All Is Not Lost for U.K. Bookies After FOBT Blow, Analysts Say

(Bloomberg) -- While the U.K. government’s move to cut the maximum stake on fixed-odds betting terminals to 2 pounds is a painful blow to Britain’s bookmakers, investors were more than prepared for such an outcome, analysts say. The decision dispels the uncertainty that had lingered over the sector, according to Davy’s David Jennings.

The expected dent to company earnings stemming from Thursday’s announcement could spur another wave of industry consolidation, according to Canaccord Genuity’s Simon Davies, who sees bid speculation providing support to share prices.

For GVC Holdings Plc, the anticipated blow to the recently purchased Ladbrokes Coral business is softened by savings from the deal and the avoidance of a contingent payment of more than 800 million pounds ($1.1 billion) to the acquired company’s shareholders. GVC shares reversed an initial 6.6 percent drop to trade up 1.1 percent at 11:05 a.m. in London.

William Hill Plc pared an initial 9.2 percent drop to trade just 0.5 percent lower, while Paddy Power Betfair Plc rose 1.9 percent after falling as much as 4.6 percent. Online operator 888 Holdings Plc shed 2.2 percent amid concern the U.K. government may seek to recoup lost machine tax through a higher point-of-consumption tax on online gambling.

All Is Not Lost for U.K. Bookies After FOBT Blow, Analysts Say

Here’s a round-up of what analysts are saying:

Davy (David Jennings)

  • Market had pretty much priced in such an outcome in recent weeks
  • Decision draws a line under the uncertainty, with investors now having a proper sense of what future earnings profiles look like
  • Timeline for implementation remains unclear; may be delayed until 2020
  • Suggestion that online taxes on gaming revenues will be increased leads to question as to how much
  • Process has emphasized the need for all operators to have both scale and diversification

Barclays (Patrick Coffey)

  • No clarity on date of implementation suggests the cut to the maximum FOBT stake will come later than 2019, offering some reprieve
  • Suggestion of increase in remote gaming duty to cover lost taxes from a lower maximum stake, though lack of clarity on this suggests government will need to wait and see how much tax is lost
    • Realistic that online taxes won’t change until 2020 or 2021, which is a positive given concerns that they would increase soon
  • GVC and William Hill forecasts of impact from lower maximum FOBT stake are lower than feared
  • May be a sense of relief for the sector

Goodbody (Gavin Kelleher)

  • Announcement “an obvious negative for the sector,” but has been almost fully priced into valuations in recent weeks
  • Market has been assuming online taxes would increase at some stage in the future
  • Well diversified B2C operators with scale, such as Paddy Power Betfair and GVC, remain best-placed to mitigate and grow through these challenges

Canaccord Genuity (Simon Davies)

  • William Hill has been “left vulnerable to bid interest” by 2-pound FOBT stake maximum
  • Decision “will drive another wave of industry consolidation, and bid speculation should provide some support”
  • Announcement “effectively kills off the FOBT”
  • Bigger concern will be that government aims to recoup lost machine tax through higher point-of-consumption tax on online gambling
  • A 5% increase in POC tax would knock 5% off GVC’s Ebitda, 8% off William Hill, and 9% for 888 Holdings and Jackpotjoy
  • Could happen with U.K.’s November budget statement

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