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Potential UK Gambling Sector Consolidation


with sports betting, the ability to combine the expense of having two sets of odds compilers and stattos would represent a substantial cost saving

Without going into MBA style jargon, the natural progression of an immature industry (emerging, growing, maturing), ultimately includes a period of consolidation, as pioneers and technology leaders look to generate economies of scale and although the online gambling industry has grown rapidly

and is facing an uncertain global economic outlook the gambling sector, in our opinion, is still far from maturity and is expanding via technological developments, geographic expansion and effective marketing.

This partly reflects a shift of offline gamblers online, as well as new gamblers finding online opportunities to experience a new form of entertainment.

The offline gambling industry in the UK (and US for that matter) is highly mature and has progressed beyond any reasonable chance of further consolidation among the market leaders as Ladbrokes, William Hill and Coral holding 28%, 26% and 18% of market share respectively on a betting shop by betting shop basis.

In the online space, however, with a headwind of likely improvements on the regulatory outlook from both a US and European perspective, we fully expect consolidation to commence in an industry where it has, thus far, been negligible.

The one online deal of note recently was between Playtech and William Hill which saw the dramatic expansion of William Hill's online exposure, whilst also improving its online software via a connected licensing deal.

The acquisition (Playtech acquired online gambling assets that were immediately transferred into a joint entity, William Hill Online) allowed Playtech to remain as an independent software supplier.

We fully expect future deals from Playtech in the online casino and poker sphere, although these are likely to focus on vertical expansion into operations such as affiliate marketing and it needs to be noted that the company retains options to acquire related entities from it's founder, Teddy Sagi.

Beyond this, we expect consolidation among the operators, with virtually any combination of the larger entities, in our opinion, driving massive potential synergies.

Beyond simple economies of scale such as combined HQ functions, property costs, financial reporting systems and such like, gambling operators could also benefit considerably from improved marketing functions and rates, amalgamation of virtually all functions such as marketing, customer service and support roles as well as the potential to consolidate platforms, servers, web hosting and pooled technological advancement teams.

Furthermore, with sports betting, the ability to combine the expense of having two sets of odds compilers and stattos would represent a substantial cost saving.

With relatively simple operating models (gross win offset by overheads), the ability to combine most functions and generate improvements to marketing abilities and rates, represents a highly attractive platform from which combined entities can drive highly attractive synergies and earnings upside for shareholders.

The clear deterrents to consolidation kicking off in earnest will be, we imagine:

  • Continued lack of clartity on ongoing or historic ligislative issues surrounding individual territories and companies
  • Inability of companies to raise debt or equity in difficult markets
  • Perceived value of individual companies, driven by possible greed and ego

However, despite these possibilities, we would expect companies to explore combinations, so as to pool market share and resources while benefiting from material synergies and an enlarged platform from which to drive market share and profitable growth in a relatively defensive but immature industry.

For likely combinations see our corporate deal speculation for 2009 and 2010 here

And whilst this article gives some direct online gambling sector corporate deal speculation we imagine, in general, that earnings enhancing deals may include:

  • Acquisitions of online operators by offline focused large caps. Effectively buying growth from resilient cashflows and undergeared balance sheets
  • Acquisition of online operators by online peers, benefiting from synergies and / or geographic expansion
  • Merger of online peers

 

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