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An investment banker has forecast more M&A activity in the UK as a means for smaller operators to compete once regulatory changes from the gambling white paper are implemented.

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The government released white paper reforms in April, outlining plans for a number of gambling amendments including a limit on stakes for online slots between £2 and £15 per spin.

Consultations are also underway for financial vulnerability or affordability checks, while tougher restrictions on bonuses and direct marketing have also been recommended.

Consolidation incoming

Simon French, head of investment banking across travel and leisure for Panmure Gordon, believes smaller operators will have to consolidate to compete with the likes of Flutter Entertainment and Entain, which have become the two leading operators in the UK following consolidation in recent years.

Speaking on a panel at And More Media’s Reputation Matters conference in London last week, French said: “There will have to be more M&A because the cost of business will take another step change and consolidation will be the only way for certain operators to survive.

“You will have to have a certain scale to be able to compete in a regulated market, and the scale required in the UK just keeps getting higher.

“Ultimately, we may get to the point where it’s a duopoly in this country [Flutter and Entain], and that may be what the Gambling Commission would like,” he added.

Tighter regulations have impacted the UK market investment case over the last decade, most notably when legislation was changed to tax online operators at the point of consumption rather than the point of supply in 2014.

This led to a swathe of M&A activity in the following years, which intensified when the maximum stakes on fixed-odds betting terminals (FOBTs) in betting shops were cut from £100 to £2 in 2019. 

Investor uncertainty

But is it more difficult for investors to forecast the financial impact of the white paper when compared to other recent regulatory changes in the UK?

French said: “I think things like changes to FOBT maximum stakes can be modelled into plans and investors can work out the financial impact within a reasonably good range.

“The trouble with the white paper is we’re dealing with something incredibly qualitative, subjective and emotional. How can you model what the impact is going to be on a huge cohort of players?”

The issue of uncertainty, according to French, has made the UK a less appealing market to investors looking to plan across a five-year period, as it is still unclear when and how the white paper measures will be implemented, with both primary and secondary legislation being subject to parliamentary time and further consultation.

“I wouldn’t say it’s a dead sector, but investors who historically owned shares in online gambling companies don’t anymore, and it’s quite hard to see what would tempt them back,” said French.

“They can’t see the returns they used to get, because the financial returns are so much lower when the cost of business is so much higher, and a lot of that is to do with regulation.”

French suggested investors were instead looking towards growth territories such as Latam and Africa.

He added: “A lot of people have burnt their money in the US, where there is still an awful lot of investor interest.

“Ironically, not everybody understands that a lot of those markets are highly regulated, but they seem to be able to deal with the burden of responsibility at a much lower cost than in the UK.”

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