the latest in a series of mergers and takeovers in the industry over the past year or so. Ladbrokes and Gala Coral signed a £2.3 billion deal recently that seeks to expand their business online. In July, sportsbook 888 Sport thought its bid for had been secured with a £900m offer; but now a deal has been agreed with GVC Holdings, the owner of Sportingbet. That still leaves companies like British bookmaker William Hill (SBR rating A), which also tried to buy 888, seeking a place in the rapidly changing market. It is odds-on that we will see more consolidation in the coming months.