UK tax threat revives gambling stocks’ M&A saga
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Oct 14 (Reuters Breakingviews) -Britain’s gambling industry is in the firing line. Shares in UK-focused betting companies like Entain ENT.L and Evoke EVOK.L fell over 10% on Monday morning following a Guardian report flagging the risk of a 3-billion-pound ($3.9 billion) tax hike on the sector. If Chancellor Rachel Reeves’ Oct. 30 budget contains that sort of bad news, it could revive dormant M&A chatter.
In a sense, the likes of Entain should have seen a fiscal raid coming. The Labour government has pointed to a 22-billion-pound fiscal hole, and politicians have long worried about problem gambling. Hence why think tanks like the Institute for Public Policy Research (IPPR) are advocating a tax hike. That includes raising the remote gaming duty, currently charged at 21% of online operators’ profits, to 50%. Online gambling alone raised over 950 million pounds in government levies last year, or nearly a third of total gambling taxes, per Citi analysts.
Such a scenario would be problematic for gambling outfits with heavy UK bets. The UK and Ireland businesses for $380 million Evoke, for example, account for about 70% of adjusted group EBITDA. That metric is lower for bigger rivals such as $6 billion Entain and $39 billion U.S.-listed Flutter FLUT.N, but still a chunky 40%.
A 50% level for the UK’s remote gaming duty, levied on gross gambling profit, would hit Evoke, Entain and Flutter’s 2025 EBITDA by 42%, 25% and 18% respectively, Berenberg analysts estimate. While Entain’s shares have risen 40% since August on signs of renewed UK online gambling growth, that could reinstall a wider pattern of cratering valuations. Before today’s selloff, Evoke’s shares had plunged nearly 90% since 2021, while Entain’s have fallen 60%. The latter also has a debt pile caused by a past acquisition spree, which could amount to 3.6 billion pounds next year, according to estimates compiled by LSEG.
Entain shareholders probably feel pretty downcast about management’s 2021 decision to spurn an approach from U.S. group MGM Resorts MGM.N, with whom it has a U.S. joint venture. At around 700 pence, Entain shares are around half the level of that bid. If a new tax grab materialises, the group might cut marketing spend to defend its margins, which could hurt its market share.
Flutter, which despite being UK market leader counts more of its group revenue from the U.S., could be a beneficiary if the likes of Entain or Evoke step back, or even seek to sell some or all of their assets. Alternatively, smaller players may feel the need to couple up. Either way, gambling M&A bankers will be watching Reeves’ statement with renewed interest.
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CONTEXT NEWS
The Guardian reported on Oct. 11 that the UK Labour government is considering a 3 billion pound ($3.9 billion) tax hike for the gambling sector, citing a source familiar with the Treasury’s thinking as saying that “it is definitely on the map” and “there is no obvious pushback to it”.
The newspaper said one of the tax plans that Treasury officials are looking at comes from the Institute for Public Policy Research (IPPR), which advocates for doubling taxes such as the 15% general betting duty and raising remote gaming duty, which affects online operators, from 21% to 50%.
A more moderate proposal comes from another think tank, the Social Market Foundation, which would double the tax on online gambling companies from 21% to 42%, the Guardian said.
Finance minister Rachel Reeves is expected to increase some taxes in her maiden budget on Oct. 30, where these taxes on betting firms could also be announced, the Guardian reported, citing sources familiar with the discussions.
Entain shares were down 7.6% to 709 pence as of 1437 GMT on Oct. 14, having previously been down nearly 15%.
Graphic: Lower multiples reduce takeover costs using shares https://reut.rs/3Yotlsv
Editing by George Hay and Oliver Taslic
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