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Betting and gaming industry consolidation to create long-term growth and employment

The betting and gaming industry has been transformed over the last ten years with digital technology adoption and engagement fundamentally changing the way betting and gaming options are consumed.

Because of these changes, and as taxation and the related compliance costs puts pressure on operators’ profit margins, the UK gambling industry is betting on a wave of mergers and acquisitions to secure a more lucrative future.

The industry is likely to experience market share consolidation as competition intensifies further, and already a number of big deals this year include the £2.3bn alliance between Ladbrokes and Gala Coral in July, a £6bn merger of Betfair and Paddy Power in August, and GVC’s £1.1bn acquisition of bwin.party in September.

Those eyeing the UK situation suggest a “mergers and acquisitions frenzy” is sweeping the UK, as key players scramble to secure their share of the growing mobile betting and gaming market.

In fact, in the year to August, there were more takeovers and mergers in the UK gambling sector than in any other country.

Analysts explain that operators are looking to scale up for two main reasons:

  1. They see the costs of tax, compliance and technology go up, and want to offset this.
  2. They want to look for new ways to grow as the market becomes more competitive.

According to the Gambling Commission, revenue in the UK gambling industry surged from £5.6bn in 2010 to £7.1bn in 2014. However, these numbers somewhat obscure the fact that almost all of that growth happened online, with consumers increasingly opting for the convenience of gambling on their smart phones and tablets.

As a result, High Street operators face tougher trading conditions than in previous years – a situation worsened by an increasingly challenging regulatory environment.

The industry is responding to these shifting conditions with purpose and intent. For example, High Street bookmakers Ladbrokes and Gala Coral joined forces this summer in a bid to offset these pressures. Together, their deal will create the UK’s largest bookmaker, with around 4,000 high street betting shops, resulting in a predicted £65m of cost efficiencies.

The idea is that if the two firms – who have pretty much been operating the same business just with different branding – can eradicate duplication costs and administer the best breed of management, they will be in a better position for future growth. As a combined group they also recognize the need to invest more in its mobile offering, and boost the overall user experience.

Paddy Power, a successful High Street and online betting shop, reported in its 2014 annual report that “over 90% of future growth would be in mobile”. And so it came as little surprise this summer that it agreed to combine with online betting exchange Betfair, making them one of the world’s biggest online gaming firms.

We’ve already touched on the significant impact that the planned changes in the regulatory environment will have on the cost of operations in the British remote betting and gaming market. While the Point of Consumption tax will become a direct, additional cost for most operators – those offshore such as Ladbrokes’ online offering, 888, Mansion, and Stan James, headquartered in Gibraltar, regulatory changes will also impact them indirectly through increasing compliance and monitoring costs. Even with the forewarning, the industry expects these changes to have a significant impact on profitability, and viability of some businesses.

The increase in costs will put immediate pressure on margins and highlight the importance of operational scale. Those with larger operating scale are likely to emerge as winners due to their ability to absorb, at least temporarily, the increased cost while continuing to invest in product development.

According to Deloitte research, as cost pressures increase, larger operators could grab market share from smaller, more cost-constrained companies. This could happen both through market exits as well as opportunistic and strategic acquisitions.

Despite the challenges facing the online gambling space, as countries around the world have to adapt to new industry regulations, the future is still bright for the industry.

In the short term, the flux of mergers and acquisitions indicate job losses, as the new corporations undergo restructuring and some redundancies required to streamline staffing levels and eliminate duplication of job roles.

Yet overall, the outlook remains optimistic. DF Recruitment predicts that in the long term, these merged establishments will be in a stronger position, allowing them to continue to expand in the future, and in turn to employ more staff. Expect many job opportunities to be created for those with the right skills, particularly in the mobile sector.

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